<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8940
Philip Morris Companies Inc.
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(Exact name of registrant as specified in its charter)
Virginia 13-3260245
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Park Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 880-5000
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
At April 30, 1998, there were 2,429,367,099 shares outstanding of the
registrant's common stock, par value $0.33 1/3 per share.
<PAGE>
PHILIP MORRIS COMPANIES INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 3 - 4
Condensed Consolidated Statements of Earnings for the
Three Months Ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 1997 and the
Three Months Ended March 31, 1998 6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 7 - 8
Notes to Condensed Consolidated Financial Statements 9 - 20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 21 - 36
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings. 37
Item 4. Submission of Matters to a Vote of Security Holders. 37
Item 6. Exhibits and Reports on Form 8-K. 38
Signature 39
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
ASSETS
CONSUMER PRODUCTS
Cash and cash equivalents $ 2,454 $ 2,282
Receivables, net 4,974 4,294
Inventories:
Leaf tobacco 4,546 4,348
Other raw materials 2,022 1,689
Finished product 3,151 3,002
------- -------
9,719 9,039
Other current assets 1,817 1,825
------- -------
Total current assets 18,964 17,440
Property, plant and equipment, at cost 20,356 20,002
Less accumulated depreciation 8,599 8,381
------- -------
11,757 11,621
Goodwill and other intangible assets
(less accumulated amortization of
$4,959 and $4,814) 17,736 17,789
Other assets 2,967 3,211
------- -------
Total consumer products assets 51,424 50,061
FINANCIAL SERVICES
Finance assets, net 5,773 5,712
Other assets 161 174
------- -------
Total financial services assets 5,934 5,886
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TOTAL ASSETS $57,358 $55,947
------- -------
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
Continued
3
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ----------
<S> <C> <C>
LIABILITIES
CONSUMER PRODUCTS
Short-term borrowings $ 1,056 $ 157
Current portion of long-term debt 1,720 1,516
Accounts payable 2,597 3,318
Accrued marketing 1,883 2,149
Accrued taxes, except income taxes 1,406 1,234
Other accrued liabilities 4,870 4,863
Income taxes 1,323 862
Dividends payable 974 972
------- -------
Total current liabilities 15,829 15,071
Long-term debt 11,630 11,585
Deferred income taxes 898 889
Accrued postretirement health care costs 2,463 2,432
Other liabilities 6,483 6,218
------- -------
Total consumer products liabilities 37,303 36,195
FINANCIAL SERVICES
Long-term debt 835 845
Deferred income taxes 3,852 3,877
Other liabilities 126 110
------- -------
Total financial services liabilities 4,813 4,832
------- -------
Total liabilities 42,116 41,027
Contingencies (Note 3)
STOCKHOLDERS' EQUITY
Common stock, par value $0.33 1/3 per share
(2,805,961,317 shares issued) 935 935
Earnings reinvested in the business 25,346 24,924
Accumulated other comprehensive earnings:
Currency translation adjustments (1,290) (1,109)
------- -------
24,991 24,750
Less cost of repurchased stock
(377,181,827 and 380,474,028 shares) 9,749 9,830
------- -------
Total stockholders' equity 15,242 14,920
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $57,358 $55,947
------- -------
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1998 1997
--------- ------
<S> <C> <C>
Operating revenues $18,383 $18,217
Cost of sales 6,707 6,717
Excise taxes on products 4,227 4,124
------- -------
Gross profit 7,449 7,376
Marketing, administration and research costs 3,934 3,961
Settlement charges (Note 3) 806
Amortization of goodwill 146 149
------- -------
Operating income 2,563 3,266
Interest and other debt expense, net 244 287
------- -------
Earnings before income taxes 2,319 2,979
Provision for income taxes 937 1,206
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Net earnings $ 1,382 $ 1,773
------- -------
------- -------
Per share data:
Basic earnings per share $ 0.57 $ 0.73
------- -------
------- -------
Diluted earnings per share $ 0.57 $ 0.72
------- -------
------- -------
Dividends declared $ 0.40 $ 0.40
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------- -------
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1997 and
the Three Months Ended March 31, 1998
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Earnings Accumulated Total
Reinvested Currency Other Cost of Stock-
Common in the Translation Comprehensive Repurchased holders'
Stock Business Adjustments Earnings Stock Equity
------ ---------- ----------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 $ 935 $22,480 $ 192 $ 190 $(9,387) $14,218
Comprehensive earnings:
Net earnings 6,310 6,310
Other comprehensive earnings,
net of income taxes:
Currency translation adjustments (1,301) (1,301) (1,301)
Net unrealized appreciation
on securities 2 2
------- ------- -------
Total other comprehensive earnings (1,301) (1,299) (1,299)
------- ------- -------
Total comprehensive earnings 5,011
Exercise of stock options and
issuance of other stock awards 14 300 314
Cash dividends
declared($1.60 per share) (3,880) (3,880)
Stock repurchased (743) (743)
----- ------- ------- ------- ------- -------
Balances, December 31, 1997 935 24,924 (1,109) (1,109) (9,830) 14,920
Comprehensive earnings:
Net earnings 1,382 1,382
Other comprehensive earnings,
net of income taxes:
Currency translation adjustments (181) (181) (181)
------- ------- -------
Total other comprehensive earnings (181) (181) (181)
------- ------- -------
Total comprehensive earnings 1,201
Exercise of stock options and
issuance of other stock awards 11 81 92
Cash dividends
declared($0.40 per share) (971) (971)
------- ------- --------- -------- ------- -------
Balances, March 31, 1998 $ 935 $25,346 $(1,290) $(1,290) $(9,749) $15,242
------- ------- --------- -------- -------- -------
------- ------- --------- -------- -------- -------
</TABLE>
Total comprehensive earnings was $1,091 million in the first quarter of 1997,
representing net earnings partially offset by currency translation adjustments.
See notes to condensed consolidated financial statements.
6
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------
1998 1997
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<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings -- Consumer products $ 1,355 $ 1,741
-- Financial services and real estate 27 32
------- -------
Net earnings 1,382 1,773
Adjustments to reconcile net earnings to
operating cash flows:
CONSUMER PRODUCTS
Depreciation and amortization 434 430
Deferred income tax provision 89 64
Gain on sale of a business (22)
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (775) (976)
Inventories (631) (120)
Accounts payable (699) (1,218)
Income taxes 493 646
Other working capital items (212) 63
Other 336 13
FINANCIAL SERVICES AND REAL ESTATE
Deferred income tax benefit (22) (23)
Other 76 65
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Net cash provided by operating activities 471 695
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CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
CONSUMER PRODUCTS
Capital expenditures (341) (287)
Purchases of businesses, net of acquired cash (223)
Proceeds from sale of a business 152
Other (27) (1)
FINANCIAL SERVICES AND REAL ESTATE
Investments in finance assets (138) (127)
Proceeds from finance assets 26 165
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Net cash used in investing activities (480) (321)
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
Continued
7
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1998 1997
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<S> <C> <C>
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
CONSUMER PRODUCTS
Net issuance of short-term borrowings $ 893 $ 453
Long-term debt proceeds 814 1,267
Long-term debt repaid (558) (372)
FINANCIAL SERVICES AND REAL ESTATE
Net repayment of short-term borrowings (20)
Long-term debt proceeds 175
Long-term debt repaid (200)
Dividends paid (970) (976)
Issuance of shares 71 106
Repurchase of outstanding stock (678)
Other (54)
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Net cash provided by (used in) financing activities 196 (245)
------ ------
Effect of exchange rate changes on cash and
cash equivalents (15) (48)
------ ------
Cash and cash equivalents:
Increase 172 81
Balance at beginning of period 2,282 240
------ -------
Balance at end of period $2,454 $ 321
------ -------
------ -------
</TABLE>
See notes to condensed consolidated financial statements.
8
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies:
-------------------
The interim condensed consolidated financial statements of Philip Morris
Companies Inc. (the "Company") are unaudited. It is the opinion of the Company's
management that all adjustments necessary for a fair statement of the interim
results presented have been reflected therein. All such adjustments were of a
normal recurring nature. Operating revenues and net earnings for any interim
period are not necessarily indicative of results that may be expected for the
entire year.
These statements should be read in conjunction with the consolidated financial
statements and related notes which appear in the Company's annual report to
stockholders and which are incorporated by reference into the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K").
Balance sheet accounts are segregated by two broad types of business. Consumer
products assets and liabilities are classified as either current or non-current,
whereas financial services assets and liabilities are unclassified, in
accordance with respective industry practices.
Note 2. Recently Adopted Accounting Standards:
-------------------------------------
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share" ("EPS") which establishes standards for computing and presenting EPS and
requires the presentation of both basic and diluted EPS. Prior period EPS have
been restated to conform with the standards established by SFAS No. 128. Basic
and diluted EPS were calculated using the following:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1998 1997
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(in millions)
<S> <C> <C>
Net earnings $1,382 $1,773
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------ ------
Weighted average shares for
basic EPS 2,425 2,422
Plus incremental shares from conversions:
Restricted stock and stock rights 1 7
Stock options 18 21
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Weighted average shares for
diluted EPS 2,444 2,450
------ ------
------ ------
</TABLE>
For the first quarter of 1998, options on 15,508,600 shares of common
stock were not included in the calculation of weighted average shares for
diluted EPS because their effects were antidilutive. The Company had no
antidilutive options in the first quarter of 1997.
In 1998, the American Institute of Certified Public Accountants' Accounting
Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP")
No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP No. 98-1 requires certain costs incurred in
connection with developing or obtaining internal-use software to be
capitalized and other costs to be expensed. The Company adopted SOP No. 98-1
effective January 1, 1998, and its application for the quarter ended March
31, 1998 had no material effect on the Company's financial position or
results of operations.
9
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
NOTE 3. Contingencies:
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Legal proceedings covering a wide range of matters are pending in various U.S.
and foreign jurisdictions against the Company, its subsidiaries and affiliates,
including Philip Morris Incorporated ("PM Inc."), the Company's domestic tobacco
subsidiary, Philip Morris International Inc. ("PMI"), the Company's
international tobacco subsidiary, and their respective indemnitees. Various
types of claims are raised in these proceedings, including products liability,
consumer protection, antitrust, securities law, tax, patent infringement,
employment matters and claims for contribution.
OVERVIEW OF TOBACCO-RELATED LITIGATION
TYPES AND NUMBER OF CASES
Pending claims related to tobacco products generally fall within three
categories: (i) smoking and health cases alleging personal injury brought on
behalf of individual plaintiffs, (ii) smoking and health cases alleging personal
injury and purporting to be brought on behalf of a class of individual
plaintiffs, and (iii) health care cost recovery cases, including class actions,
brought by state and local governments, unions, federal and state taxpayers,
health maintenance organizations ("HMOs"), native American tribes and others
seeking reimbursement for Medicaid and/or other health care expenditures
allegedly caused by cigarette smoking. Damages claimed in some of the smoking
and health class actions and health care cost recovery cases range into the
billions of dollars.
In recent years there has been a substantial increase in the number of smoking
and health cases being filed in the United States, a trend that accelerated in
1997 and the first four months of 1998.
As of May 1, 1998, there were approximately 410 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 50 cases in Texas
that were voluntarily dismissed but which may be refiled under certain
conditions), compared with approximately 375 such cases on December 31, 1997,
and 185 such cases on December 31, 1996. Many of the new cases were filed in
Florida and New York. Seventeen of the individual cases involve allegations of
various personal injuries allegedly related to exposure to environmental tobacco
smoke ("ETS").
In addition, as of May 1, 1998, there were approximately 55 purported smoking
and health class actions pending in the United States against PM Inc. and, in
some cases, the Company (including six that involve allegations of various
personal injuries related to exposure to ETS), compared with approximately 50
such cases on December 31, 1997, and 20 such cases on December 31, 1996. Most
of these actions purport to constitute statewide class actions and were filed
after May
-10-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1996 when the Fifth Circuit Court of Appeals, in the Castano case, reversed a
federal district court's certification of a purported nationwide class action on
behalf of persons who were allegedly "addicted" to tobacco products.
The number of health care cost recovery actions in the United States also
increased, with approximately 120 such cases pending as of May 1, 1998, compared
with approximately 105 such cases on December 31, 1997, and 25 such cases on
December 31, 1996.
There are also a number of tobacco-related actions pending outside the United
States against affiliates and subsidiaries of PMI including, as of May 1, 1998,
approximately 20 smoking and health cases initiated by one or more individuals
(Argentina (13), Brazil (1), Canada (1), Italy (1), Japan (1), Scotland (1) and
Turkey (2)), four smoking and health class actions (Brazil (2), Canada (1) and
Nigeria (1)) and one health care cost recovery action (Republic of the Marshall
Islands). On May 12, 1998, the Republic of Guatemala filed a health care cost
recovery action in the United States against the Company, PM Inc. and others.
LITIGATION SETTLEMENTS
On May 8, 1998, PM Inc. and other companies in the United States tobacco
industry settled the health care cost recovery action brought by the State of
Minnesota and Blue Cross and Blue Shield of Minnesota ("Blue Cross"). The
settlement is discussed below under the heading "Health Care Cost Recovery
Litigation--Minnesota Trial and Settlement." During 1997 and in January of
1998, PM Inc. and other companies in the United States tobacco industry also
settled health care cost recovery actions brought by the States of
Mississippi, Florida and Texas, and an ETS smoking and health class action
brought on behalf of airline flight attendants. These settlements are
discussed in Part I, Item 3. Legal Proceedings of the Company's 1997 Form
10-K. Copies of the Florida, Mississippi and Texas settlement agreements are
filed as Exhibits to the 1997 Form 10-K.
VERDICTS IN INDIVIDUAL CASES
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. The
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 filed a motion seeking a new
trial. In May and October 1997, Florida juries also returned verdicts for
defendants in smoking and health cases involving another United States cigarette
manufacturer (Connor v. R.J. Reynolds Tobacco Company; Karbiwnyk v. R.J.
Reynolds Tobacco Company). In March 1998, an Indiana jury returned a verdict
for defendants in an ETS smoking and health case (Dunn v. RJR Holdings Corp., et
al.). Plaintiff has filed a motion seeking a new trial. In September 1997, a
court in Brazil awarded plaintiffs in a smoking and health case the Brazilian
currency equivalent of $81,000, attorneys' fees (in an amount to be determined
by the court) and a monthly annuity for 35 years equal to two-thirds of the
deceased smoker's last monthly salary (Alves v. Souza Cruz). Defendant is
appealing the judgment. Neither the Company nor its affiliates were parties to
that action.
-11-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
FUTURE TRIAL DATES
Approximately 25 individual smoking and health cases are currently scheduled for
trial in 1998 against PM Inc. and, in some cases, the Company, 10 of which are
scheduled to commence in Florida in June 1998. Trial is currently underway in
Florida in an individual smoking and health case against another cigarette
manufacturer (Widdick v. Brown and Williamson Tobacco Corporation, et al.). A
smoking and health class action in Florida is scheduled for trial in July 1998
(Engle, et al. v. R.J. Reynolds Tobacco Company, et al.). Trial in a smoking
and health class action in New York may begin in the summer or fall of 1998
(Frosina, et al. v. Philip Morris, Inc., et al.). Health care cost recovery
actions brought by the States of Washington and Oklahoma are scheduled for trial
in September and November 1998, respectively.
A description of the smoking and health litigation, health care cost recovery
litigation and certain other proceedings pending against the Company and/or its
subsidiaries and affiliates follows.
SMOKING AND HEALTH LITIGATION
Plaintiffs' allegations of liability in smoking and health cases are based on
various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, breach of special duty, conspiracy, concert of
action, violations of deceptive trade practice laws and consumer protection
statutes, and claims under the federal Racketeer Influenced and Corrupt
Organization Act ("RICO") and state RICO statutes. In certain of these cases
plaintiffs claim that cigarette smoking exacerbated the injuries caused by their
exposure to asbestos. Plaintiffs in the smoking and health actions seek various
forms of relief, including compensatory and punitive damages, treble/multiple
damages and other statutory damages and penalties, creation of medical
monitoring funds, disgorgement of profits, and injunctive and equitable relief.
Defenses raised in these cases include lack of proximate cause, assumption of
the risk, comparative fault and/or contributory negligence, statutes of
limitations, and preemption by the Federal Cigarette Labeling and Advertising
Act (the "Labeling Act"). In June 1992, the United States Supreme Court held
that the Labeling Act, as enacted in 1965, does not preempt common law damage
claims, but that the Labeling Act, as amended in 1969, preempts claims arising
after July 1969 against cigarette manufacturers "based on failure to warn and
the neutralization of federally mandated warnings to the extent that those
claims rely on omissions or inclusions in advertising or promotions." The Court
also held that the 1969 Labeling Act does not preempt claims based on express
warranty, fraudulent misrepresentation or conspiracy. The Court further held
that claims for fraudulent concealment were preempted except "insofar as those
claims relied on a duty to disclose...facts through channels of communication
other than advertising or promotion." (The Court did not consider whether such
common law damage claims were valid under state law.) The Court's decision was
announced by a plurality opinion. The effect of the decision on pending and
future cases will be the subject of further proceedings in the lower federal and
state courts. Additional similar litigation could be encouraged if legislation
to eliminate the federal preemption defense, proposed in Congress in recent
years, were enacted. It is not possible to predict whether any such legislation
will be enacted.
-12-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In May 1996, the Fifth Circuit Court of Appeals held that a purported class
consisting of all "addicted" smokers nationwide did not meet the standards and
requirements of the federal rules governing class actions (Castano, et al. v.
The American Tobacco Company, et al.). Since this class decertification, lawyers
for plaintiffs have filed numerous smoking and health class action suits in
various state and federal courts. In general, these cases purport to be brought
on behalf of residents of a particular state or states and raise "addiction"
claims similar to those raised in the Castano case and, in some cases, claims of
physical injury as well. As of May 1, 1998, smoking and health class actions
were pending in Alabama, Arkansas, California, the District of Columbia,
Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland,
Michigan, Minnesota, Mississippi, Nevada, New Jersey, New Mexico, New York,
Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, South Dakota,
Tennessee, Texas, Utah, West Virginia and Wisconsin, as well as in Canada,
Brazil and Nigeria. As of May 1, 1998, classes had been certified in five of
these smoking and health class actions, in Florida, Louisiana, Maryland and New
York (2), and class certification had been denied or reversed in four cases
involving PM Inc., in Louisiana, the District of Columbia, Pennsylvania and
Puerto Rico. A number of these class certification decisions are under appeal.
One ETS smoking and health class action was settled in 1997 as discussed in the
Company's 1997 Form 10-K.
HEALTH CARE COST RECOVERY LITIGATION
In certain of the pending proceedings, foreign, state and local government
entities, unions, federal and state taxpayers, HMOs, native American tribes and
others seek reimbursement for Medicaid and/or other health care expenditures
allegedly caused by tobacco products and, in some cases, for future expenditures
and damages as well. Certain of these cases purport to be brought on behalf of a
class of plaintiffs, and in some cases, the class has been certified by the
court. In one health care cost recovery case, private citizens seek recovery of
alleged tobacco-related health care expenditures incurred by the federal
Medicare program. In one purported class action, Blue Cross/Blue Shield
subscribers in the United States are seeking reimbursement of allegedly
increased medical insurance premiums caused by tobacco products. In the native
American cases, claims are also asserted for alleged lost productivity of tribal
government employees. Other relief sought by some but not all plaintiffs
includes punitive damages, treble/multiple damages and other statutory damages
and penalties, injunctions prohibiting alleged marketing and sales to minors,
disclosure of research, disgorgement of profits, funding of anti-smoking
programs, disclosure of nicotine yields, and payment of attorney and expert
witness fees.
The claims asserted in these health care cost recovery actions vary. In most
cases, plaintiffs assert the equitable claim that the tobacco industry was
"unjustly enriched" by plaintiffs' payment of health care costs allegedly
attributable to smoking, and seek reimbursement of those costs. Other claims
made by some but not all plaintiffs include the equitable claim of indemnity,
common law claims of negligence, strict liability, breach of express and implied
warranty, violation of a voluntary undertaking or special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under federal and state
statutes governing consumer fraud, antitrust, deceptive trade practices and
false advertising, and claims under federal and state RICO statutes.
-13-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Defenses raised include failure to state a valid claim, lack of benefit,
adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot obtain
equitable relief because they participated in, and benefited from, the sale of
cigarettes), lack of antitrust injury, federal preemption, lack of proximate
cause and statute of limitations. In addition, defendants argue that they should
be entitled to "set-off" any alleged damages to the extent the plaintiff
benefits economically from the sale of cigarettes through the receipt of excise
taxes or otherwise. Defendants also argue that these cases are improper because
plaintiffs must proceed under principles of subrogation and assignment. Under
traditional theories of recovery, a payor of medical costs (such as an insurer
or a state) can seek recovery of health care costs from a third party solely by
"standing in the shoes" of the injured party. Defendants argue that plaintiffs
should be required to bring an action on behalf of each individual health care
recipient and should be subject to all defenses available against the injured
party. In certain of these cases, defendants have also challenged the ability of
the plaintiffs to use contingency fee counsel to prosecute these actions.
Further, certain cigarette companies, including PM Inc., have filed declaratory
judgment actions in a number of states seeking to block the state's health care
cost recovery action and/or to prevent the state from hiring contingency fee
counsel.
As of May 1, 1998, there were approximately 120 health care cost recovery cases
pending against PM Inc. and, in some cases, the Company. Thirty-eight of these
cases were filed by states, through their attorneys general and/or other state
agencies, in Alaska, Arizona, Arkansas, California, Colorado, Connecticut,
Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine,
Maryland, Massachusetts, Michigan, Minnesota (settled May 8, 1998), Missouri,
Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio,
Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota,
Utah, Vermont, Washington, West Virginia and Wisconsin, and eight were filed by
city and county governments. Approximately 55 of the pending health care cost
recovery actions were filed by unions, six by federal and state taxpayers, five
by HMOs and three by native American tribes. Health care cost recovery actions
have also been brought by the Republic of the Marshall Islands, the Commonwealth
of Puerto Rico and the Republic of Guatemala. As discussed above, under the
heading "Overview of Tobacco-Related Litigation--Litigation Settlements," four
health care cost recovery cases have been settled in 1997 and 1998.
MINNESOTA TRIAL AND SETTLEMENT
Trial in the Minnesota health care cost recovery action began in January
1998. Plaintiffs sought $1.78 billion in compensatory damages, disgorgement
of profits, restitution, treble damages under Minnesota's antitrust statute,
punitive damages, funding of smoking cessation and public education programs,
civil penalties of $25,000 for each separate violation of various consumer
protection statutes, civil penalties of $50,000 for each separate violation
of Minnesota's antitrust statute, attorneys' fees and costs, various forms of
non-monetary relief and such other relief as the court deemed just and
equitable. The Minnesota state trial court made several rulings that deprived
the industry of, or otherwise limited the industry in asserting, many of its
defenses. The Company believes that such rulings were erroneous.
On May 8, 1998, together with R.J. Reynolds Tobacco Company, Brown &
Williamson Tobacco Corporation and Lorillard Tobacco Company, PM Inc. entered
into a Settlement Agreement with the State of Minnesota to settle and resolve
with finality all claims by Minnesota relating to the subject matter of its
health care cost recovery action, including future claims for reimbursement
of health care costs allegedly associated with tobacco products, except for
issues pending before the court pertaining to the discoverability or
production of documents for which the settling defendants reserve their rights
of appeal. The Settlement Agreement and certain ancillary agreements, the
terms of which were approved by the Minnesota state trial court, are filed as
Exhibits to this Form 10-Q and the following summary of their terms is
qualified by reference thereto.
Under the Settlement Agreement, the settling defendants will pay Minnesota $240
million on or before September 5, 1998. This amount was allocated among the
settling defendants based on their parent companies' relative market
capitalization.
-14-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The settling defendants will also pay Minnesota the following aggregate amounts
in January of the year indicated: 1999: $220.8 million; 2000: $242.55 million;
2001: $242.55 million; 2002: $242.55 million; and 2003: $121.55 million. These
payments, which in the case of payments after 1999 will be adjusted for
inflation, changes in domestic sales volume, and, under specified circumstances,
increases in net operating profits from domestic sales, will be allocated among
the settling defendants in accordance with their relative unit volume of
domestic cigarette sales in the year preceding payment.
In the event a settling defendant defaults on its obligation to make timely
payment of the above amounts, the remaining settling defendants may, in their
absolute discretion, pay the missing payment to Minnesota. If the remaining
defendants elect not to make up the missing payment, each settling defendant
can be required by Minnesota to pay its share of the remaining payments
scheduled above within 30 days of the default, subject to inflation and
volume adjustments. The obligations of the settling defendants under the
Settlement Agreement are several and not joint; the Settlement Agreement does
not obligate any settling defendant to pay the share of another settling
defendant.
In addition to these payments, on December 31, 1998 and annually thereafter,
the settling defendants will make ongoing payments to Minnesota in the
following aggregate nominal amounts: 1998: $102 million; 1999: $114.75
million; 2000: $127.5 million; 2001: $165.75 million; 2002: $165.75
million; and each year thereafter: $204 million. Beginning in 1999, these
payments will be adjusted for inflation and changes in volume. All ongoing
payments will be allocated among the settling defendants in accordance with
their relative unit volume of domestic cigarette sales in the year of payment.
Enactment of federal tobacco-related legislation, if any, will not affect the
payments required by the Settlement Agreement except as follows: if federal
tobacco-related legislation resolving State Attorney General health care cost
recovery actions is enacted on or before November 30, 2000, and if such
legislation provides for payments by tobacco companies (whether by settlement
payment, tax or any other means), all or part of which is made available to
states, Minnesota must elect to receive any funds that are (i) unrestricted
as to their use, or (ii) are restricted to any form of health care or to any
use related to tobacco (collectively "Federal Settlement Funds"), and the
settling defendants will receive a dollar-for-dollar offset against ongoing
payments of Federal Settlement Funds up to the full amount of such payments,
provided however, that (i) there will be no offset on account of any federal
program, subsidies, payments, credits or other aid to Minnesota that are not
conditioned or tied to the settlement of any state tobacco-related suit or
the relinquishment of state tobacco-related claims; (ii) Minnesota
relinquishes no rights or benefits under the Settlement Agreement except for
payments subject to the offset; (iii) there are no federally imposed
preconditions to the receipt of Federal Settlement Funds other than the
settlement of any state tobacco-related lawsuit or the relinquishment of
state tobacco-related claims, actions or expenditures related to tobacco,
including but not limited to, education, cessation, control or enforcement,
or actions or expenditures related to health care; (iv) if the settling
defendants enter into any pre-verdict settlement agreement of similar
litigation brought by a non-federal governmental plaintiff that does not
require such an offset, the foregoing offset will be null and void; and (v)
if the settling defendants enter into any pre-verdict settlement agreement of
similar litigation brought by a non-federal governmental plaintiff that has
an offset term more favorable to the plaintiff, the Settlement Agreement
will, at the option of Minnesota, be revised to include a comparable term.
Nothing in the Settlement Agreement will reduce the total amounts payable to
Minnesota thereunder beyond the amount of Federal Settlement Funds actually
received by Minnesota.
If the settling defendants enter into any future pre-verdict settlement
agreement of similar litigation on terms more favorable to a non-federal
governmental plaintiff, the Settlement Agreement will not otherwise be
revised except to the extent such future settlement agreement provides for
joint and several liability for monetary payments, for a parent company
guaranty or other credit assurance, or for the implementation of different
non-economic tobacco-related public health measures.
The settling defendants agreed as part of the Minnesota Settlement not to
oppose passage in Minnesota of certain enumerated legislative or regulatory
proposals intended to reduce underage tobacco use, but they retained the
right to challenge proposals that are adopted. They further agreed not to
challenge facially the enforceability or constitutionality of existing
Minnesota tobacco control laws or to support legislation that would preempt
Minnesota's rights or recoveries under the Settlement Agreement. They agreed
to disclose specified future payments for lobbying or related purposes in
Minnesota.
The settling defendants also agreed to discontinue all billboard and transit
advertisement of tobacco products in Minnesota and not to make any payments
for tobacco product placement in motion pictures made in the United States.
The settling defendants also submitted to a Consent Judgment enjoining the
industry from (i) offering or selling non-tobacco services or merchandise
(e.g., caps, jackets or bags) in Minnesota bearing the name or logo of a
tobacco brand other than tobacco products or items with the sole function of
advertising; (ii) making any material misrepresentation of fact regarding the
health consequences of using tobacco products; (iii) entering into any
contract, combination or conspiracy to limit health information or research
into smoking and health or product development; and (iv) taking any action to
target children in Minnesota in the advertising, promotion or marketing of
cigarettes. The settling defendants also agreed to disband the Council for
Tobacco Research-U.S.A., Inc. and to maintain the Minnesota document
depository for at least ten years. The Minnesota document depository
consists of industry documents provided to Minnesota during discovery.
Plaintiffs can make an application to the court to include in the depository
more than 30,000 documents as to which defendants had asserted a privilege.
Many of these documents were subpoened by the House Commerce Committee, which
posted them on the Internet. The settling defendants also agreed that on or
before June 1, 1998 and annually thereafter through and including 2007, they
will pay $10 million into a national research account. Such payments will be
allocated among the settling defendants in accordance with their relative
unit volume of domestic cigarette sales in the year preceding payment.
The Settlement Agreement provides that it is not an admission or concession
or evidence of any liability or wrongdoing whatsoever and is entered into by
the settling defendants solely to avoid the further expense, inconvenience,
burden and uncertainty of litigation. It further provides that no payment
thereunder is made in respect of a potential fine, penalty or enhanced
damages.
-15-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In the event that there is a challenge to any provision of the settlement
with Minnesota by anyone other than the Attorney General of Minnesota, Blue
Cross or a settling defendant ("a third-party challenge"), any amounts
required to be paid by the settling defendants pursuant to the settlement
will be paid into escrow. If, as a result of such a challenge, certain
material terms of the settlement are modified or rendered unenforceable,
Minnesota and the settling defendants will negotiate an equivalent or
comparable substitute term or other appropriate credit or adjustment. In the
event that the parties are unable to agree on such a substitute term or
appropriate credit or adjustment, then the parties will submit the issue to
the trial court for resolution, subject to any available appeal rights. In
the event that any third-party challenge is not made until after December 31,
1998, the payments due Minnesota in January of 1999, 2000, 2001, 2002 and
2003 will be payable directly to Minnesota regardless of such challenge,
while all other payments due under the settlement will be paid into escrow
pending resolution of the challenge. In the event that the court determines
that there has been a failure of consideration legally sufficient to warrant
termination of the settlement with Minnesota, then the settlement may be
terminated by the adversely affected party. In the event of such
termination, Minnesota's lawsuit will be reinstated.
The settling defendants also settled the claims of Minnesota's co-plaintiff,
Blue Cross. They will pay Blue Cross $160 million on or before September 5,
1998. This amount was allocated among the settling defendants based on their
parent companies' relative market capitalization.
The settling defendants will also pay Blue Cross $79.2 million in January
1999 and $57.45 million in January of each of the years 2000 through and
including 2003. These payments, which in the case of payments made after
1999 will be adjusted for inflation and changes in volume, will be allocated
among the settling defendants in accordance with their relative unit volume
of domestic cigarette sales in the year preceding payment. These payments
would be accelerated in the event a settling defendant defaults and the
remaining settling defendants do not elect, in their sole discretion, to
satisfy the missing payment, subject to inflation and volume adjustments.
The settling defendants also agreed to pay attorneys' fees to the attorneys
who represented Minnesota in this action. The amount of such fees, which was
calculated in accordance with an agreed formula, equals $440.825 million,
payable as follows: $74.75 million on or before September 5, 1998; $100
million on or before January 31, 1999; $100 million on or before April 15,
1999; $100 million on or before January 31, 2000 and $66.075 million on or
before July 1, 2000. The settling defendants also agreed to pay $4 million
for attorneys' costs. Payment of the attorneys' fees and costs will be
allocated among the settling defendants in accordance with their relative
unit volume of domestic cigarette sales in the year preceding payment.
The settling defendants also agreed to pay Blue Cross's attorneys' fees as
follows: $60 million on July 1, 1998 and $57.25 million on September 4,
1998, together with costs of $4 million on or before May 18, 1998. Such
payments will be allocated among the settling defendants in accordance with
their relative unit volume of domestic cigarette sales in the year preceding
payment.
The agreements to pay attorneys' fees described in the preceding two
paragraphs will not be includable in the $500 million aggregate annual cap on
attorneys' fees awardable by arbitration panels under prior settlements.
The Company has recorded pre-tax charges of $806 million in the first quarter
of 1998 to accrue for its share of all fixed and determinable portions of the
obligations described above.
Counsel for the Company have to date been contacted by counsel for the States
of Texas, Florida and Mississippi seeking to discuss the issue of what
effect, if any, the settlement of the Minnesota action has upon the terms of
the prior settlements with those states pursuant to the "most favored nation"
provision of those prior state settlements. That provision provides that, in
the event the settling defendants enter into a subsequent pre-verdict
settlement with a non-federal governmental entity on terms more favorable to
such entity than the terms of the prior state settlements (after due
consideration of relevant differences in population or other appropriate
factors), the terms of the prior state settlements will be revised to provide
treatment at least as relatively favorable. The Company cannot presently
determine what the result of any discussions with Texas, Florida or
Mississippi regarding the most favored nation issue may be, nor can it
determine what the result of any litigation with any of those states
concerning that issue may be. A determination of this issue adverse to the
Company could result in an obligation in the Company to make substantial
additional payments to one or more of those states.
-16-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
CERTAIN OTHER TOBACCO-RELATED LITIGATION
In June 1995, an action was filed in federal court in Maryland against PM Inc.
seeking certification of a purported class consisting of "all persons and
estates injured as a result of the defendant's alleged failure to manufacture a
fire safe cigarette since 1987" (Sacks, et al. v. Philip Morris Inc.).
Plaintiffs alleged in their complaint that PM Inc. intentionally withheld and
suppressed material information relating to technology to produce a cigarette
less likely to cause fires, and failed to design and sell its cigarettes using
the alleged technology. Compensatory and punitive damages were sought. In March
1998, the appellate court affirmed the trial court's order granting defendant's
motion to dismiss.
In September 1997, a purported class action, consisting of Alabama residents who
purchased cigarettes in 1997, was commenced by private plaintiffs in Alabama
state court alleging that the U.S. tobacco companies and others conspired to fix
cigarette prices in Alabama (Mosley, et al. v. Philip Morris Companies Inc., et
al.). In April 1998, the action was dismissed with prejudice as to the named
plaintiff and dismissed without prejudice as to the other members of the
putative class, based on the parties' stipulation and joint motion to dismiss.
Since September 1997, seven suits have been filed by former asbestos
manufacturers and asbestos manufacturers' personal injury settlement trusts
against domestic tobacco manufacturers, including PM Inc., and others (Raymark
Industries, Inc. v. Brown & Williamson Tobacco Corporation, et al.; Raymark
Industries, Inc. v. R.J. Reynolds Tobacco Company, et al.; Fibreboard
Corporation and Owens Corning v. The American Tobacco Company, et al.; Robert A.
Falise, et al., Trustees of the Manville Personal Injury Settlement Trust v. The
American Tobacco Company, et al.; Keene Creditors Trust v. Brown & Williamson
Tobacco Corporation, et al.; H.K. Porter Company, Inc. v. B.A.T. Industries,
PLC, et al.; and Raymark Industries, Inc. v. The American Tobacco Company, et
al., United States District Court, Eastern District, New York, filed January 30,
1998). These cases seek, among other things, contribution or reimbursement for
amounts expended for the defense and payment of asbestos claims that were
allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of
these cases also seek punitive damages.
CERTAIN OTHER ACTIONS
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in a complaint filed as a purported class action in federal
court in New York (Lawrence, et al. v. Philip Morris Companies Inc., et al.).
Plaintiffs allege that defendants violated the federal securities laws by
maintaining artificially high levels of profitability through an inventory
management practice pursuant to which defendants allegedly shipped more
inventory to customers than was necessary to satisfy market demand. In August
1995, the court granted plaintiffs' motion for class certification, certifying a
class of all persons who purchased common stock of the Company between July 10,
1991 and April 1, 1993, and who held such stock at the close of business on
April 1, 1993.
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in several purported class actions that were later
consolidated in the United States District Court in the Southern District of New
York (Kurzweil, et al. v. Philip Morris Companies Inc., et al. and State Board
of Administration of Florida, et al. v. Philip Morris Companies Inc., et al.).
In those cases,
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
plaintiffs asserted that defendants violated federal securities laws by making
allegedly false and misleading statements regarding the allegedly "addictive"
qualities of cigarettes. In September 1995, the court granted defendants' motion
to dismiss the two complaints in their entirety. The court then granted
plaintiffs in the State Board action leave to replead one of their claims. The
court dismissed the State Board claims in April 1996 and the Kurzweil claims in
August 1996. In April 1997, the court granted a motion filed by the Kurzweil
plaintiffs to vacate the judgment and for leave to amend their complaint.
Thereafter, plaintiffs filed an amended complaint.
Since April 1996, five purported class action suits have been filed in Wisconsin
alleging that Kraft Foods, Inc. ("Kraft") and others engaged in a conspiracy to
fix and depress the prices of bulk cheese and milk through their trading
activity on the National Cheese Exchange (Stuart, et al. v. Kraft Foods, Inc.,
et al.; Sheeks, et al. v. Kraft Foods, Inc., et al.; Servais, et al. v. Kraft
Foods, Inc. and the National Cheese Exchange, Inc.; Dodson, et al. v. Kraft
Foods, Inc., et al.; and Noll, et al. v. Kraft Foods, Inc., et al.). Plaintiffs
seek injunctive and equitable relief and treble damages. The court has granted
the Sheeks and Stuart plaintiffs' motions for voluntary dismissal without
prejudice. Plaintiffs in the three remaining cases have filed a consolidated
class action complaint in Wisconsin seeking certification of a class consisting
of all milk producers in the U.S. In October 1997, a purported class action suit
was filed in Illinois against Kraft only (Vincent, et al. v. Kraft Foods, Inc.),
and in April 1998, a purported class action suit was filed in California against
Kraft and others (Knevelboard Dairies, et al. v. Kraft Foods, Inc., et al.,
Superior Court of California, Los Angeles County, filed April 14, 1998). Both
of these suits contain allegations similar to those in the consolidated
Wisconsin class action, but the Vincent case seeks a class comprising all of
Kraft's milk suppliers, and the Knevelboard case seeks a class comprised of
defendants' milk suppliers in California.
-----------------------------------------------
Tax assessments alleging the nonpayment of taxes in Italy (value-added taxes for
the years 1988 to 1995 and income taxes for the years 1987 to 1995) have been
served upon certain affiliates of the Company. The aggregate amount of unpaid
taxes assessed to date is alleged to be the Italian lira equivalent of $2.5
billion. In addition, the Italian lira equivalent of $3.4 billion in interest
and penalties has been assessed (reduced from $6.0 billion to reflect a change
in law). The Company anticipates that value-added and income tax assessments
may also be received in respect of 1996 and 1997. In September 1997, in the
first to be heard of several appeals filed by affiliates of the Company, the
Italian administrative tax court in Milan overturned one of the assessments for
value-added taxes and that decision has been appealed by the tax authorities.
Hearings on additional appeals were held in October and December 1997, and
January and March 1998. In a separate proceeding in Naples, in October 1997, a
court dismissed charges of criminal association against certain present and
former officers and directors of affiliates of the Company, but permitted
charges of tax evasion to remain pending. In February 1998, the tax evasion
charges were dismissed by the criminal court in Naples following a determination
that jurisdiction was not proper, and the case file was transmitted to the
public prosecutor in Milan, who will determine whether to bring charges, in
which case a preliminary investigations judge will make a new finding as to
whether there should be a trial on these charges. The Company, its affiliates
and the officers
-18-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
and directors who are subject to the proceedings believe they have complied with
applicable Italian tax laws and are vigorously contesting the pending tax
assessments and pending proceedings.
---------------------------------------------------------------
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 or settlement of a pending smoking and health or health care
cost recovery case 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. These developments may
negatively affect the perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending litigation, and
may prompt 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 pending litigation. The
present legislative and litigation environment is substantially uncertain and it
is possible that the Company's business, results of operations, cash flows or
financial position could be materially affected by an unfavorable outcome or
settlement of certain pending litigation or by the enactment of federal tobacco
legislation discussed below. 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. All such cases are, and will continue to be, vigorously
defended. However, the Company and its subsidiaries may periodically enter into
discussions in an attempt to settle various cases when they believe it is in the
best interest of the Company's stockholders to do so.
Reference is made to Exhibit 99 to this Form 10-Q for a list of pending smoking
and health class actions and health care cost recovery actions, and for a
description of certain developments in such proceedings.
---------------------------------------------------------------
THE JUNE 1997 PROPOSED RESOLUTION AND PROPOSED FEDERAL TOBACCO LEGISLATION
On June 20, 1997, PM Inc. and other companies in the United States tobacco
industry entered into a Memorandum of Understanding (the "Resolution") to
support the adoption of federal legislation and ancillary undertakings that
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 proposed
Resolution is discussed in the Company's 1997 Form 10-K, and a copy of the
proposed Resolution is filed as Exhibit 10.17 thereto.)
In April 1998, the Senate Commerce Committee approved by a 19-1 vote a bill
sponsored by Senator John McCain (the "Commerce Bill"). Unlike the process
resulting in the proposed Resolution, the domestic tobacco industry was excluded
from discussion of the drafting of the Commerce Bill, and the Bill is
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
substantially different and significantly more adverse to the domestic tobacco
industry and the Company than the proposed Resolution.
The Commerce Bill's financial provisions, which would entail industry payments
in excess of one-half trillion dollars over the first twenty-five years, and,
according to Wall Street analysts, could result by the fifth year in increases
in the retail price of cigarettes by more than $2.50 per pack, are significantly
more onerous than those contained in the proposed Resolution. The Commerce Bill
would also provide the United States Food and Drug Administration ("FDA") with
broad regulatory control over design, sale, distribution and marketing of
tobacco products, including authority to decree a complete ban on tobacco
products or nicotine, subject to Congress's right to vote to override such bans
within two years. The Bill's provisions would apply to international sales of
tobacco products and, management believes, would effectively destroy the ability
of PMI to compete in international markets against foreign manufacturers not
subject to these provisions. The Commerce Bill eliminates virtually all of the
provisions of the proposed Resolution that would limit liability of the tobacco
industry in civil litigation in the U.S., except for an annual cap on liability
that could be revoked in a variety of circumstances.
Because the Commerce Bill does not reduce the uncertainties facing the domestic
tobacco industry or provide it with any other meaningful benefit, the Company
and other companies with domestic tobacco affiliates have announced that they
will actively oppose enactment of the Commerce Bill, that such affiliates would
refuse to sign on to provisions requiring their consent and that they would
challenge its legality in the courts if it is enacted. Other federal tobacco
bills are under consideration by Congress in addition to the Commerce Bill. The
Company cannot predict whether the Commerce Bill or any other such federal
tobacco legislation will be enacted or the form any such enactment might take.
As a result of these developments, the present legislative and litigation
environment is substantially uncertain and could result in material adverse
consequences for the business, financial condition, cash flows or results of
operations of the Company, PM Inc. and PMI or require significant changes in
their practices and policies, including the Company's dividend and share
repurchase policies.
NOTE 4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In 1998, AcSEC issued SOP No. 98-5, "Reporting on the Costs of Start-Up
Activities." SOP No. 98-5 establishes standards on accounting for start-up and
organization costs and in general, requires such costs to be expensed as
incurred. This standard is required to be adopted on January 1, 1999. The
Company is currently evaluating the estimated impact of adoption, if any.
-20-
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
CONSOLIDATED OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31,
OPERATING REVENUES
----------------------
(in millions)
1998 1997
------- -------
Tobacco $10,663 $ 9,920
Food 6,675 7,211
Beer 980 986
Financial services and real estate 65 100
------- -------
Operating revenues $18,383 $18,217
------- -------
------- -------
OPERATING INCOME
----------------------
(in millions)
Tobacco $ 1,648 $ 2,354
Food 1,037 1,016
Beer 128 119
Financial services and real estate 42 48
------- -------
Operating companies income 2,855 3,537
Amortization of goodwill (146) (149)
General corporate expenses (115) (109)
Minority interest in earnings of
consolidated subsidiaries (31) (13)
------- -------
Operating income $ 2,563 $ 3,266
------- -------
------- -------
Operating revenues for the first quarter of 1998 increased 0.9% over the first
quarter of 1997 due primarily to increases in domestic and international tobacco
operations. Food segment operating revenues declined due to the 1997 sales of
Brazilian ice cream businesses, North American maple-flavored syrup businesses
and a Scandinavian sugar confectionery business. Financial services and real
estate operating revenues decreased due to the 1997 sale of the real estate
business. Excluding the operating revenues of these and other smaller
operations divested in 1997, operating revenues for the first quarter of 1998
increased $407 million (2.3%) over the first quarter of 1997.
Operating income for the first quarter of 1998 decreased 21.5% from the first
quarter of 1997, reflecting charges related to voluntary early retirement and
separation programs and the settlement of tobacco litigation in Minnesota. In
February 1998, the Company announced voluntary early retirement and separation
programs for salaried and hourly employees, primarily at PM Inc. During the
first quarter, PM Inc. recorded pre-tax charges of $95 million related to these
programs. The Company expects to record additional pre-tax charges of
approximately $195 million in the second quarter related to these programs.
Results also reflect pre-tax charges of $806 million related to settling health
care cost recovery litigation in Minnesota, as previously discussed in Note 3 to
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<PAGE>
the Condensed Consolidated Financial Statements. Excluding these charges and
results from operations divested since the beginning of 1997, operating income
for the first quarter of 1998 increased $246 million (7.6%) over the first
quarter of 1997, reflecting favorable results of operations in domestic tobacco,
international tobacco and North American food operations.
Currency movements, primarily the strengthening of the U.S. dollar versus
European and Asian currencies, decreased operating revenues by $1.1 billion
($647 million, excluding excise taxes) and operating income by $133 million in
the first quarter of 1998 versus the comparable 1997 period. Although the
Company cannot predict future movements in currency rates or economic
developments, it anticipates that the continued global strength of the U.S.
dollar will continue to have a significant adverse impact on operating revenues
and operating income during the remainder of 1998 and that economic instability
in Asia will continue to slow the Company's businesses in that region.
Interest and other debt expense, net, decreased $43 million (15.0%) from the
comparable 1997 period due primarily to higher interest income, reflecting an
increase in cash and cash equivalents, and lower average debt outstanding during
the first quarter of 1998.
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
establishes standards for computing and presenting earnings per share ("EPS")
and requires the presentation of both basic and diluted EPS. Prior period EPS
have been restated to conform with the standards established by SFAS No. 128.
Diluted and basic EPS, both of which were $0.57 in the first quarter of 1998,
decreased by 20.8% and 21.9%, respectively, from the comparable 1997 period
due primarily to previously discussed charges for voluntary early retirement
and separation programs and the Minnesota health care cost recovery
litigation settlement. Excluding the after-tax impact of these charges, net
earnings increased 9.0% to $1.9 billion, diluted EPS increased 9.7% to $0.79
and basic EPS increased 9.6% to $0.80, respectively, in the first quarter of
1998.
Because many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they are unable to
distinguish between the years 2000 and 1900. As a result, business and
governmental entities are at risk for possible miscalculations or systems
failures causing disruptions in their business operations. This is commonly
known as the Year 2000 issue or Century Date Change ("CDC") problem.
The Company and its operating subsidiaries are implementing plans so that
their business systems and processes will function properly with respect to
the CDC. Based on the Company's current assessment of the CDC problem, it
estimates that the aggregate cost for its CDC efforts will be approximately
$400 million to $500 million, of which approximately $300 million to $400
million remains to be spent.
Due to the interdependent nature of computer systems, the Company and its
operating subsidiaries could be materially adversely affected if private and
governmental entities with which they do business or which provide essential
services are not CDC compliant. Key business partners and governmental entities
are being identified and their level of preparedness for dealing with the CDC is
being assessed and contingency plans are being developed. The Company currently
believes that the greatest risk of disruption to its businesses exists in
international markets.
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<PAGE>
OPERATING RESULTS BY BUSINESS SEGMENT
TOBACCO
BUSINESS ENVIRONMENT
The tobacco industry, both in the United States and abroad, has faced, and
continues to face, a number of issues that may adversely affect the business,
volume, operating revenues, cash flows, operating income and financial position
of PM Inc., PMI and the Company, and that may require significant changes in
their practices and policies.
In the United States, these issues include actual and proposed excise tax
increases; proposed federal regulatory controls (including, as discussed below,
the issuance of final regulations by the FDA that regulate cigarettes as "drugs"
or "medical devices"); actual and proposed requirements regarding disclosure of
cigarette ingredients and other proprietary information; actual and proposed
requirements regarding disclosure of the yields of "tar", nicotine and other
constituents found in cigarette smoke; governmental and grand jury
investigations; increased smoking and health litigation, including private
plaintiff class action litigation and health care cost recovery actions brought
by state and local governments, unions and others seeking reimbursement for
Medicaid and/or other health care expenditures allegedly caused by cigarette
smoking; actual and proposed federal, state and local governmental and private
bans and restrictions on smoking (including in workplaces and in buildings
permitting public access); actual and proposed restrictions on tobacco
manufacturing, marketing, advertising (including decisions by certain companies
to limit or not accept tobacco advertising) and sales; actual and proposed
legislation and regulations to require substantial additional health warnings on
cigarette packages and in advertising, and to eliminate the tax deductibility of
tobacco advertising and promotional costs; proposed legislation to require the
establishment of ignition propensity performance standards for cigarettes;
increased assertions of adverse health effects associated with both smoking and
exposure to ETS; legislation or other governmental action seeking to ascribe to
the industry responsibility and liability for the purported adverse health
effects associated with both smoking and exposure to ETS; the diminishing social
acceptance of smoking; increased pressure from anti-smoking groups; unfavorable
press reports; and the pending Senate Commerce Bill (discussed below) and other
federal tobacco legislation now under consideration by Congress.
Cigarettes are subject to substantial excise taxes in the United States and to
similar taxes in most foreign markets. The United States federal excise tax on
cigarettes is currently $12 per 1,000 cigarettes ($0.24 per pack of 20
cigarettes). In August 1997, legislation was enacted that will raise the
federal excise tax to $17 per 1,000 cigarettes ($0.34 per pack of 20 cigarettes)
starting in the year 2000 and then to $19.50 per 1,000 cigarettes ($0.39 per
pack of 20 cigarettes) in 2002. In general, excise taxes and other
cigarette-related taxes levied by federal, state and local governments have been
increasing. These taxes vary considerably and, when combined with sales taxes
and the current federal excise tax, may be as high as $1.50 per pack in a given
locality. Congress is currently considering a number of bills, including the
Senate Commerce Bill discussed below, that provide for significant increases in
the federal excise tax or other federal payments. Increases in other
cigarette-related taxes have been proposed at the state and local level.
In the opinion of PM Inc. and PMI, past increases in excise and similar taxes
have had an adverse impact on sales of cigarettes. Any future increases, the
extent of which cannot be predicted, could result in volume declines for the
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cigarette industry, including PM Inc. and PMI, and might cause sales to shift
from the premium segment to the discount segment.
In August 1996, the FDA issued final regulations pursuant to which it asserts
jurisdiction over cigarettes as "drugs" or "medical devices" under the
provisions of the Food, Drug and Cosmetic Act. The final regulations include
severe restrictions on the distribution, marketing and advertising of
cigarettes, and would require the industry to comply with a wide range of
labeling, reporting, recordkeeping, manufacturing and other requirements
applicable to medical devices and their manufacturers. For the most part, the
regulations were scheduled to become effective on August 28, 1997. The FDA's
exercise of jurisdiction, if not reversed by judicial or legislative action,
could lead to more expansive FDA-imposed restrictions on cigarette operations
than those set forth in the final regulations, and could materially adversely
affect the volume, operating revenues, cash flows and operating income of PM
Inc. PM Inc. and others challenged in the courts the FDA's authority to
regulate cigarettes. In April 1997, a U.S. district court ruled that Congress
has not precluded the FDA from regulating cigarettes as "drugs" or "medical
devices" and that the FDA may regulate cigarettes if the facts asserted in
support of the FDA's assertion of jurisdiction are proven to be correct. The
court also ruled, however, that the section of the Food, Drug and Cosmetic Act
relied upon by the agency does not give the FDA authority to implement its
regulations restricting cigarette advertising and promotions. The court stayed
implementation of the FDA's regulations scheduled for August 1997. The court
left in effect the specific regulations that took effect in February 1997
establishing a federal minimum age of 18 for the sale of tobacco products and
requiring proof of age for anyone under age 27. The tobacco company plaintiffs,
including PM Inc., are appealing that portion of the district court's order
relating to the FDA's assertion of jurisdiction. The FDA is appealing that
portion of the order enjoining the advertising and promotion restrictions. The
respective appeals were heard by the U.S. Court of Appeals for the Fourth
Circuit in August 1997. In March 1998, a member of the Fourth Circuit panel
that was considering the appeals died and as a result the appeals have been set
for re-argument on June 9, 1998. The outcome of this litigation cannot be
predicted.
In August 1996, the Commonwealth of Massachusetts enacted legislation to require
cigarette manufacturers to disclose to the Massachusetts Department of Public
Health ("DPH") the flavorings and other ingredients used in each brand of
cigarettes sold in the Commonwealth, and to provide "nicotine-yield ratings" for
their products based on standards to be established by the DPH. PM Inc.
believes that enforcement of the ingredient disclosure provisions of the statute
could permit the disclosure by DPH to the public of valuable proprietary
information concerning its brands. PM Inc. and three other domestic cigarette
manufacturers have filed suit in federal district court in Boston challenging
the legislation. In December 1997, the court granted a preliminary injunction
to the tobacco company plaintiffs and enjoined the Commonwealth from enforcing
the ingredient disclosure provisions of the legislation until further order of
the court. The ultimate outcome of this lawsuit cannot be predicted. The
enactment of this legislation has encouraged efforts to enact, and the enactment
of, ingredient disclosure legislation in other states, such as Texas and
Minnesota.
In December 1997, PM Inc. disclosed to the DPH "nicotine-yield ratings" for its
products sold in the Commonwealth based on standards established by the DPH for
determining "nicotine delivery under average smoking conditions." The
"nicotine-yield ratings" produced using the DPH standards are higher than the
yields produced using the standards established by a 1970 voluntary agreement
between the Federal Trade Commission ("FTC") and domestic cigarette
manufacturers, including PM Inc., and which are required to be included in all
cigarette
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advertising. In September 1997, the FTC issued a request for public comments on
its proposed revision of the "tar" and nicotine testing and reporting standards
established by the 1970 voluntary agreement. In February 1998, PM Inc. and
three other domestic cigarette manufacturers filed comments on the proposed
revisions in which they stressed the value of historical continuity with respect
to "tar" and nicotine testing and disclosure; expressed the opinion that the
proposed revisions are unnecessary; but, agreed to assist the FTC in its efforts
to improve consumer understanding of the meaning of routine testing results.
In June 1995, PM Inc. announced that it had voluntarily undertaken a program to
limit minors' access to cigarettes. Elements of the program include
discontinuing free cigarette sampling to consumers in the United States,
discontinuing the distribution of cigarettes by mail to consumers in the United
States, placing a notice on cigarette cartons and packs for sale in the United
States stating "Underage Sale Prohibited," working with others in support of
state legislation to prevent youth access to tobacco products, taking measures
to encourage retailer compliance with minimum-age laws, and independent auditing
of the program.
In October 1997, at the request of the United States Senate Judiciary Committee,
PM Inc. provided the Committee with a document setting forth the Company's
position on a number of issues. On the issues of the role played by cigarette
smoking in the development of lung cancer and other diseases in smokers, and
whether nicotine, as found in cigarette smoke, is "addictive", the Company
stated that despite the differences that may exist between its views and those
of the public health community, it would, in order to ensure that there will be
a single, consistent public health message on these issues, refrain from
debating the issues other than as necessary to defend itself and its opinions in
the courts and other forums in which it is required to do so. The Company also
stated that in relation to these issues, and the alleged health effects of
exposure to ETS, the Company is prepared to defer to the judgment of public
health authorities as to what health warning messages will best serve the public
interest.
In late January 1998, the chief executive officers of the four leading domestic
tobacco companies or their parent corporations, including the Company, pledged
to Congress to publicly release millions of pages of industry documents placed
into the document depository established in connection with Minnesota's health
care cost recovery action. The documents comprise a wide range of smoking and
health issues covered in scientific and marketing research reports, memoranda,
executive correspondence, handwritten notes and other materials. They do not
include highly sensitive trade secret information, certain third-party and
personnel information, or documents for which attorney client privilege or work
product doctrine claims have been asserted. In February 1998, the first
installment of these documents was made available via the Internet, consisting
of the vast majority of the documents selected from the document depository by
the attorney general of Minnesota in connection with Minnesota's health care
cost recovery action. Additional installments are expected to be made available
during the second and third quarters of 1998.
Many foreign countries, as well as the European Union, have also taken a
number of different steps to regulate the manufacture and/or marketing of
cigarettes. Most prominently, these steps include: restricting or prohibiting
cigarette advertising and promotion, banning or severely restricting smoking
in workplaces and public places or otherwise discouraging cigarette smoking
and increasing taxes on cigarettes. Some countries have taken further steps,
including requiring ingredient disclosure, imposing maximum constituent
levels, controlling prices, and restricting imports. It is not possible to
predict what, if any, other foreign governmental legislation or regulations
will be adopted relating to the
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<PAGE>
manufacturing, advertising, sale or use of cigarettes or to the tobacco industry
generally.
In March 1998, pursuant to a regulation in Thailand that requires manufacturers
and importers of tobacco products to disclose to the Ministry of Public Health
("MPH") the ingredients of their products to be sold in Thailand on a by-brand
basis, a subsidiary of PMI disclosed to the MPH by-brand ingredient lists for
its products imported into Thailand for sale in that country. The disclosure
was accompanied by a claim of confidentiality under applicable Thai and
international law. Although this Thai regulation does not require the MPH to
make public the submitted ingredient lists, there are no assurances that the
confidentiality of the lists submitted will be maintained.
PM Inc. has received requests for information (including grand jury subpoenas)
in connection with governmental investigations of the tobacco industry, and is
cooperating with respect to such requests. Certain present and former employees
of PM Inc. have testified or have been asked to testify in connection with
certain of these matters. The investigations include an investigation by the
United States Attorney for the Eastern District of New York relating to The
Council for Tobacco Research-U.S.A., Inc., a research organization of which PM
Inc. is a sponsor; and an investigation by the United States Department of
Justice relating to issues raised in testimony provided by tobacco industry
executives before Congress and other related matters. While the outcomes of
these investigations cannot be predicted, PM Inc. believes it has acted
lawfully.
As further discussed above in Note 3 to the Condensed Consolidated Financial
Statements, there is litigation pending in various U.S. and foreign
jurisdictions related to tobacco products. These cases generally fall within
three categories: (i) smoking and health cases alleging personal injury brought
on behalf of individual plaintiffs, (ii) smoking and health cases alleging
personal injury and purporting to be brought on behalf of a class of individual
plaintiffs, and (iii) health care cost recovery cases, including class actions,
brought by state and local governments, unions, federal and state taxpayers,
HMOs, native American tribes and others seeking reimbursement for Medicaid
and/or other health care expenditures allegedly caused by cigarette smoking.
Damages claimed in some of the smoking and health class actions and health care
cost recovery cases range into the billions of dollars.
In recent years there has been a substantial increase in the number of smoking
and health cases being filed in the United States, a trend that accelerated in
1997 and the first four months of 1998.
As of May 1, 1998, there were approximately 410 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 50 cases in Texas
that were voluntarily dismissed but which may be refiled under certain
conditions), compared with approximately 375 such cases on December 31, 1997,
and 185 such cases on December 31, 1996. Many of the new cases were filed in
Florida and New York. Seventeen of the individual cases involve allegations of
various personal injuries allegedly related to exposure to ETS.
In addition, as of May 1, 1998, there were approximately 55 purported smoking
and health class actions pending in the United States against PM Inc. and, in
some cases, the Company (including six that involve allegations of various
personal injuries related to exposure to ETS), compared with approximately 50
such cases on December 31, 1997, and 20 such cases on December 31, 1996. Most
of these actions purport to constitute statewide class actions and were filed
after May 1996 when the Fifth Circuit Court of Appeals, in the CASTANO case,
reversed a
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federal district court's certification of a purported nationwide class action on
behalf of persons who were allegedly "addicted" to tobacco products.
The number of health care cost recovery actions in the United States also
increased, with approximately 120 such cases pending as of May 1, 1998, compared
with approximately 105 such cases on December 31, 1997, and 25 such cases on
December 31, 1996.
There are also a number of tobacco-related actions pending outside the United
States against affiliates and subsidiaries of PMI including, as of May 1, 1998,
approximately 20 smoking and health cases initiated by one or more individuals
(Argentina (13), Brazil (1), Canada (1), Italy (1), Japan (1), Scotland (1) and
Turkey (2)), four smoking and health class actions (Brazil (2), Canada (1) and
Nigeria (1)) and one health care cost recovery action (Republic of the Marshall
Islands). On May 12, 1998, the Republic of Guatemala filed a health care cost
recovery action in the United States against the Company, PM Inc. and others.
On May 8, 1998, PM Inc. and other companies in the United States tobacco
industry settled the health care cost recovery action brought by the State of
Minnesota and Blue Cross Blue Shield of Minnesota. The settlement is discussed
in Note 3 to the Condensed Consolidated Financial Statements under the heading
"Health Care Cost Recovery Litigation--MINNESOTA TRIAL AND SETTLEMENT." During
1997 and in January of 1998, PM Inc. and other companies in the United States
tobacco industry also settled health care cost recovery actions brought by the
States of Mississippi, Florida and Texas and an ETS smoking and health class
action brought on behalf of airline flight attendants. These settlements are
discussed in the Company's 1997 Form 10-K.
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 or settlement of a pending smoking and health or health care
cost recovery case 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. These developments may
negatively affect the perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending litigation, and
may prompt 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 pending litigation. The
present legislative and litigation environment is substantially uncertain and it
is possible that the Company's business, results of operations, cash flows or
financial position could be materially affected by an unfavorable outcome or
settlement of certain pending litigation or by the enactment of federal tobacco
legislation discussed below. 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. All such cases are, and will continue to be, vigorously
defended. However, the Company and its subsidiaries may periodically enter into
discussions in an attempt to settle various cases when they believe it is in the
best interest of the Company's stockholders to do so.
THE JUNE 1997 PROPOSED RESOLUTION AND PROPOSED FEDERAL TOBACCO LEGISLATION
On June 20, 1997, PM Inc. and other companies in the United States tobacco
industry entered into a Memorandum of Understanding (the "Resolution") to
support
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the adoption of federal legislation and ancillary undertakings that 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 proposed Resolution is
discussed in the Company's 1997 Form 10-K, and a copy of the proposed Resolution
is filed as Exhibit 10.17 thereto.)
In April 1998, the Senate Commerce Committee approved by a 19-1 vote a bill
sponsored by Senator John McCain (the "Commerce Bill"). Unlike the process
resulting in the proposed Resolution, the domestic tobacco industry was excluded
from discussion of the drafting of the Commerce Bill, and the Bill is
substantially different and significantly more adverse to the domestic tobacco
industry and the Company than the proposed Resolution. A letter to stockholders
describing the Company's view of the Commerce Bill is included in the Company's
Current Report on Form 8-K dated April 20, 1998.
The Commerce Bill's financial provisions, which would entail industry payments
in excess of one-half trillion dollars over the first twenty-five years, and,
according to Wall Street analysts, could result by the fifth year in increases
in the retail price of cigarettes by more than $2.50 per pack, are significantly
more onerous than those contained in the proposed Resolution. The Commerce Bill
would also provide the FDA with broad regulatory control over design, sale,
distribution and marketing of tobacco products, including authority to decree a
complete ban on tobacco products or nicotine, subject to Congress's right to
vote to override such bans within two years. The Bill's provisions would apply
to international sales of tobacco products and, management believes, would
effectively destroy the ability of PMI to compete in international markets
against foreign manufacturers not subject to these provisions. The Commerce
Bill eliminates virtually all of the provisions of the proposed Resolution that
would limit liability of the tobacco industry in civil litigation in the U.S.,
except for an annual cap on liability that could be revoked in a variety of
circumstances.
Because the Commerce Bill does not reduce the uncertainties facing the domestic
tobacco industry or provide it with any other meaningful benefit, the Company
and other companies with domestic tobacco affiliates have announced that they
will actively oppose enactment of the Commerce Bill, that such affiliates would
refuse to sign on to provisions requiring their consent and that they would
challenge its legality in the courts if it is enacted. Other federal tobacco
bills are under consideration by Congress in addition to the Commerce Bill. The
Company cannot predict whether the Commerce Bill or any other such federal
tobacco legislation will be enacted or the form any such enactment might take.
As a result of these developments, the present legislative and litigation
environment is substantially uncertain and could result in material adverse
consequences for the business, financial condition, cash flows or results of
operations of the Company, PM Inc. and PMI or require significant changes in
their practices and policies, including the Company's dividend and share
repurchase policies.
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OPERATING RESULTS
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------
OPERATING REVENUES OPERATING INCOME
------------------ -----------------
(in millions)
1998 1997 1998 1997
------- ------- ------- -------
Domestic tobacco $ 3,311 $ 2,912 $ 224 $ 1,074
International tobacco 7,352 7,008 1,424 1,280
------- ------- ------- -------
Total $10,663 $ 9,920 $ 1,648 $ 2,354
------- ------- ------- -------
------- ------- ------- -------
DOMESTIC TOBACCO. During the first quarter of 1998, PM Inc.'s operating
revenues increased 13.7% over the comparable 1997 period, due to pricing ($328
million), higher volume ($53 million) and improved product mix ($18 million).
As discussed previously, the Company announced voluntary early retirement and
separation programs for salaried and hourly employees, primarily at PM Inc.
During the first quarter, PM Inc. recorded pre-tax charges of $95 million
related to these programs. In addition, PM Inc. recorded pre-tax charges of
$806 million related to settling health care cost recovery litigation in
Minnesota, as discussed more thoroughly in Note 3 to the Condensed
Consolidated Financial Statements.
Operating income for the first quarter of 1998 decreased 79.1% from the
comparable 1997 period, due to previously discussed tobacco litigation
settlement charges ($806 million), higher marketing, administration and research
costs ($200 million, primarily higher marketing expense), previously discussed
charges for the voluntary early retirement and separation programs ($95 million)
and higher fixed manufacturing costs ($11 million), partially offset by price
increases, net of cost increases (netting to $216 million), higher volume ($34
million) and improved product mix ($12 million). Excluding the impact of the
voluntary early retirement and separation programs and the tobacco litigation
settlement charges, PM Inc.'s operating income for the first quarter of 1998
increased 4.7% over the comparable 1997 period.
Domestic tobacco industry shipment volume during the first quarter declined 1.8%
from the comparable 1997 period; however, PM Inc. estimates that, excluding
changes in trade inventories, industry shipments would have declined by almost
twice as much. While PM Inc. cannot predict future rates of decline, it
believes that, over the long term, industry shipments should continue to decline
in line with historical trends, subject to the effects of price increases
related to tobacco litigation settlements or the possible enactment of federal
tobacco legislation discussed under "Tobacco--Business Environment" above.
PM Inc.'s shipment volume for the first quarter of 1998 was 54.5 billion units,
an increase of 2.1% over the first quarter of 1997, reflecting higher MARLBORO
volume. MARLBORO shipment volume increased 2.0 billion units (5.6%) to 38.8
billion units for a 35.9% share of the total industry, an increase of 2.5 share
points over 1997. First quarter MARLBORO shipments included advance orders by
wholesalers for an April retail promotion and the launch of MARLBORO ULTRA
LIGHTS. PM Inc.'s 1998 shipment market share was 50.4%, an increase of 1.9
share points over 1997. Consumer purchases as measured by retail data from an
independent market research company are consistent with these shipment trends.
Based on shipments, the premium segment accounted for approximately 72.6% of the
domestic cigarette industry volume in 1998, an increase of 1.1 share points over
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1997. This reflects a continued shift toward higher-margin premium cigarettes
and away from the discount segment, a trend which began in the second half of
1993. In the premium segment, PM Inc.'s volume increased 3.4%, compared with a
0.3% decrease for the industry, resulting in a premium segment share of 59.4%,
an increase of 2.1 share points over 1997, reflecting higher MARLBORO volume.
In the discount segment, PM Inc.'s shipments decreased 4.9% to 7.8 billion units
in 1998, compared with an industry decline of 5.6%, resulting in a discount
segment share of 26.4%, an increase of 0.2 share points over 1997. BASIC
shipment volume increased 505 million units to 6.0 billion units, for a 20.3%
share of the discount segment, an increase of 2.7 share points over the
comparable 1997 period.
PM Inc. cannot predict future change or rates of change in the relative sizes of
the premium and discount segments or in PM Inc.'s shipments, shipment market
share or retail market share; however, it believes that PM Inc.'s shipments
would be materially adversely affected by price increases related to tobacco
litigation settlements or the possible enactment of federal tobacco legislation
discussed under "Tobacco--Business Environment" above.
In April 1998, PM Inc. announced a price increase of $2.50 per thousand
cigarettes on its premium and discount brands. On May 11, 1998, PM Inc.
announced an additional price increase of $2.50 per thousand cigarettes on its
premium and discount brands. These increases follow similar announcements of
price increases of $1.25 per thousand cigarettes in January 1998, $3.50 per
thousand cigarettes in September 1997 and $2.50 per thousand cigarettes in March
1997. Each $1.00 per thousand increase by PM Inc. equates to a $.02 increase to
the wholesale price of each pack of twenty cigarettes.
In October 1997, PM Inc. announced that it would commence limited consumer
preference testing on a new cigarette smoking system. The new cigarette smoking
system consists of a cigarette specially designed to be smoked while partially
inside an electronic PUFF ACTIVATED LIGHTER so that the cigarette burns only
when puffed. The limited consumer preference testing is expected to take
approximately 12 months to complete.
INTERNATIONAL TOBACCO. During the first quarter of 1998, international tobacco
operating revenues of PMI increased 4.9% over 1997, including excise taxes.
Excluding excise taxes, operating revenues increased 6.8%, due primarily to
price increases ($209 million), favorable volume/mix ($145 million) and the
consolidation of previously unconsolidated subsidiaries ($212 million),
partially offset by unfavorable currency movements ($356 million). Operating
income for the first quarter of 1998 increased 11.3% over the comparable 1997
period, due primarily to price increases, net of cost increases ($161 million),
favorable volume/mix ($39 million), the consolidation of previously
unconsolidated subsidiaries ($28 million) and lower marketing, administration
and research costs, partially offset by unfavorable currency movements ($111
million).
PMI's volume grew 9.0 billion units (4.7%) in the first quarter of 1998 over the
comparable 1997 period to 199.9 billion units. PMI achieved this growth despite
weaker business conditions in Asia, primarily in Korea and Indonesia, and an
unfavorable comparison in Japan, where first quarter 1997 volume benefited from
significant trade buying in advance of a tax-driven retail price increase.
However, MARLBORO volume and market share grew strongly in Japan. Volume
advanced solidly in a number of major markets, including Germany, Italy, France,
the Benelux countries, Spain, Poland, the Czech and Slovak Republics, Eastern
Europe, Turkey, Australia, the Philippines, Mexico and Argentina. In addition,
PMI recorded market share gains in virtually all major markets. Overall volume
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growth was driven by aggregate gains for PMI's portfolio of major international
brands, including MARLBORO, which grew strongly over the first quarter of 1997,
and double-digit volume gains for L&M, PARLIAMENT and CHESTERFIELD.
FOOD
BUSINESS ENVIRONMENT
Kraft Foods, Inc. ("Kraft"), the largest processor and marketer of retail
packaged food in the United States, and its subsidiary Kraft Foods
International, Inc. ("KFI"), which markets coffee, confectionery and grocery
products in Europe and the Asia/Pacific region, are subject to fluctuating
commodity costs, currency movements and competitive challenges in various
product categories and markets. Certain subsidiaries and affiliates of PMI that
manufacture and sell food products in Latin America are also subject to
competitive challenges in various product categories and markets. To confront
these challenges, Kraft, KFI and PMI continue to take steps to build the value
of premium brands, with new product and marketing initiatives, to improve their
food business portfolios and to reduce costs.
Increases in commodity costs can affect retail price volatility and influence
consumer and trade buying patterns, leading to price competition in some
markets. The North American and international food businesses are subject to
fluctuating commodity costs, particularly coffee bean and cocoa prices. Coffee
bean prices reached a twenty-year high in May 1997, leading to price increases
by Kraft, KFI and their competitors. Coffee volume in 1997 was lower, compared
to 1996, as customers reacted to these increases that began in the second
quarter of 1997. Sterling-denominated cocoa costs increased in 1997, adversely
impacting margins on confectionery products at KFI.
During 1997, PMI sold its Brazilian ice cream businesses in the fourth quarter,
Kraft sold North American maple-flavored syrup businesses in the third quarter
and KFI sold a Scandinavian sugar confectionery business in the first quarter.
Kraft and KFI also sold several smaller non-strategic businesses in 1997. The
operating results of businesses divested in 1997 were not material to operating
results in any of the periods presented.
In the fourth quarter of 1997, KFI and the food operations of PMI recorded
realignment charges related primarily to the downsizing or closure of
manufacturing and other facilities, as well as the discontinuance of certain
low-margin product lines. Included in the charges were provisions for
incremental postemployment benefits, primarily related to severance.
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OPERATING RESULTS
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------
OPERATING REVENUES OPERATING INCOME
------------------ -----------------
(in millions)
1998 1997 1998 1997
------- ------- ------- -------
North American food $ 4,365 $ 4,400 $ 802 $ 743
International food 2,310 2,811 235 273
------- ------- ------- -------
Total $ 6,675 $ 7,211 $ 1,037 $ 1,016
------- ------- ------- -------
------- ------- ------- -------
NORTH AMERICAN FOOD. During the first quarter of 1998, operating revenues
decreased 0.8% from the first quarter of 1997, due primarily to the impact of
divestitures ($50 million), unfavorable product mix ($50 million) and
unfavorable currency movements ($23 million), partially offset by pricing ($94
million, largely due to commodity-driven cost increases). Operating income for
the first quarter of 1998 increased 7.9% over the first quarter of 1997, due
primarily to price increases, net of cost increases (netting to $83 million),
volume increases in ongoing operations ($12 million) and lower marketing,
administration and research costs ($29 million), partially offset by unfavorable
product mix ($50 million) and the impact of divestitures ($11 million).
Excluding operating results of the divested North American food businesses
discussed above, underlying operating revenues and underlying operating income
increased 0.3% and 9.6%, respectively, in the first quarter of 1998 versus the
comparable 1997 period.
Strong underlying volume gains were achieved by beverages, from the strength of
ready-to-drink products; frozen pizza, resulting from the continued success of
rising crust pizza; meals, due to the growth of Taco Bell grocery products as
well as strength in macaroni and cheese dinners; and cereals, aided by new
products. In processed meats, lunch combinations volume increased reflecting
the continued success of new product introductions. Cheese volume rose slightly
due to growth of the natural cheese category. Cheese, spoonable dressings and
desserts and snacks volumes were negatively affected by a difficult comparison
against the first quarter of 1997 when the timing of the Easter holiday resulted
in increased 1997 first quarter shipments; volume for pourable salad dressings
declined due to intense competition. Coffee volume in the first quarter of 1998
declined from the comparable 1997 period when coffee shipments accelerated in
advance of commodity-driven price increases. In Canada, volume increased due to
solid performance in retail branded products.
INTERNATIONAL FOOD. Operating revenues for the first quarter of 1998 decreased
17.8% from the first quarter of 1997, due to unfavorable currency movements
($268 million), lower ongoing volume/mix ($206 million) and the impact of
divestitures ($145 million), partially offset by pricing ($98 million).
Operating income for the first quarter of 1998 decreased 13.9% from the first
quarter of 1997, due primarily to lower ongoing volume/mix ($51 million), cost
increases net of price increases (netting to $31 million, primarily related to
higher coffee costs), the impact of divestitures ($31 million) and unfavorable
currency movements ($19 million), partially offset by lower marketing,
administration and research costs ($94 million, largely lower marketing
expense).
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Excluding the operating results of the divested international food businesses
discussed above, underlying operating revenues decreased 13.4% and underlying
operating income decreased 2.9% in the first quarter of 1998 from the first
quarter of 1997 due primarily to lower volume and currency movements.
KFI's coffee volume continued to be adversely impacted by soft consumption and
trade de-stocking in anticipation of price declines in certain markets, as well
as a difficult comparison against the prior year, when shipments were heavy in
advance of rising prices. Confectionery volume was down due to higher retail
pricing in Germany and the contraction of several key chocolate markets.
However, in Central and Eastern Europe, volume gains were achieved in several
markets, led by continued volume growth in the Ukraine. Volume declined in
KFI's cheese and grocery business as a result of higher retail prices in Germany
and economic instability in Asia. Latin America volume declined primarily due to
PMI's sale of its Brazilian ice cream businesses in the fourth quarter of 1997.
BEER
Operating revenues of the Miller Brewing Company ("Miller") for the first
quarter of 1998 decreased $6 million (0.6%) from the first quarter of 1997, due
primarily to unfavorable price/mix ($5 million). Operating income for the first
quarter of 1998 increased $9 million (7.6%) over the first quarter of 1997, due
primarily to lower marketing, administration and research costs ($16 million),
partially offset by unfavorable price/mix ($4 million) and lower volume ($2
million). Favorable marketing, administration and research costs reflect a
litigation settlement from a supplier in the first quarter of 1998 and a
favorable comparison to 1997 when Miller recorded its share of restructuring
charges at then 20%-owned Molson Breweries of Canada, an operation sold in the
fourth quarter of 1997. Excluding the results of this divested business, which
results include the previously mentioned restructuring charges, underlying
operating income increased 1.6%.
Miller's domestic shipment volume of 9.9 million barrels for the first quarter
of 1998 increased 0.7% from the comparable 1997 period, reflecting increases in
near-premium and budget brands. Shipments of near-premium products grew on
double-digit increases in RED DOG, and budget brand shipments advanced due
primarily to MILWAUKEE'S BEST. Shipments of premium products decreased slightly
due primarily to poor weather and intense competition in the key markets of
California and Texas. Lower shipments of MILLER beer were partially offset by
double-digit gains in ICEHOUSE and FOSTER'S. MILLER LITE shipments were
essentially flat. Wholesalers' sales to retailers in the first quarter of 1998
decreased slightly from the comparable 1997 period, reflecting lower sales of
MILLER LITE and MILLER beer.
FINANCIAL SERVICES AND REAL ESTATE
Philip Morris Capital Corporation's ("PMCC") financial services and real estate
operating revenues and operating income declined in the first quarter of 1998
from the first quarter of 1997, reflecting the sale of its real estate
subsidiary, Mission Viejo Company, in the third quarter of 1997. Operating
revenues and operating income from PMCC's financial services business increased
in the first quarter of 1998 over the comparable 1997 period due to increased
leasing and structured finance investments and the continued profitability of
PMCC's existing portfolio of finance assets.
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FINANCIAL REVIEW
NET CASH PROVIDED BY OPERATING ACTIVITIES
During the first quarter of 1998, net cash provided by operating activities
was $471 million compared with $695 million in the comparable 1997 period.
The decrease in net cash provided by operating activities reflects the
payment of tobacco litigation settlements charged to earnings in the second
half of 1997. Included in first quarter 1998 net earnings were previously
discussed non-cash charges for voluntary early retirement programs and the
settlement of health care cost recovery litigation in Minnesota (aggregating
to $550 million on an after-tax basis). These charges were offset by changes
in working capital and other operating cash flows as presented in the
Company's Condensed Consolidated Statement of Cash Flows.
NET CASH USED IN INVESTING ACTIVITIES
During the first quarter of 1998, net cash used in investing activities was $480
million, compared with $321 million used during the comparable 1997 period. The
difference primarily reflects PMCC's proceeds in 1997 from the sale of finance
assets. During the first quarter of 1997, cash used by PMI for the purchase of
a controlling interest in a cigarette manufacturer in Portugal more than offset
cash provided by KFI from the sale of a Scandanavian sugar confectionery
business.
NET CASH USED IN FINANCING ACTIVITIES
During the first quarter of 1998, net cash of $196 million was provided by
financing activities, as compared with $245 million used in financing activities
during the comparable 1997 period. This difference was primarily due to stock
repurchases during the first quarter of 1997.
DEBT
The Company's total debt (consumer products and financial services) was $15.2
billion and $14.1 billion at March 31, 1998 and December 31, 1997, respectively.
Total consumer products debt was $14.4 billion and $13.3 billion at March 31,
1998 and December 31, 1997, respectively. At March 31, 1998 and December 31,
1997, the Company's ratio of consumer products debt to total equity was 0.95 and
0.89, respectively. The ratio of total debt to total equity was 1.00 and 0.95
at March 31, 1998 and December 31, 1997, respectively.
The Company and its subsidiaries maintain credit facilities with a number of
lending institutions, amounting to approximately $12.0 billion at March 31,
1998. These include revolving bank credit agreements totaling $10.0 billion,
which may be used to support any commercial paper borrowings by the Company and
which are available for acquisitions and other corporate purposes. An agreement
for $2.0 billion expires in October 1998. An agreement for $8.0 billion expires
in 2002, enabling the Company to refinance short-term debt on a long-term basis.
Based upon the Company's intent and ability to refinance such debt, consumer
products short-term borrowings of $36 million and $37 million were reclassified
as long-term debt at March 31, 1998 and December 31, 1997, respectively. The
Company expects to continue to refinance long-term and short-term debt from time
to time. The nature and amount of the Company's long-term and short-term debt
and the proportionate amount of each can be expected to vary as a result of
future business requirements, market conditions and other factors.
During the first quarter of 1998, the Company issued $800 million of fixed rate
long-term debt. At the same time, it entered into an interest rate swap
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agreement that effectively converted the issuance to variable rate debt for two
years.
The Company operates internationally, with manufacturing and sales facilities in
various locations around the world. The Company continually evaluates its
foreign currency net asset exposure (primarily the Swiss franc, German mark,
Netherlands guilder, Swedish krona and Canadian dollar) based on current market
conditions and business strategies, and it acts to manage such exposure, when
deemed prudent, through various hedging transactions. The Company has entered
into currency and related interest rate swap agreements to manage a portion of
its exposure to currency movements. The U.S. dollar value of aggregate notional
principal amounts for these agreements outstanding was equivalent to $1.4
billion at both March 31, 1998 and December 31, 1997. Of these amounts, $729
million and $736 million related to consumer products debt at March 31, 1998 and
December 31, 1997, respectively.
The Company enters into forward exchange and option contracts, for purposes
other than trading, to reduce the effects of fluctuating foreign currency on
foreign currency denominated current assets, liabilities, commitments and
short-term intercompany transactions. At March 31, 1998 and December 31, 1997,
the Company had entered into contracts, with maturities of less than one year
and U.S. dollar equivalents of $2.8 billion (including $1.6 billion in option
contracts) and $2.5 billion (including $1.1 billion in option contracts),
respectively.
Use of the above-mentioned derivative financial instruments has not had a
material impact on the Company's financial position at March 31, 1998 or
results of operations for the three months then ended.
The Company's credit ratings by Moody's at March 31, 1998 and December 31, 1997
were "P-1" in the commercial paper market and "A2" for long-term debt
obligations. The Company's credit ratings by Standard & Poor's ("S&P") at March
31, 1998 and December 31, 1997 were "A-1" in the commercial paper market and "A"
for long-term debt obligations. The debt ratings of the Company remain on S&P's
CreditWatch list, as S&P monitors tobacco litigation and legislation
developments.
As discussed above under "Tobacco--Business Environment," the present
legislative and litigation environment is substantially uncertain and could
result in material adverse consequences for the business, financial condition,
cash flows or results of operations of the Company, PM Inc. and PMI or require
significant changes in their practices and policies.
EQUITY AND DIVIDENDS
During the first quarter of 1997, the Board of Directors announced an $8.0
billion share repurchase program. The Company repurchased common stock at an
aggregate cost of $51 million under this program prior to its suspension in
April 1997.
Dividends paid in the first quarter of 1998 were slightly lower than in the
comparable 1997 period, reflecting fewer shares outstanding. The current
quarterly dividend rate of $0.40 per share was established by the Company's
Board of Directors in the third quarter of 1996, resulting in an annualized
dividend rate of $1.60 per share.
As discussed above under "Tobacco--Business Environment," the present
legislative and litigation environment is substantially uncertain and could
require significant changes in the Company's dividend and share repurchase
policies.
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During the first quarter of 1998, currency translation adjustments reduced
stockholders' equity by $181 million due to the strengthening of the U.S. dollar
versus European currencies, primarily the Swedish krona, Netherlands guilder,
German mark and Swiss franc.
CASH AND CASH EQUIVALENTS
- -------------------------
Cash and cash equivalents were $2.5 billion at March 31, 1998 and $2.3 billion
at December 31, 1997.
NEW ACCOUNTING STANDARDS
- ------------------------
In 1998, the American Institute of Certified Public Accountants' Accounting
Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP")
No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP No. 98-1 requires certain costs incurred in
connection with developing or obtaining internal-use software to be
capitalized and other costs to be expensed. The Company adopted SOP No. 98-1
effective January 1, 1998, and its application for the quarter ended March
31, 1998 had no material effect on the Company's financial position or
results of operations.
In 1998, AcSEC issued SOP No. 98-5, "Reporting on the Costs of Start-Up
Activities." SOP No. 98-5 establishes standards on accounting for start-up and
organization costs and in general, requires such costs to be expensed as
incurred. This standard is required to be adopted on January 1, 1999. The
Company is currently evaluating the estimated impact of adoption, if any.
CONTINGENCIES
- -------------
See Note 3 to the Condensed Consolidated Financial Statements for a discussion
of contingencies.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
The Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company; any such statement is qualified by reference to the following
cautionary statements.
The tobacco industry continues to be subject to health concerns relating to the
use of tobacco products and exposure to ETS, legislation, including tax
increases, governmental regulation, privately imposed smoking restrictions,
governmental and grand jury investigations, litigation, and the effects of price
increases related to tobacco litigation settlements and, if implemented, federal
tobacco legislation discussed above. Each of the Company's operating
subsidiaries is subject to intense competition, changes in consumer preferences,
the effects of changing prices for its raw materials and local economic
conditions. The performance of each of PMI and KFI is affected by foreign
economies and currency movements. Developments in any of these areas, which are
more fully described above and which descriptions are incorporated into this
section by reference, could cause the Company's results to differ materially
from results that have been or may be projected by or on behalf of the Company.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 3, "Contingencies," of the Notes to the Condensed
Consolidated Financial Statements included in Part I, Item 1 of this report, and
to "Tobacco--Business Environment," of the Management's Discussion and Analysis
of Financial Condition and Results of Operations included in Part I, Item 2 of
this report.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders was held in Richmond, Virginia on April
30, 1998. 2,057,808,671 shares of Common Stock, 84.7% of outstanding shares,
were represented in person or by proxy.
The following fourteen directors were elected to a one-year term expiring
in 1999:
NUMBER OF SHARES
---------------------------------
FOR WITHHELD
------------- ----------
Elizabeth E. Bailey 2,032,913,955 24,894,716
Geoffrey C. Bible 2,032,923,445 24,885,226
Murray H. Bring 2,033,129,620 24,679,051
Harold Brown 2,030,898,108 26,910,563
William H. Donaldson 2,033,477,080 24,331,591
Jane Evans 2,032,288,394 25,520,277
Robert E. R. Huntley 2,033,154,240 24,654,431
Rupert Murdoch 2,030,521,673 27,286,998
John D. Nichols 2,032,548,092 25,260,579
Lucio A. Noto 2,033,033,446 24,775,225
Richard D. Parsons 2,032,669,213 25,139,458
John S. Reed 2,033,481,522 24,327,149
Carlos Slim Helu 2,019,475,686 38,332,985
Stephen M. Wolf 2,033,133,872 24,674,799
The selection of Coopers & Lybrand L.L.P. as auditors was approved:
2,049,153,194 shares voted in favor; 4,013,214 shares voted against and
4,642,263 shares abstained (including broker non-votes).
The two stockholder proposals were defeated:
Stockholder Proposal 1 - Protecting Youth from Smoking in Developing Countries:
168,552,862 shares voted in favor; 1,552,954,539 shares voted against and
336,301,270 shares abstained (including broker non-votes).
Stockholder Proposal 2 - Establish a Review Committee to Investigate and
Recommend Actions Related to Smuggled Cigarettes of the Company: 104,022,358
shares voted in favor; 1,599,008,378 shares voted against and 354,777,935 shares
abstained (including broker non-votes).
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.2 By-Laws, as amended, of the Company.
10.1 Settlement Agreement and Stipulation for Entry of Consent
Judgment, dated May 8, 1998, regarding the claims of the State
of Minnesota.
10.2 Form of Consent Judgment regarding the Minnesota health care
cost recovery action.
10.3 Settlement Agreement and Release, dated May 8, 1998, regarding
the claims of Blue Cross and Blue Shield of Minnesota.
10.4 Agreement to Pay State of Minnesota Attorneys' Fees and Costs,
dated May 8, 1998.
10.5 Agreement to Pay Blue Cross and Blue Shield of Minnesota
Attorneys' Fees and Costs, dated May 8, 1998.
12 Statement regarding computation of ratios of earnings to fixed
charges.
27 Financial Data Schedule.
27.1-27.3 Restated Financial Data Schedules.
99 Certain Pending Litigation Matters and Recent Developments.
(b) Reports on Form 8-K. During the quarter for which this report is
filed, the Registrant filed a Current Report on Form 8-K, dated
January 16, 1998, regarding the settlement of the Texas health
care cost recovery action, a Current Report on Form 8-K, dated
January 28, 1998, containing the Registrant's consolidated financial
statements for the year ended December 31, 1997, a Current
Report on Form 8-K/A, dated February 17, 1998, relating to the
January 28, 1998 Current Report on Form 8-K, and a Current Report on
Form 8-K dated March 11, 1998, filing certain documents in connection
with the Registrant's public offering of its Puttable Reset
Securities. The Registrant also filed a Current Report on Form 8-K,
dated April 20, 1998, containing a letter to stockholders describing
the Company's view of a federal tobacco bill sponsored by Senator
John McCain.
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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.
/s/ LOUIS C. CAMILLERI
Louis C. Camilleri, Senior Vice President and
Chief Financial Officer
May 15, 1998
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Exhibit 3.2
BY-LAWS
OF
PHILIP MORRIS COMPANIES INC.
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. - The annual meeting of the stockholders for
the election of directors and for the transaction of such other business as may
properly come before the meeting, and any postponement or adjournment thereof,
shall be held on such date and at such time as the Board of Directors may in its
discretion determine.
SECTION 2. SPECIAL MEETINGS. - Unless otherwise provided by law, special
meetings of the stockholders may be called by the chairman of the Board of
Directors, or in the chairman's absence, the deputy chairman of the Board of
Directors (if any), the vice chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) or, in the
absence of all of the foregoing, an executive vice president or by order of the
Board of Directors, whenever deemed necessary.
SECTION 3. PLACE OF MEETINGS. - All meetings of the stockholders shall be
held at such place in the Commonwealth of Virginia as from time to time may be
fixed by the Board of Directors.
SECTION 4. NOTICE OF MEETINGS. - Notice, stating the place, day and hour
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting (except as a different time is specified herein
or by law), to each stockholder of record having voting power in respect of the
business to be transacted thereat.
Notice of a stockholders' meeting to act on an amendment of the Articles of
Incorporation, a plan of merger or share exchange, a proposed sale of all, or
substantially all of the Corporation's assets, otherwise than in the usual and
regular course of business, or the dissolution of the Corporation shall be given
not less than twenty-five nor more than sixty days before the date of the
meeting and shall be accompanied, as appropriate, by a copy of the proposed
amendment, plan of merger or share exchange or sale agreement.
April 30, 1998
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Notwithstanding the foregoing, a written waiver of notice signed by the
person or persons entitled to such notice, either before or after the time
stated therein, shall be equivalent to the giving of such notice. A stockholder
who attends a meeting shall be deemed to have (i) waived objection to lack of
notice or defective notice of the meeting, unless at the beginning of the
meeting he or she objects to holding the meeting or transacting business at the
meeting, and (ii) waived objection to consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the meeting
notice, unless he or she objects to considering the matter when it is presented.
SECTION 5. QUORUM. - At all meetings of the stockholders, unless a greater
number or voting by classes is required by law, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, action on a matter is approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless the vote
of a greater number or voting by classes is required by law or the Articles of
Incorporation, and except that in elections of directors those receiving the
greatest number of votes shall be deemed elected even though not receiving a
majority. Less than a quorum may adjourn.
SECTION 6. ORGANIZATION AND ORDER OF BUSINESS. - At all meetings of the
stockholders, the chairman of the Board of Directors or, in the chairman's
absence, the deputy chairman of the Board of Directors (if any), the vice
chairman of the Board of Directors (if any), the president (if one shall have
been elected by the Board of Directors) or, in the absence of all of the
foregoing, the most senior executive vice president, shall act as chairman. In
the absence of all of the foregoing officers or, if present, with their consent,
a majority of the shares entitled to vote at such meeting, may appoint any
person to act as chairman. The secretary of the Corporation or, in the
secretary's absence, an assistant secretary, shall act as secretary at all
meetings of the stockholders. In the event that neither the secretary nor any
assistant secretary is present, the chairman may appoint any person to act as
secretary of the meeting.
The chairman shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts and things as are necessary
or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the dismissal of business not
properly presented, the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof and the opening and closing of the voting polls.
At each annual meeting of stockholders, only such business shall be
conducted as shall have been properly brought before the meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of the
Corporation who shall be entitled to vote at such meeting and who complies with
the notice
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<PAGE>
procedures set forth in this Section 6. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the secretary of the Corporation. To be timely, a stockholder's notice must be
given, either by personal delivery or by United States certified mail, postage
prepaid, and received at the principal executive offices of the Corporation (i)
not less than 120 days nor more than 150 days before the first anniversary of
the date of the Corporation's proxy statement in connection with the last annual
meeting of stockholders or (ii) if no annual meeting was held in the previous
year or the date of the applicable annual meeting has been changed by more than
30 days from the date contemplated at the time of the previous year's proxy
statement, not less than 60 days before the date of the applicable annual
meeting. A stockholder's notice to the secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the annual meeting,
including the complete text of any resolutions to be presented at the annual
meeting, and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the Corporation's stock transfer books,
of such stockholder proposing such business, (c) a representation that such
stockholder is a stockholder of record and intends to appear in person or by
proxy at such meeting to bring the business before the meeting specified in the
notice, (d) the class and number of shares of stock of the Corporation
beneficially owned by the stockholder and (e) any material interest of the
stockholder in such business. Notwithstanding anything in the By-Laws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 6. The chairman of an
annual meeting shall, if the facts warrant, determine that the business was not
brought before the meeting in accordance with the procedures prescribed by this
Section 6. If the chairman should so determine,he or she shall so declare to
the meeting and the business not properly brought before the meeting shall not
be transacted. Notwithstanding the foregoing provisions of this Section 6, a
stockholder seeking to have a proposal included in the Corporation's proxy
statement shall comply with the requirements of Regulation 14A under the
Securities Exchange Act of 1934, as amended (including, but not limited to, Rule
14a-8 or its successor provision). The secretary of the Corporation shall
deliver each such stockholder's notice that has been timely received to the
Board of Directors or a committee designated by the Board of Directors for
review.
SECTION 7. VOTING. - A stockholder may vote his or her shares in person or
by proxy. Any proxy shall be delivered to the secretary of the meeting at or
prior to the time designated by the chairman or in the order of business for so
delivering such proxies. No proxy shall be valid after eleven months from its
date, unless otherwise provided in the proxy. Each holder of record of stock of
any class shall, as to all matters in respect of which stock of such class has
voting power, be entitled to such vote as is provided in the Articles of
Incorporation for each share of stock of
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such class standing in the holders's name on the books of the Corporation.
Unless required by statute or determined by the chairman to be advisable, the
vote on any question need not be by ballot. On a vote by ballot, each ballot
shall be signed by the stockholder voting or by such stockholder's proxy, if
there be such proxy.
SECTION 8. WRITTEN AUTHORIZATION. - A stockholder or a stockholder's
duly authorized attorney-in-fact may execute a writing authorizing another
person or persons to act for him or her as proxy. Execution may be accomplished
by the stockholder or such stockholder's duly authorized attorney-in-fact or
authorized officer, director, employee or agent signing such writing or causing
such stockholder's signature to be affixed to such writing by any reasonable
means including, but not limited to, by facsimile signature.
SECTION 9. ELECTRONIC AUTHORIZATION. - The secretary or any vice
president may approve procedures to enable a stockholder or a stockholder's duly
authorized attorney-in-fact to authorize another person or persons to act for
him or her as proxy by transmitting or authorizing the transmission of a
telegram, cablegram, internet transmission, telephone transmission or other
means of electronic transmission to the person who will be the holder of the
proxy or to a proxy solicitation firm, proxy support service organization or
like agent duly authorized by the person who will be the holder of the proxy to
receive such transmission, provided that any such transmission must either set
forth or be submitted with information from which the inspectors of election can
determine that the transmission was authorized by the stockholder or the
stockholder's duly authorized attorney-in-fact. If it is determined that such
transmissions are valid, the inspectors shall specify the information upon which
they relied. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section 9
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used, provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original writing or transmission.
SECTION 10. INSPECTORS. - At every meeting of the stockholders for
election of directors, the proxies shall be received and taken in charge, all
ballots shall be received and counted and all questions concerning the
qualifications of voters, the validity of proxies, and the acceptance or
rejection of votes shall be decided, by two or more inspectors. Such inspectors
shall be appointed by the chairman of the meeting. They shall be sworn
faithfully to perform their duties and shall in writing certify to the returns.
No candidate for election as director shall be appointed or act as inspector.
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ARTICLE II
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. - The business and affairs of the Corporation
shall be managed under the direction of the Board of Directors.
SECTION 2. NUMBER. - The number of directors shall be fourteen (14).
SECTION 3. TERM OF OFFICE AND QUALIFICATION. - Each director shall serve
for the term for which he or she shall have been elected and until a successor
shall have been duly elected.
SECTION 4. NOMINATION AND ELECTION OF DIRECTORS. - At each annual meeting
of stockholders, the stockholders entitled to vote shall elect the directors.
No person shall be eligible for election as a director unless nominated in
accordance with the procedures set forth in this Section 4. Nominations of
persons for election to the Board of Directors may be made by the Board of
Directors or any committee designated by the Board of Directors or by any
stockholder entitled to vote for the election of directors at the applicable
meeting of stockholders who complies with the notice procedures set forth in
this Section4. Such nominations, other than those made by the Board of
Directors or any committee designated by the Board of Directors, may be made
only if written notice of a stockholder's intent to nominate one or more persons
for election as directors at the applicable meeting of stockholders has been
given,either by personal delivery or by United States certified mail, postage
prepaid, to the secretary of the Corporation and received (i) not less than 120
days nor more than 150 days before the first anniversary of the date of the
Corporation's proxy statement in connection with the last annual meeting of
stockholders, or (ii) if no annual meeting was held in the previous year or the
date of the applicable annual meeting has been changed by more than 30 days from
the date contemplated at the time of the previous year's proxy statement, not
less than 60 days before the date of the applicable annual meeting, or (iii)
with respect to any special meeting of stockholders called for the election of
directors, not later than the close of business on the seventh day following the
date on which notice of such meeting is first given to stockholders. Each such
stockholder's notice shall set forth (a) as to the stockholder giving the
notice, (i) the name and address, as they appear on the Corporation's stock
transfer books, of such stockholder, (ii) a representation that such stockholder
is a stockholder of record and intends to appear in person or by proxy at such
meeting to nominate the person or persons specified in the notice, (iii) the
class and number of shares of stock of the Corporation beneficially owned by
such stockholder, and (iv) a description of all arrangements or understandings
between such stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made by such stockholder; and (b) as to each person whom
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the stockholder proposes to nominate for election as a director, (i) the name,
age, business address and, if known, residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of stock of the Corporation which are beneficially owned by such person,
(iv) any other information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors or is otherwise
required by the rules and regulations of the Securities and Exchange Commission
promulgated under the Securities Exchange Act of 1934, as amended, and (v) the
written consent of such person to be named in the proxy statement as a nominee
and to serve as a director if elected. The secretary of the Corporation shall
deliver each such stockholder's notice that has been timely received to the
Board of Directors or a committee designated by the Board of Directors for
review. Any person nominated for election as director by the Board of Directors
or any committee designated by the Board of Directors shall, upon the request of
the Board of Directors or such committee, furnish to the secretary of the
Corporation all such information pertaining to such person that is required to
be set forth in a stockholder's notice of nomination. The chairman of the
meeting of stockholders shall, if the facts warrant, determine that a nomination
was not made in accordance with the procedures prescribed by this Section 4. If
the chairman should so determine, he or she shall so declare to the meeting and
the defective nomination shall be disregarded.
SECTION 5. ORGANIZATION. - At all meetings of the Board of Directors, the
chairman of the Board of Directors or, in the chairman's absence, the deputy
chairman of the Board of Directors (if any), the vice chairman of the Board of
Directors (if any), the president (if one shall have been elected by the Board
of Directors) or, in the absence of all of the foregoing, the senior most
executive vice president, shall act as chairman of the meeting. The secretary
of the Corporation or, in the secretary's absence, an assistant secretary, shall
act as secretary of meetings of the Board of Directors. In the event that
neither the secretary nor any assistant secretary shall be present at such
meeting, the chairman of the meeting shall appoint any person to act as
secretary of the meeting.
SECTION 6. VACANCIES. - Any vacancy occurring in the Board of Directors,
including a vacancy resulting from amending these By-Laws to increase the number
of directors by thirty percent or less, may be filled by the affirmative vote of
a majority of the remaining directors though less than a quorum of the Board of
Directors.
SECTION 7. PLACE OF MEETING. - Meetings of the Board of Directors, regular
or special, may be held either within or without the Commonwealth of Virginia.
SECTION 8. ORGANIZATIONAL MEETING. - The annual organizational meeting of
the Board of Directors shall be held immediately following adjournment of the
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annual meeting of stockholders and at the same place, without the
requirement of any notice other than this provision of the By-Laws.
SECTION 9. REGULAR MEETINGS: NOTICE. - Regular meetings of the Board of
Directors shall be held at such times and places as it may from time to time
determine. Notice of such meetings need not be given if the time and place have
been fixed at a previous meeting.
SECTION 10. SPECIAL MEETINGS. - Special meetings of the Board of Directors
shall be held whenever called by order of the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the vice
chairman of the Board of Directors (if any), the president (if any) or two of
the directors. Notice of each such meeting, which need not specify the business
to be transacted thereat, shall be mailed to each director, addressed to his or
her residence or usual place of business, at least two days before the day on
which the meeting is to be held, or shall be sent to such place by telegraph,
telex or telecopy or be delivered personally or by telephone, not later than the
day before the day on which the meeting is to be held.
SECTION 11. WAIVER OF NOTICE. - Whenever any notice is required to be
given to a director of any meeting for any purpose under the provisions of law,
the Articles of Incorporation or these By-Laws, a waiver thereof in writing
signed by the person or persons entitled to such notice, either before or after
the time stated therein, shall be equivalent to the giving of such notice. A
director's attendance at or participation in a meeting waives any required
notice to him or her of the meeting unless at the beginning of the meeting or
promptly upon the director's arrival, he or she objects to holding the meeting
or transacting business at the meeting and does not thereafter vote for or
assent to action taken at the meeting.
SECTION 12. QUORUM AND MANNER OF ACTING. - Except where otherwise provided
by law, a majority of the directors fixed by these By-Laws at the time of any
regular or special meeting shall constitute a quorum for the transaction of
business at such meeting, and the act of a majority of the directors present at
any such meeting at which a quorum is present shall be the act of the Board of
Directors. In the absence of a quorum, a majority of those present may adjourn
the meeting from time to time until a quorum be had. Notice of any such
adjourned meeting need not be given.
SECTION 13. ORDER OF BUSINESS. - At all meetings of the Board of Directors
business may be transacted in such order as from time to time the Board of
Directors may determine.
SECTION 14. COMMITTEES. - In addition to the executive committee
authorized by Article III of these By-Laws, other committees, consisting of two
or more directors, may be designated by the Board of Directors by a resolution
adopted
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by the greater number of (i) a majority of all directors in office at the time
the action is being taken or (ii) the number of directors required to take
action under Article II, Section 12 hereof. Any such committee, to the extent
provided in the resolution of the Board of Directors designating the committee,
shall have and may exercise the powers and authority of the Board of Directors
in the management of the business and affairs of the Corporation, except as
limited by law.
ARTICLE III
EXECUTIVE COMMITTEE
SECTION 1. HOW CONSTITUTED AND POWERS. - The Board of Directors, by
resolution adopted pursuant to Article II, Section 14 hereof, may designate, in
addition to the chairman of the Board of Directors, one or more directors to
constitute an executive committee, who shall serve during the pleasure of the
Board of Directors. The executive committee, to the extent provided in such
resolution and permitted by law, shall have and may exercise all of the
authority of the Board of Directors.
SECTION 2. ORGANIZATION, ETC. - The executive committee may choose a
chairman and secretary. The executive committee shall keep a record of its acts
and proceedings and report the same from time to time to the Board of Directors.
SECTION 3. MEETINGS. - Meetings of the executive committee may be called
by any member of the committee. Notice of each such meeting, which need not
specify the business to be transacted thereat, shall be mailed to each member of
the committee, addressed to his or her residence or usual place of business, at
least two days before the day on which the meeting is to be held or shall be
sent to such place by telegraph, telex or telecopy or be delivered personally or
by telephone, not later than the day before the day on which the meeting is to
be held.
SECTION 4. QUORUM AND MANNER OF ACTING. - A majority of the executive
committee shall constitute a quorum for transaction of business, and the act of
a majority of those present at a meeting at which a quorum is present shall be
the act of the executive committee. The members of the executive committee
shall act only as a committee, and the individual members shall have no powers
as such.
SECTION 5. REMOVAL. - Any member of the executive committee may be
removed, with or without cause, at any time, by the Board of Directors.
SECTION 6. VACANCIES. - Any vacancy in the executive committee shall be
filled by the Board of Directors.
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ARTICLE IV
OFFICERS
SECTION 1. NUMBER. - The officers of the Corporation shall be a chairman
of the Board of Directors, a deputy chairman of the Board of Directors (if
elected by the Board of Directors), a president (if elected by the Board of
Directors), one or more vice chairmen of the Board of Directors (if elected by
the Board of Directors), a chief operating officer (if elected by the Board of
Directors), one or more vice presidents (one or more of whom may be designated
executive vice president or senior vice president), a treasurer, a controller, a
secretary, one or more assistant treasurers, assistant controllers and assistant
secretaries and such other officers as may from time to time be chosen by the
Board of Directors. Any two or more offices may be held by the same person.
SECTION 2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. - All officers of
the Corporation shall be chosen annually by the Board of Directors, and each
officer shall hold office until a successor shall have been duly chosen and
qualified or until the officer resigns or is removed in the manner hereinafter
provided. The chairman of the Board of Directors, the deputy chairman of the
Board of Directors (if any), the president (if any) and the vice chairmen of the
Board of Directors (if any) shall be chosen from among the directors.
SECTION 3. VACANCIES. - If any vacancy shall occur among the officers of
the Corporation, such vacancy shall be filled by the Board of Directors.
SECTION 4. OTHER OFFICERS, AGENTS AND EMPLOYEES - THEIR POWERS AND DUTIES.
- - The Board of Directors may from time to time appoint such other officers as
the Board of Directors may deem necessary, to hold office for such time as may
be designated by it or during its pleasure, and the Board of Directors or the
chairman of the Board of Directors may appoint, from time to time, such agents
and employees of the Corporation as may be deemed proper, and may authorize any
officers to appoint and remove agents and employees. The Board of Directors or
the chairman of the Board of Directors may from time to time prescribe the
powers and duties of such other officers, agents and employees of the
Corporation.
SECTION 5. REMOVAL. - Any officer, agent or employee of the Corporation
may be removed, either with or without cause, by a vote of a majority of the
Board of Directors or, in the case of any agent or employee not appointed by the
Board of Directors, by a superior officer upon whom such power of removal may be
conferred by the Board of Directors or the chairman of the Board of Directors.
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SECTION 6. CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE
OFFICER. - The chairman of the Board of Directors shall preside at meetings of
the stockholders and of the Board of Directors and shall be a member of the
executive committee. The chairman shall be the Chief Executive Officer of the
Corporation and shall be responsible to the Board of Directors. He or she shall
be responsible for the general management and control of the business and
affairs of the Corporation and shall see to it that all orders and resolutions
of the Board of Directors are implemented. The chairman shall from, time to
time, report to the Board of Directors on matters within his or her knowledge
which the interests of the Corporation may require be brought to its notice. The
chairman shall do and perform such other duties as from time to time the Board
of Directors may prescribe.
SECTION 7. DEPUTY CHAIRMAN OF THE BOARD OF DIRECTORS. - In the absence of
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if elected by the Board of Directors) shall preside at meetings of
the stockholders and of the Board of Directors. The deputy chairman shall be
responsible to the chairman of the Board of Directors and shall perform such
duties as shall be assigned to him or her by the chairman of the Board of
Directors. The deputy chairman shall from time to time report to the chairman
of the Board of Directors on matters within the deputy chairman's knowledge
which the interests of the Corporation may require be brought to the chairman's
notice.
SECTION 8. PRESIDENT. - In the absence of the chairman of the Board of
Directors and the deputy chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) shall
preside at meetings of the stockholders and of the Board of Directors. The
president shall be responsible to the chairman of the Board of Directors.
Subject to the authority of the chairman of the Board of Directors, the
president shall be devoted to the Corporation's business and affairs under the
basic policies set by the Board of Directors and the chairman of the Board of
Directors. He or she shall from, time to time, report to the chairman of the
Board of Directors on matters within the president's knowledge which the
interests of the Corporation may require be brought to the chairman's notice.
In the absence of the chairman of the Board of Directors and the deputy chairman
of the Board of Directors (if any), the president (if any) shall, except as
otherwise directed by the Board of Directors, have all of the powers and the
duties of the chairman of the Board of Directors. The president (if any) shall
do and perform such other duties as from time to time the Board of Directors or
the chairman of the Board of Directors may prescribe.
SECTION 9. VICE CHAIRMEN OF THE BOARD OF DIRECTORS. - In the absence of
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), the vice chairman of the Board of
Directors designated for such purpose by the chairman of the Board of Directors
(if any) shall preside at meetings of the stockholders and of the Board of
Directors. Each vice
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chairman of the Board of Directors shall be responsible to the chairman of the
Board of Directors. Each vice chairman of the Board of Directors shall from
time to time report to the chairman of the Board of Directors on matters within
the vice chairman's knowledge which the interests of the Corporation may require
be brought to the chairman's notice. In the absence or inability to act of the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), such vice chairman of the Board
of Directors as the chairman of the Board of Directors may designate for the
purpose shall have the powers and discharge the duties of the chairman of the
Board of Directors. In the event of the failure or inability of the chairman of
the Board of Directors to so designate a vice chairman of the Board of
Directors, the Board of Directors may designate a vice chairman of the Board of
Directors who shall have the powers and discharge the duties of the chairman of
the Board of Directors.
SECTION 10. CHIEF OPERATING OFFICER. - The chief operating officer (if
any) shall be responsible to the Chairman of the Board of Directors for the
principal operating businesses of the Corporation and shall perform those duties
which may from time to time be assigned.
SECTION 11. VICE PRESIDENTS. - The vice presidents of the Corporation
shall assist the chairman of the Board of Directors, the deputy chairman of the
Board of Directors, the president (if any) and the vice chairmen (if any) of the
Board of Directors in carrying out their respective duties and shall perform
those duties which may from time to time be assigned to them. The chief
financial officer shall be a vice president of the Corporation (or more senior)
and shall be responsible for the management and supervision of the financial
affairs of the Corporation.
SECTION 12. TREASURER. - The treasurer shall have charge of the funds,
securities, receipts and disbursements of the Corporation. He or she shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such banks or trust companies or with such bankers or other
depositaries as the Board of Directors may from time to time designate. The
treasurer shall render to the Board of Directors, the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if any), the vice chairmen of the Board of Directors (if any), and the chief
financial officer, whenever required by any of them, an account of all of his
transactions as treasurer. If required, the treasurer shall give a bond in such
sum as the Board of Directors may designate, conditioned upon the faithful
performance of the duties of the treasurer's office and the restoration to the
Corporation at the expiration of his or her term of office or in case of death,
resignation or removal from office, of all books, papers, vouchers, money or
other property of whatever kind in his or her possession or under his or her
control belonging to the Corporation. The treasurer shall perform such other
duties as from time to time may be assigned to him or her.
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SECTION 13. ASSISTANT TREASURERS. - In the absence or disability of the
treasurer, one or more assistant treasurers shall perform all the duties of the
treasurer and, when so acting, shall have all the powers of, and be subject to
all restrictions upon, the treasurer. Assistant treasurers shall also perform
such other duties as from time to time may be assigned to them.
SECTION 14. SECRETARY. - The secretary shall keep the minutes of all
meetings of the stockholders and of the Board of Directors in a book or books
kept for that purpose. He or she shall keep in safe custody the seal of the
Corporation, and shall affix such seal to any instrument requiring it. The
secretary shall have charge of such books and papers as the Board of Directors
may direct. He or she shall attend to the giving and serving of all notices of
the Corporation and shall also have such other powers and perform such other
duties as pertain to the secretary's office, or as the Board of Directors, the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), the president (if any) or any vice chairman of the Board of
Directors may from time to time prescribe.
SECTION 15. ASSISTANT SECRETARIES. - In the absence or disability of the
secretary, one or more assistant secretaries shall perform all of the duties of
the secretary and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the secretary. Assistant secretaries
shall also perform such other duties as from time to time may be assigned to
them.
SECTION 16. CONTROLLER. - The controller shall be administrative head of
the controller's department. He or she shall be in charge of all functions
relating to accounting and the preparation and analysis of budgets and
statistical reports and shall establish, through appropriate channels, recording
and reporting procedures and standards pertaining to such matters. The
controller shall report to the chief financial officer and shall aid in
developing internal corporate policies whereby the business of the Corporation
shall be conducted with the maximum safety, efficiency and economy. The
controller shall be available to all departments of the Corporation for advice
and guidance in the interpretation and application of policies which are within
the scope of his or her authority. The controller shall perform such other
duties as from time to time may be assigned to him or her.
SECTION 17. ASSISTANT CONTROLLERS. - In the absence or disability of the
controller, one or more assistant controllers shall perform all of the duties of
the controller and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the controller. Assistant controllers
shall also perform such other duties as from time to time may be assigned to
them.
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ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 1. CONTRACTS. - The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president, the treasurer
and such other persons as the chairman of the Board of Directors may authorize
shall have the power to execute any contract or other instrument on behalf of
the Corporation; no other officer, agent or employee shall, unless otherwise in
these By-Laws provided, have any power or authority to bind the Corporation by
any contract or acknowledgement, or pledge its credit or render it liable
pecuniarily for any purpose or to any amount.
SECTION 2. LOANS. - The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president, the treasurer
and such other persons as the Board of Directors may authorize shall have the
power to effect loans and advances at any time for the Corporation from any
bank, trust company or other institution, or from any corporation, firm or
individual, and for such loans and advances may make, execute and deliver
promissory notes or other evidences of indebtedness of the Corporation, and, as
security for the payment of any and all loans, advances, indebtedness and
liability of the Corporation, may pledge, hypothecate or transfer any and all
stocks, securities and other personal property at any time held by the
Corporation, and to that end endorse, assign and deliver the same.
SECTION 3. VOTING OF STOCK HELD. - The chairman of the Board of Directors,
the deputy chairman of the Board of Directors (if any), the president (if any),
any vice chairman of the Board of Directors (if any), any vice president or the
secretary may from time to time appoint an attorney or attorneys or agent or
agents of the Corporation to cast the votes that the Corporation may be entitled
to cast as a stockholder or otherwise in any other corporation, any of whose
stock or securities may be held by the Corporation, at meetings of the holders
of the stock or other securities of such other corporation, or to consent in
writing to any action by any other such corporation, and may instruct the person
or persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed on behalf of the Corporation
such written proxies, consents, waivers or other instruments as such officer may
deem necessary or proper in the premises; or the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if any), any vice chairman of the Board of Directors (if any), any vice
president or the secretary may attend in person any meeting of the holders of
stock or other securities of such other corporation and thereat vote or
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exercise any and all powers of the Corporation as the holder of such stock or
other securities of such other corporation.
ARTICLE VI
CERTIFICATES REPRESENTING SHARES
Certificates representing shares of the Corporation shall be signed by the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), or the vice chairman of the Board of Directors (if any), or
the president of the Corporation (if any) and the secretary or an assistant
secretary. Any and all signatures on such certificates, including signatures of
officers, transfer agents and registrars, may be facsimile.
ARTICLE VII
DIVIDENDS
The Board of Directors may declare dividends from funds of the Corporation
legally available therefor.
ARTICLE VIII
SEAL
The Board of Directors shall provide a suitable seal or seals, which shall
be in the form of a circle, and shall bear around the circumference the words
"Philip Morris Companies Inc." and in the center the word and figures "Virginia,
1985."
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year.
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ARTICLE X
AMENDMENT
The power to alter, amend or repeal the By-Laws of the Corporation or to
adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made by
the Board of Directors may be repealed or changed by the stockholders, or new
By-Laws may be adopted by the stockholders, and the stockholders may prescribe
that any By-Laws made by them shall not be altered, amended or repealed by the
directors.
ARTICLE XI
EMERGENCY BY-LAWS
If a quorum of the Board of Directors cannot be readily assembled because
of some catastrophic event, and only in such event, these By-Laws shall, without
further action by the Board of Directors, be deemed to have been amended for the
duration of such emergency, as follows:
SECTION 1. SECTION 6 OF ARTICLE II SHALL READ AS FOLLOWS:
Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the directors present at a meeting of the
Board of Directors called in accordance with these By-Laws.
SECTION 2. THE FIRST SENTENCE OF SECTION 10 OF ARTICLE II SHALL READ AS
FOLLOWS:
Special meetings of the Board of Directors shall be held whenever called by
order of the chairman of the Board of Directors or a deputy chairman (if
any),or of the president (if any) or any vice chairman of the Board of
Directors (if any) or any director or of any person having the powers and
duties of the chairman of the Board of Directors, the deputy chairman, the
president or any vice chairman of the Board of Directors.
SECTION 3. SECTION 12 OF ARTICLE II SHALL READ AS FOLLOWS:
The directors present at any regular or special meeting called in
accordance with these By-Laws shall constitute a quorum for the transaction
of business at such meeting, and the action of a majority of such directors
shall be the act of the Board of Directors, provided, however, that in the
event that only one director is present at any such meeting no action
except the election of directors shall be taken until at least two
additional directors have been elected and are in attendance.
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EXHIBIT 10.1
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF RAMSEY SECOND JUDICIAL DISTRICT
THE STATE OF MINNESOTA, Case Type: Other Civil
BY HUBERT H. HUMPHREY III, Court File No. C1-94-8565
ITS ATTORNEY GENERAL,
and
BLUE CROSS AND BLUE SHIELD
OF MINNESOTA,
Plaintiffs,
vs.
PHILIP MORRIS INCORPORATED,
R.J. REYNOLDS TOBACCO COMPANY,
BROWN & WILLIAMSON TOBACCO
CORPORATION, B.A.T. INDUSTRIES
P.L.C., BRITISH-AMERICAN TOBACCO
COMPANY LIMITED, BAT (U.K. &
EXPORT) LIMITED, LORILLARD
TOBACCO COMPANY, THE AMERICAN
TOBACCO COMPANY, LIGGETT GROUP,
INC., THE COUNCIL FOR TOBACCO
RESEARCH-U.S.A., INC., and THE
TOBACCO INSTITUTE, INC.,
Defendants.
SETTLEMENT AGREEMENT AND STIPULATION
FOR ENTRY OF CONSENT JUDGMENT
THIS SETTLEMENT AGREEMENT AND RELEASE ("Settlement Agreement") is made as
of the date hereof, by and among the parties hereto, as indicated by their
signatures below, to settle
<PAGE>
and resolve with finality all claims of the State of Minnesota relating to the
subject matter of this action which have been or could have been asserted by the
State of Minnesota.
WHEREAS, the State of Minnesota, through its Attorney General Hubert H.
Humphrey III, and Blue Cross and Blue Shield of Minnesota, commenced this action
on August 17, 1994, asserting various claims for monetary, equitable and
injunctive relief on behalf of the State of Minnesota and Blue Cross and Blue
Shield of Minnesota against certain tobacco manufacturers and others as
Defendants;
WHEREAS, the Defendants have denied each and every one of Plaintiffs'
allegations of unlawful conduct or wrongdoing and have asserted a number of
defenses to Plaintiffs' claims, which defenses have been contested by
Plaintiffs;
WHEREAS, the parties hereto wish to avoid the further expense, delay,
inconvenience, burden and uncertainty of continued litigation of this matter
(including appeals from any verdict), the State of Minnesota and the Settling
Defendants have agreed to settle this litigation pursuant to terms which will
achieve for the State of Minnesota (and thus for the people of the State of
Minnesota) significant funding for the advancement of public health, the
implementation of important tobacco-related public health measures in
Minnesota, as well as funding for national research dedicated to studying and
significantly reducing the use of Tobacco Products by youth;
WHEREAS, the State of Minnesota and Settling Defendants have agreed to
settle this lawsuit on terms set forth in this Settlement Agreement and
Stipulation for Entry of Consent Judgment and the attached Consent Judgment;
WHEREAS, the parties have further agreed to jointly petition the Court for
approval of the Consent Judgment, on the grounds that settlement would be in the
public interest;
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NOW, THEREFORE, BE IT KNOWN THAT, in consideration of the payments to be
made by the Settling Defendants, the dismissal and release of claims by the
State of Minnesota and such other consideration as described herein, the
sufficiency of which is hereby acknowledged, the parties hereto, acting by and
through their authorized agents, memorialize and agree as follows:
I. GENERAL PROVISIONS
A. Jurisdiction. The State and the Settling Defendants acknowledge that
this Court has jurisdiction over the subject matter of this action and over each
of the parties to this Settlement Agreement, and that this Court shall retain
jurisdiction for the purposes of implementing and enforcing this Settlement
Agreement. The parties hereto agree to present any disputes under this
Settlement Agreement, including without limitation any claims for breach or
enforcement of this Settlement Agreement, exclusively to this Court. The Court
may, upon the State's application, enter a Consent Judgment in the form attached
hereto as Exhibit A. The cumulative terms of this Settlement Agreement and
Stipulation for Entry of Consent Judgment, and the attached Consent Judgment,
may be referred to for convenience as this "Agreement" or "Settlement
Agreement."
B. Voluntary Agreement of the Parties. The State and the Settling
Defendants acknowledge and agree that this Settlement Agreement is voluntarily
entered into by all parties hereto as the result of arm's-length negotiations
during which all such parties were represented by counsel. The State and
Settling Defendants understand that Congress may enact legislation dealing with
some of the issues addressed in this Agreement. Settling Defendants and their
assigns, affiliates, agents, and successors hereby waive any right to challenge
this Agreement or the Consent Judgment, directly or through third parties, on
the ground that any term hereof is unconstitutional, outside the power
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or jurisdiction of the Court, preempted by or in conflict with any current or
future federal legislation (except where non-economic terms of future federal
legislation are irreconcilable).
C. Definitions.
For the purposes of this Settlement Agreement and attached Consent
Judgment, the following terms shall have the meanings set forth below:
1. "State" or "State of Minnesota" means the State of Minnesota acting
by and through its Attorney General;
2. "Blue Cross" means BCBSM, Inc., d/b/a Blue Cross and Blue Shield of
Minnesota, and all of its administrators, representatives, employees,
directors, officers, agents, attorneys, parents and divisions;
3. "Settling Defendants" means those Defendants in this action that
are signatories hereto;
4. "Defendants" means Philip Morris Incorporated, R.J. Reynolds
Tobacco Company, Brown & Williamson Tobacco Corporation, B.A.T Industries
P.L.C., British-American Tobacco Company Limited, BAT (U.K. and Export)
Limited, Lorillard Tobacco Company, The American Tobacco Company, The
Council for Tobacco Research-U.S.A., Inc., and the Tobacco Institute, Inc.
and their successors and assigns;
5. "Consumer Price Index" shall mean the Consumer Price Index for All
Urban Consumers, for the most recent twelve-month period for which such
percentage information is available as published by the Bureau of Labor
Statistics of the U.S. Department of Labor.
6. "Court" means the District Court of the State of Minnesota, County
of Ramsey, Second Judicial District;
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7. "Market Share" means a Settling Defendant's respective share of
sales of cigarettes by unit for consumption in the United States during (i)
with respect to payments made pursuant to Paragraph II.D. of this
Settlement Agreement, the calendar year ending on the date on which the
payment at issue is due, regardless of when such payment is made, and (ii)
with respect to all other payments made pursuant to this Settlement
Agreement, the calendar year immediately preceding the year in which the
payment at issue is due, regardless of when such payment is made;
8. "Cigarettes" means any product which contains nicotine, is intended
to be burned or heated under ordinary conditions of use, and consists of or
contains (i) any roll of tobacco wrapped in paper or in any substance not
containing tobacco; or (ii) tobacco, in any form, that is functional in the
product, which, because of its appearance, the type of tobacco used in the
filler, or its packaging and labeling, is likely to be offered to, or
purchased by, consumers as a cigarette; or (iii) any roll of tobacco
wrapped in any substance containing tobacco which, because of its
appearance, the type of tobacco used in the filler, or its packaging and
labeling, is likely to be offered to, or purchased by, consumers as a
cigarette described in subparagraph (i) of this paragraph;
9. "Smokeless Tobacco" means any powder that consists of cut, ground,
powdered, or leaf tobacco that contains nicotine and that is intended to be
placed in the oral cavity;
10. "Tobacco Products" means Cigarettes and Smokeless Tobacco;
11. "Billboards" includes billboards, as well as all signs and
placards in arenas and stadiums, whether open-air or enclosed. "Billboards"
does not include (1) any advertisements
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placed on or outside the premises of retail establishments which sell
tobacco products, or any retail point-of-sale; and (2) billboards or
advertisements in connection with the sponsorship by the Defendants of any
entertainment, sporting or similar event, such as NASCAR, that appears in
the State of Minnesota as part of a national or multi-state tour;
12. "Children" or "youth" means persons under the age of 18;
13. "Depository," unless otherwise specified, means the Minnesota
document depository established by the Court's Order dated June 16, 1995.
"Depositories" includes both the Minnesota depository and the Guildford,
U.K. document depository established by the Court's Order dated September
6, 1995;
14. "Transit Advertisements" means advertising on private or public
vehicles and all advertisements placed at, on or within any bus stop, taxi
stand, waiting area, train station, airport or any similar location.
"Transit Advertisements" does not include any advertisements placed on or
outside the premises of retail establishments licensed to sell Tobacco
Products or any retail point-of-sale;
15. "Special State Counsel" means Robins, Kaplan, Miller & Ciresi
L.L.P. or a successor, if any; and
16. "Final Approval" means the date on which this Settlement Agreement
and the form of State Escrow Agreement are approved by the Court. At the
time of such approval, the settlement between the parties is final.
II. SETTLEMENT PAYMENTS
A. Settlement Receipts. The payments to be made by the Settling
Defendants under this Settlement Agreement are in satisfaction of all of the
State of Minnesota's claims for damages
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incurred by the State in the year of such payment or earlier years related to
the subject matter of this action, including, without limitation, claims for
equitable and injunctive relief, claims for health care expenditures and claims
for punitive damages, except that no part of any payment under this Settlement
Agreement is made in settlement of an actual or potential liability for a fine,
penalty (civil or criminal) or enhanced damages.
B. Settlement Payments to the State of Minnesota. Each Settling Defendant
severally shall cause to be paid to an account designated in writing by the
State of Minnesota in accordance with and subject to paragraph II.E. of this
Settlement Agreement, the following amounts: the amount listed for it in
Schedule A hereto, such amount representing its share of $240,000,000, to be
paid on or before September 5, 1998; pro rata in proportion to its Market Share,
its share of $220,800,000, to be paid on or before January 4, 1999; pro rata in
proportion to its Market Share, its share of $242,550,000, to be paid on or
before January 3, 2000; pro rata in proportion to its Market Share, its share of
$242,550,000, to be paid on or before January 2, 2001; pro rata in proportion to
its Market Share, its share of $242,550,000, to be paid on or before January 2,
2002; and pro rata in proportion to its Market Share, its share of $121,550,000,
to be paid on or before January 2, 2003. The payments made by the Settling
Defendants pursuant to this Paragraph shall be adjusted upward by the greater of
3% or the Consumer Price Index applied each year on the previous year, beginning
with the payment due to be made on or before January 3, 2000. The payments due
to be made by the Settling Defendants pursuant to this Paragraph on or before
January 3, 2000, on or before January 2, 2001, on or before January 2, 2002, and
on or before January 2, 2003, will also be decreased or increased, as the case
may be, in accordance with the formula for adjustments of payments as set forth
in Appendix A. The payments due to be made by the Settling Defendants pursuant
to this Paragraph
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on or before September 5, 1998, and on or before January 4, 1999, shall not be
subject to inflation escalation and volume adjustments described in the
preceding sentences.
In the event that any of the Settling Defendants fails to make any payment
required of it pursuant to this Paragraph (a "Defaulting Defendant") by the
applicable date set forth in this paragraph II.B. (a "Missed Payment"), the
State of Minnesota shall provide notice to each of the Settling Defendants of
such non-payment. The Defaulting Defendant shall have 15 days after receipt of
such notice to pay the Missed Payment, together with interest accrued from the
original applicable due date at the prime rate as published in the Wall Street
Journal on the latest publication date on or before the date of default plus 3%.
If the Defaulting Defendant does not make such payment within such 15-day
period, the State of Minnesota shall provide notice to each of the Settling
Defendants of such continued non-payment. Any or all of the Settling Defendants
(other than the Defaulting Defendant) shall thereafter have 15 days after
receipt of such notice to elect (in such Settling Defendant's or such Settling
Defendants' sole and absolute discretion) to pay the Missed Payment, together
with interest accrued from the original applicable due date at the prime rate as
published in the Wall Street Journal on the latest publication date on or before
the date of default plus 3%. In the event that the State of Minnesota does not
receive the Missed Payment, together with such accrued interest, within such
additional 15-day period, all payments required to be made by each of the
respective Settling Defendants pursuant to this Paragraph shall at the end of
such additional 15-day period be accelerated and shall immediately become due
and owing to the State of Minnesota from each Settling Defendant pro rata in
proportion to its Market Share; provided, however, that any such accelerated
payments (a) shall all be adjusted upward by the greater of (i) the rate of 3%
per annum or (ii) the actual total percent change in the CPI, in either instance
for the period between January 1
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<PAGE>
of the year in which the acceleration of payments pursuant to this Paragraph
occurs and the date on which such accelerated payments are due pursuant to this
subsection, and (b) shall all immediately be adjusted in accordance with the
formula for adjustments of payments set forth in Appendix A.
Nothing in this Paragraph shall be deemed under any circumstance to create
any obligation on the part of any Settling Defendant to pay any amount owed or
payable to the State of Minnesota by any other Settling Defendant. All
obligations of the Settling Defendants pursuant to this Paragraph are intended
to be and shall remain several, and not joint.
C. Public Health Foundation. The Attorney General will propose, and the
Settling Defendants have agreed not to oppose, that the Legislature appropriate
to a foundation one-half the payments due in September 1998, and in January of
the years 1999 through 2003, to be used for such activities as the directors of
the foundation may determine will diminish the human and economic consequences
of tobacco use. It is contemplated that the directors of the foundation will
include public representatives, and representatives of such groups as the
American Lung Association, Minnesota Chapter; the University of Minnesota School
of Public Health; the Minnesota SmokeFree 2000 Coalition; the American Cancer
Society, Minnesota Division; the American Heart Association, Minnesota Chapter;
the Association for Non-Smokers' Rights--Minnesota; and the Mayo Clinic Nicotine
Dependence Center.
D. Annual Payments. Each of the Settling Defendants agrees that,
beginning on December 31, 1998, and annually thereafter on December 31st of each
year after 1998 (subject to final adjustment within 30 days), it shall severally
cause to be paid to an account designated in writing by the State of Minnesota
in accordance with and subject to paragraph II.E. of this Settlement
9
<PAGE>
Agreement, pro rata in proportion to its respective Market Share, its share of
2.55% of the following amounts (in billions):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year 1998 1999 2000 2001 2002 2003 thereafter
- ----
1 2 3 4 5 6
Amount $4B $4.5B $5B $6.5B $6.5B $8B $8B
- ------
</TABLE>
The payments made by Settling Defendants pursuant to this Paragraph shall be
adjusted upward by the greater of 3% or the Consumer Price Index applied each
year on the previous year, beginning with the annual payment due on December 31,
1999. Such payments will also be decreased or increased, as the case may be,
beginning with the annual payment due on December 31, 1999, in accordance with
the formula for adjustments of payments set forth in Appendix A.
E. Payment of Settlement Proceeds. Any payment made pursuant to this
Settlement Agreement shall be made to an account designated in writing by the
State of Minnesota or the Court, as applicable; provided that after Final
Approval, if the Court's approval is challenged by any third party, payments due
to be made shall be paid into a special escrow account (the "State Escrow
Account"), and held in escrow pursuant to this Section V.B. and the State Escrow
Agreement.
F. Adjustments in Event of Federal Legislation. The enactment of federal
tobacco-related legislation shall not affect the payments required by this
Agreement except as follows:
1. If federal tobacco-related legislation providing for the resolution
or other disposition of State Attorney General actions brought against
tobacco companies is enacted on or before November 30, 2000, and if such
legislation provides for payment(s) by tobacco companies (whether by
settlement payment, tax or any other means), all or part of which is made
available to States, the State of Minnesota shall elect to receive any
funds that are (i)
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unrestricted as to their use, or (ii) are restricted to any form of health
care or to any use related to tobacco (collectively "Federal Settlement
Funds"), and Settling Defendants shall receive a dollar-for-dollar offset
up to the full amount of payments required under Section II.D of this
Agreement for any and all Settlement Funds received by the State of
Minnesota, until all Federal Settlement Funds provided however:
a. There shall be no offset to payments required by this
Agreement on account of any federal program, subsidies, payments,
credits or other aid to the State which are not conditioned or tied to
the settlement of a state tobacco-related suit or the relinquishment
of state tobacco-related claims;
b. The State relinquishes no rights or benefits under this
Agreement except for payments subject to the offset;
c. There are no federally imposed preconditions to the receipt of
Federal Settlement Funds other than (i) the settlement of any state
tobacco-related lawsuit or the relinquishment of state tobacco-related
claims, (ii) actions or expenditures related to tobacco, including but
not limited to, education, cessation, control or enforcement, or (iii)
actions or expenditures related to health care;
d. If Settling Defendants enter into any pre-verdict settlement
agreement (subsequent to the date of this Agreement) of similar
litigation brought by a non-federal governmental plaintiff which does
not require such an offset, this Section is null and void;
e. If Settling Defendants enter into any pre-verdict settlement
agreement (subsequent to the date of this Agreement) of similar
litigation brought by a non-
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federal governmental plaintiff which has an offset term more favorable
to the plaintiff, this Settlement Agreement shall, at the option of
the Office of the Attorney General of the State of Minnesota, be
revised to include a comparable term.
2. Nothing in this section is intended to or shall reduce the total
amounts payable to the State under this Agreement by Settling
Defendants beyond the amount of Federal Settlement Funds actually
received by the State of Minnesota.
III. DISMISSAL OF CLAIMS AND RELEASES
A. State of Minnesota's Dismissal of Claims. Upon approval of this
Settlement Agreement by the Court, the Court shall enter a Final Judgment
dismissing with prejudice all claims as to all Defendants.
This Agreement resolves all claims between the State and the Defendants,
except for issues pending before the court pertaining to the discoverability or
production of documents for which the Defendants reserve their rights of appeal.
B. State of Minnesota's Release and Discharge. Upon Final Approval, the
State of Minnesota shall release and forever discharge all Defendants and their
present and former parents, subsidiaries (whether or not wholly owned) and
affiliates, and their respective divisions, organizational units, officers,
directors, employees, representatives, insurers, suppliers, agents, attorneys
and distributors (and the predecessors, heirs, executors, administrators,
successors and assigns of each of the foregoing) from any and all manner of
civil claims, demands, actions, suits and causes of action, damages whenever
incurred, liabilities of any nature whatsoever, including civil penalties, as
well as costs, expenses and attorneys' fees, known or unknown, suspected or
unsuspected, accrued or unaccrued, whether legal, equitable or statutory
("Claims") that the State
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<PAGE>
of Minnesota (including any of its past, present or future administrators,
representatives, employees, officers, attorneys, agents, representatives,
officials acting in their official capacities, agencies, departments,
commissions, and divisions, and whether or not any such person or entity
participates in the settlement), whether directly, indirectly, representatively,
derivatively or in any other capacity, ever had, now has or hereafter can, shall
or may have, as follows:
a. for past conduct, as to any Claims relating to the subject
matter of this action which have been asserted or could be asserted
now or in the future in this action or a comparable Federal action by
the State; and
b. for future conduct, only as to monetary Claims directly or
indirectly based on, arising out of or in any way related to, in whole
or in part, the use of or exposure to Tobacco Products manufactured in
the ordinary course of business, including without limitation any
future claims for reimbursement for health care costs allegedly
associated with use of or exposure to Tobacco Products;
(such past and future Claims hereinafter referred to as the "Released Claims");
provided, however, that the foregoing shall not operate as a release of any
person, party or entity (whether or not a signatory to this Agreement) as to any
of the obligations undertaken in this Agreement in connection with a monetary
breach or default of this Agreement.
The State of Minnesota hereby covenants and agrees that it shall not
hereafter sue or seek to establish civil liability against any person or entity
covered by the release provided under Paragraph III.B based, in whole or in
part, upon any of the Released Claims, and the State of Minnesota agrees that
this covenant and agreement shall be a complete defense to any such civil action
or proceeding.
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<PAGE>
C. Settling Defendants' Release and Discharge. Upon Final Approval,
Settling Defendants shall release and forever discharge the State of Minnesota
(including any of its past, present or future administrators, representatives,
employees, officers, attorneys, agents, representatives, officials acting in
their official capacities, agencies, departments, commissions, and divisions,
and whether or not any such person or entity participates in the settlement)
from any and all manner of civil claims, demands, actions, suits and causes of
action, damages whenever incurred, liabilities of any nature whatsoever,
including costs, expenses, penalties and attorneys' fees, known or unknown,
suspected or unsuspected, accrued or unaccrued, whether legal, equitable or
statutory, arising out of or in any way related to, in whole or in part, the
subject matter of the litigation of this lawsuit, that Settling Defendants
(including any of their present and former parents, subsidiaries, divisions,
affiliates, officers, directors, employees, witnesses (fact or expert),
representatives, insurers, agents, attorneys and distributors and the
predecessors, heirs, executors, administrators, successors and assigns of each
of the foregoing, and whether or not any such person participates in the
settlement), whether directly, indirectly, representatively, derivatively or in
any other capacity, ever had, now has or hereafter can, shall or may have.
D. Limited Most-Favored Nation Provision. In partial consideration for
the monetary payments to be made by the Settling Defendants pursuant to this
Settlement Agreement, the State of Minnesota agrees that if the Settling
Defendants enter into any future pre-verdict settlement agreement of other
similar litigation brought by a non-federal governmental plaintiff on terms more
favorable to such non-federal governmental plaintiff than the terms of this
Settlement Agreement (after due consideration of relevant differences in
population or other appropriate factors), the terms of this Settlement Agreement
shall not be revised except as follows: to the extent, if any, such other
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<PAGE>
pre-verdict settlement agreement includes terms that provide (a) for joint and
several liability among the Settling Defendants with respect to monetary
payments to be made pursuant to such agreement; (b) a guarantee by the parent
company of any of the Settling Defendants or other assurances of payment or
creditors' remedies with respect to monetary payments to be made pursuant to
such agreement; or (c) for the implementation of non-economic tobacco-related
public health measures different from those contained in this Settlement
Agreement, then this Settlement Agreement shall, at the option of the Office of
the Attorney General of the State of Minnesota, be revised to include terms
comparable to such terms.
IV. DEFENDANTS' ASSURANCES
A. Settling Defendants agree not to directly or indirectly, including
through any third party or affiliate:
1. Oppose the passage of those future Minnesota legislative proposals
or administrative rules intended by their terms to reduce tobacco use by
children listed on Schedule B. (The foregoing does not prohibit Settling
Defendants from resisting enforcement of, or suing for declaratory or
injunctive relief with respect to any such legislation or rule on any
grounds.)
2. Facially challenge the enforceability or constitutionality of
existing Minnesota laws or rules relating to tobacco control, including,
but not limited to, Minnesota Statutes Section 461.17 regarding the
disclosure of certain ingredients in cigarettes; Minnesota Statutes
Sections 461.12, et. seq., and 609.685 regarding the sale of tobacco to
minors; Minnesota Statutes Section 325F.77 regarding the distribution of
samples; and Minnesota Statutes Section 144.411 et. seq. regarding clean
indoor air.
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<PAGE>
3. Support in Congress or any forum, legislation, rules or policies
which would preempt, override, or abrogate or diminish the State's rights
or recoveries under this Agreement. Except as specifically provided in the
foregoing sentence, nothing in this Agreement shall be deemed to restrain
the parties from advocating terms of any national settlement or taking any
other positions on issues relating to tobacco. The State and its attorneys
specifically reserve the right to continue to litigate or advocate for
additional document disclosure beyond that ordered by the Ramsey County
District Court, in any forum outside of Minnesota.
4. Settling Defendants' obligation to produce documents in discovery
pertaining to enactment or repeal of, or opposition to, state legislation
or state executive action relating to tobacco in Minnesota is extended
beyond August 17, 1994, to the date of this Agreement, with Settling
Defendants required to produce these documents within thirty (30) days of
the date of this Agreement.
B. Disclosure of Payments Likely to Affect Public Policy.
1. Each Settling Defendant shall disclose to the Office of the
Attorney General and the Office of the Governor, at the times and in the
manner provided below, information about the following payments:
a. Any payment to a "lobbyist" or "principal" within the meaning
of Minnesota Statutes, Section 10A.01, subdivisions 11 and 28, if
Settling Defendant knows or has reason to know that the payment will
be used, directly or indirectly, to influence legislative or
administrative action, or the official action of state or local
government in Minnesota in any way relating to Tobacco Products or
their use.
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<PAGE>
b. Any payment to a third party, if the Settling Defendant knows
the payment is partly in consideration for the third party attending,
offering testimony at, or participating before a state or local
government hearing in Minnesota in any way relating to Tobacco
Products or their use; and
c. Any payment (other than a "political contribution" under Minn.
Stat. Section 10.01, subd. 7, or 2 USC Section 431(8)(A)) to, or for
the benefit of, a state or local official in Minnesota, whether made
directly by a defendant or indirectly through an employee acting in
the scope of his employment, affiliate, lobbyist, or other agent
acting under the substantial control of a defendant.
2. Disclosures required under this section shall be filed with
the Office of the Attorney General and with the Office of the Governor
on the first day of January, April, July and October of each year for
any and all payments made through the first day of the previous month
and shall be transmitted in electronic format or such format as the
attorney general may require, with the following information:
a. The name, address, telephone number and e-mail address of
the recipient.
b. The amount of each payment described in Paragraph B(1).
c. The aggregate amount of all payments described in
Paragraph B(1) to the recipient in the calendar year.
3. Information filed under this section is "public data" within the
meaning of the Minnesota Government Data Practices Act.
17
<PAGE>
C. Settling Defendants agree to discontinue all Billboards and Transit
Advertisements of Tobacco Products in the State. Settling Defendants shall use
their best efforts in cooperation with the State to identify all such Billboards
that are located within 1000 feet of any public or private school or playground
in the State, and shall provide the State with a preliminary list of the
location of all Billboards and stationary Transit Advertisements within 30 days
from the date hereof, such list to be finalized within an additional 15 days.
Settling Defendants shall, at the earlier of the expiration of applicable
contracts or four months from the date the final list is supplied to the State,
remove all Billboards and Transit Advertisements for Tobacco Products from
within the State, leaving the space unused or used for advertising unrelated to
Tobacco Products; or at the option of the State of Minnesota, will allow the
State, at its expense, to substitute for the remaining term of the contract,
alternative advertising intended to discourage the use of Tobacco Products by
children and their exposure to second-hand smoke. The parties also agree to
secure the expedited removal of up to 50 Billboards or stationary Transit
Advertisements for Tobacco Products designated by the State within 30 days after
their designation. Each Settling Defendant which has Billboard advertising in
the State shall provide the Court and the Attorney General, or his designee,
with the name of a contact person to whom the State may direct inquiries during
the time such Billboards and Transit Advertisements are being eliminated, from
whom the State may obtain periodic reports as to the progress of their
elimination and who will be responsible for ensuring that appropriate action is
taken to remove any Billboards that have not been timely eliminated.
D. Settling Defendants shall not make, in the connection with any motion
picture made in the United States, or cause to be made any payment, direct or
indirect, to any person to use, display, make reference to, or use as a prop any
cigarette, cigarette package, advertisement for
18
<PAGE>
cigarettes, or any other item bearing the brand name, logo, symbol, motto,
selling message, recognizable color or pattern of colors, or any other indicia
of product identification identical or similar to, or identifiable with, those
used for any brand of domestic tobacco products.
E. On and after December 31, 1998, Settling Defendants shall permanently
cease marketing, licensing, distributing, selling or offering, directly or
indirectly, including by catalogue or direct mail, in the State of Minnesota,
any service or item (other than tobacco products or any item of which the sole
function is to advertise tobacco products) which bears the brand name (alone or
in conjunction with any other word), logo, symbol, motto, selling message,
recognizable color or pattern of colors, or any other indicia of product
identification identical or similar to, or identifiable with, those used for any
brand of domestic tobacco products.
F. Settling Defendants and the Law Firm of Robins, Kaplan, Miller &
Ciresi L.L.P. ("RKM&C") have reached a separate agreement for the payment of the
State's costs and attorneys fees. In consideration for said agreement, RKM&C has
released the State from its obligation to pay costs and attorneys fees under the
Special Attorney Appointment dated May 23, 1994.
V. MISCELLANEOUS PROVISIONS
A. Representations of Parties. The respective parties hereto hereby
represent that this Settlement Agreement has been duly authorized and, upon
execution, will constitute a valid and binding contractual obligation,
enforceable in accordance with its terms, of each of the parties hereto.
The State represents that all of its outside counsel that have represented it
in this action are, by and through their authorized representatives, signatores
to this Settlement Agreement.
B. Court Approval. The Parties agree to submit this Settlement Agreement
to the Court for its review and approval on Friday, May 8, 1998. If the Court
declines to approve this Settlement
19
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Agreement, the Blue Cross Settlement Agreement, the form of State Escrow
Agreement, and the form of Blue Cross Escrow Agreement, the matter will be
immediately submitted to the jury. If the Court, as a condition of approval or
otherwise, requires any change in the Agreements which any signatory is
unwilling to make, the case will be immediately submitted to the jury. If before
the Court approves the Agreements, any third-party seeks to intervene for the
purpose of opposing the Settlement Agreement, the Blue Cross Settlement
Agreement, the State Escrow Agreement, and the Blue Cross Escrow Agreement, any
Party at its sole election, may withdraw from this Agreement, after first giving
notice to the Court and all of the Parties before the jury is dismissed, and
submit the case to the jury. If the Court approves the Settlement Agreement as
submitted, the Agreement will be final and binding upon all Parties.
In the event that there is a challenge to any provision of this Settlement
Agreement by anyone other than the Attorney General of the State of Minnesota as
of the date of this Agreement, BCBS or Settling Defendants ("a third-party
challenge") after Final Approval, any amounts required to be paid by Settling
Defendants pursuant to this Settlement Agreement shall be paid into escrow
pursuant to the State Escrow Agreement. If, as a result of such a challenge, any
material term of Sections II, III, IV of this Settlement Agreement is modified
or rendered unenforceable, the parties shall negotiate an equivalent or
comparable substitute term or other appropriate credit or adjustment. In the
event that the parties are unable to agree on such a substitute term or
appropriate credit or adjustment, then the parties will submit the issue to the
Court for resolution, subject to any available appeal rights. In the event that
any third-party challenge is made after December 31, 1998, any payments due
under Paragraph II.B. shall be made to the State according to the terms of this
Settlement Agreement, and only those payments due under Paragraph II.D. shall be
placed into escrow as provided above.
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<PAGE>
In the event that the Court determines that there has been a failure of
consideration legally sufficient to warrant termination of this Settlement
Agreement, then this Settlement Agreement may be terminated by the party
adversely affected. In the event of such termination, the action will be
reinstated and all decisions of the trial court, and any party's appeal or other
rights with respect thereto, will have the same force and effect as if this
Settlement Agreement had never been entered into.
C. Obligations Several, Not Joint. All obligations of the Settling
Defendants pursuant to this Settlement Agreement are intended to be and shall
remain several, and not joint.
D. Headings. The headings of the paragraphs of this Settlement Agreement
are not binding and are for reference only and do not limit, expand or otherwise
affect the contents of this Settlement Agreement.
E. No Determination or Admission. This Settlement Agreement and any
proceedings taken hereunder are not intended to be and shall not in any event be
construed as, or deemed to be, an admission or concession or evidence of any
liability or any wrongdoing whatsoever on the part of any party hereto or any
person covered by the releases provided under paragraphs III.B. and C. hereof.
The Settling Defendants specifically disclaim and deny any liability or
wrongdoing whatsoever with respect to the allegations and claims asserted
against them in this action and enter into this Settlement Agreement solely to
avoid the further expense, inconvenience, burden and uncertainty of litigation.
F. Non-Admissibility. The settlement negotiations resulting in this
Settlement Agreement have been undertaken by the parties hereto in good faith
and for settlement purposes only, and neither this Settlement Agreement nor any
evidence of negotiations hereunder shall be offered or received
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<PAGE>
in evidence in this action, or any other action or proceeding, for any purpose
other than in an action or proceeding arising under this Settlement Agreement.
G. Amendment; Waiver. This Settlement Agreement may be amended only by a
written instrument executed by the Attorney General and the Settling Defendants.
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 Settlement Agreement shall not be deemed to be or construed as a
waiver of any other breach, whether prior, subsequent or contemporaneous, of
this Settlement Agreement.
H. Notices. All notices or other communications to any party to this
Settlement Agreement shall be in writing (and shall include telex, telecopy or
similar writing) and shall be given to the respective parties hereto at the
following addresses. Any party hereto may change the name and address of the
person designated to receive notice on behalf of such party by notice given as
provided in this paragraph.
For the State of Minnesota:
Hubert H. Humphrey III
Attorney General
102 State Capitol
St. Paul, MN 55155
Fax: 612.297.4193
with copies to:
Michael V. Ciresi
Robins, Kaplan, Miller & Ciresi L.L.P.
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, MN 55402-2015
Fax: 612.339.4181
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<PAGE>
Chief Deputy Attorney General
State of Minnesota
102 State Capitol
St. Paul, MN 55155
Fax: 612.297.4193
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
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For Brown & Williamson Tobacco Corporation:
F. Anthony Burke
Brown & Williamson Tobacco Corporation
200 Brown & Williamson Tower
401 South Fourth Avenue
Louisville, KY 40202
Fax: 502.568.7297
With a copy to:
Stephen R. Patton
Kirkland & Ellis
200 East Randolph Dr.
Chicago, IL 60601
Fax: 312.861.2200
For Lorillard Tobacco Company:
Arthur J. Stevens
Lorillard Tobacco Company
714 Green Valley Road
Greensboro, NC 27408
Fax: 910.335.7707
I. Cooperation. The parties hereto agree to use their best efforts and to
cooperate with each other to cause this Settlement Agreement to become
effective, to obtain all necessary approvals, consents and authorizations, if
any, and to execute all documents and to take such other action as may be
appropriate in connection therewith. Consistent with the foregoing, the parties
hereto agree that they will not directly or indirectly assist or encourage any
challenge to this Settlement Agreement by any other person. All parties hereto
agree to support the integrity and enforcement of the terms of this Settlement
Agreement.
J. Governing Law. This Settlement Agreement shall be governed by the laws
of the State of Minnesota, without regard to the conflicts of law rules of such
state.
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<PAGE>
K. Construction. None of the parties hereto shall be considered to be the
drafter of this Settlement Agreement or any provision hereof for the purpose of
any statute, case law or rule of interpretation or construction that would or
might cause any provision to be construed against the drafter hereof.
L. Severability. Subject to the provisions of Paragraph V.B., the terms
of this Agreement are severable. If any term of this Agreement is found to be
unlawful, the remaining terms shall remain in full force and effect, and the
parties agree to negotiate a substitute term of equivalent value.
M. Intended Beneficiaries. This action was brought by the State of
Minnesota, through its Attorney General, and by Blue Cross to recover certain
monies and to promote the health and welfare of the people of Minnesota. No
portion of this Settlement Agreement shall provide any rights to, or be
enforceable by, any person or entity that is neither a party hereto nor a person
encompassed by the releases provided in paragraphs III.B. and C. of this
Settlement Agreement. Except as expressly provided in this Settlement Agreement,
no portion of this Settlement Agreement shall bind any non-party or determine,
limit or prejudice the rights of any such person or entity. None of the rights
granted or obligations assumed under this Settlement Agreement by the parties
hereto may be assigned or otherwise conveyed without the express prior written
consent of all of the parties hereto.
N. Counterparts. This Settlement Agreement may be executed in
counterparts. Facsimile or photocopied signatures shall be considered as valid
signatures as of the date hereof, although the original signature pages shall
thereafter be appended to this Settlement Agreement.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto, through their fully authorized
representatives, have agreed to this Comprehensive Settlement Agreement and
Release as of this 8th day of May, 1998.
STATE OF MINNESOTA, acting by and through
Hubert H. Humphrey III, its duly elected and
authorized Attorney General
By:/s/ HUBERT H. HUMPHREY III
--------------------------------------------
Hubert H. Humphrey III
Attorney General
/s/ LEE E. SHEEHY
---------------------------------------------
Lee E. Sheehy
Chief Deputy Attorney General
/S/ ERIC A. JOHNSON
---------------------------------------------
Eric A. Johnson
Executive Assistant to the Attorney General
/s/ THOMAS F. PURSELL
---------------------------------------------
Thomas F. Pursell
Senior Counsel to the Attorney General
/s/ D. DOUGLAS BLANKE
---------------------------------------------
D. Douglas Blanke
Director of Consumer Policy
COUNSEL TO THE STATE OF MINNESOTA
By: /s/ MICHAEL V. CIRESI
--------------------------------------------
Michael V. Ciresi
Robins, Kaplan, Miller & Ciresi L.L.P.
26
<PAGE>
PHILIP MORRIS INCORPORATED
By: /s/ MEYER G. KOPLOW
--------------------------------------------
Meyer G. Koplow
Counsel
By: /s/ MARTIN J. BARRINGTON
--------------------------------------------
Martin J. Barrington
General Counsel
R.J. REYNOLDS TOBACCO COMPANY
By: /s/ D. SCOTT WISE
--------------------------------------------
D. Scott Wise
Counsel
By: /s/ CHARLES A. BLIXT
--------------------------------------------
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO
CORPORATION
By: /s/ STEPHEN R. PATTON
--------------------------------------------
Stephen R. Patton
Counsel
By: /s/ F. ANTHONY BURKE
--------------------------------------------
F. Anthony Burke
Vice President and General Counsel
LORILLARD TOBACCO COMPANY
By: /s/ ARTHUR J. STEVENS
--------------------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
27
<PAGE>
SCHEDULE A
AMOUNTS PAYABLE BY SETTLING DEFENDANTS ON OR
BEFORE SEPTEMBER 5, 1998 PURSUANT TO
PARAGRAPH II.B. OF THE SETTLEMENT AGREEMENT
<TABLE>
<CAPTION>
Date 9/5/98
- ------------------------------------------------------ --------------
Settling Defendants
- -------------------
<S> <C>
Philip Morris Incorporated............................ $ 163,200,000
R.J. Reynolds Tobacco Company......................... $ 16,320,000
Brown & Williamson Tobacco Corporation................ $ 42,960,000
Lorillard Tobacco Company............................. $ 17,520,000
Total Amount.......................................... $ 240,000,000
</TABLE>
1
<PAGE>
SCHEDULE B
Potential Future Legislation to Reduce Tobacco Use by Children
- -- Legislation to expand the self-service-sale restrictions of the youth
access to tobacco law and to remove the current exception for sales of
cigars.
- -- Legislation to clarify the current youth access law provision on
vending machines, making clear that machines equipped with automatic
locks or that use tokens are vending machines within the meaning of the
law.
- -- Legislation providing enhanced or coordinated funding for enforcement
efforts under sales-to-minors provisions of the criminal code or the
youth access statute and ordinances.
- -- Legislation to encourage or support the use of technology to increase
effectiveness of age-of-purchase laws, such as, without limitation, the
use of programmable scanners or scanners to read drivers' licenses.
- -- Legislation or rules restricting the wearing, carrying or display of
tobacco indicia in school-related settings, including, without
limitation, in school facilities, on school premises, or in connection
with school-sponsored activities.
- -- Legislation to create or stiffen non-monetary incentives for youth not
to smoke, such as expansion of youth community service programs.
2
<PAGE>
APPENDIX A
FORMULA FOR CALCULATING
STATE OF MINNESOTA VOLUME ADJUSTMENTS
Any payment that by the terms of the Settlement Agreement is to be adjusted
pursuant to this Appendix (the "Applicable Base Payment") shall be adjusted
pursuant to this Appendix in the following manner:
(A) in the event the aggregate number of units of Tobacco Products sold
domestically by the Settling Defendants in the Applicable Year (as defined
hereinbelow) (the "Actual Volume") is greater than the aggregate number of units
of Tobacco Products sold domestically by the Settling Defendants in 1997 (the
"Base Volume"), the Applicable Base Payment shall be multiplied by the ratio of
the Actual Volume to the Base Volume;
(B) in the event the Actual Volume is less than the Base Volume,
(i) the Applicable Base Payment shall be multiplied by the ratio of
the Actual Volume to the Base Volume, and the resulting product shall be
divided by 0.98; and
(ii) if a reduction of the Applicable Base Payment results from the
application of subparagraph (B)(i) of this Appendix, but the Settling
Defendants' aggregate net operating profits from domestic sales of Tobacco
Products for the Applicable Year (the "Actual Net Operating Profit") is
greater than the Settling Defendants' aggregate net operating profits from
domestic sales of Tobacco Products in 1997 (the "Base Net Operating
Profit") (such Base Net Operating Profit being adjusted upward by the
greater of the rate of 3% per annum or the actual total percent change in
the Consumer Price Index, in either instance for the period between January
1, 1998 and the date on which the payment at issue is made), then the
amount by which the Applicable Base Payment is reduced by the application
of
3
<PAGE>
subparagraph (B)(i) shall be reduced (but not below zero) by 2.55% of 25%
of such increase in such profits. For purposes of this Appendix, "net
operating profits from domestic sales of Tobacco Products" shall mean net
operating profits from domestic sales of Tobacco Products as reported to
the United States Securities and Exchange Commission ("SEC") for the
Applicable Year or, in the case of a Settling Defendant that does not
report profits to the SEC, as reported in financial statements prepared in
accordance with generally accepted accounting principles and audited by a
nationally recognized accounting firm. The determination of the Settling
Defendants' aggregate net operating profits from domestic sales of Tobacco
Products shall be derived using the same methodology as was employed in
deriving such Settling Defendants' aggregate net operating profits from
domestic sales of Tobacco Products in 1997. Any increase in an Applicable
Base Payment pursuant to this subparagraph B(ii) shall be payable within
120 days after the date that the payment at issue was required to be made.
(C) "Applicable Year" means (i) with respect to the payments made
pursuant to paragraph II.D of the Settlement Agreement, the calendar year
ending on the date on which the payment at issue is due, regardless of when
such payment is made; and (ii) with respect to all other payments made
pursuant to this Settlement Agreement, the calendar year immediately
preceding the year in which the payment at issue is due, regardless of when
such payment is made.
4
<PAGE>
EXHIBIT 10.2
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF RAMSEY SECOND JUDICIAL DISTRICT
THE STATE OF MINNESOTA, Case Type: Other Civil
BY HUBERT H. HUMPHREY III, Court File No. C1-94-8565
ITS ATTORNEY GENERAL,
and
BLUE CROSS AND BLUE SHIELD
OF MINNESOTA,
Plaintiffs,
vs. CONSENT JUDGMENT
PHILIP MORRIS INCORPORATED,
R.J. REYNOLDS TOBACCO COMPANY,
BROWN & WILLIAMSON TOBACCO
CORPORATION, B.A.T. INDUSTRIES
P.L.C., BRITISH-AMERICAN TOBACCO
COMPANY LIMITED, BAT (U.K. &
EXPORT) LIMITED, LORILLARD
TOBACCO COMPANY, THE AMERICAN
TOBACCO COMPANY, LIGGETT GROUP,
INC., THE COUNCIL FOR TOBACCO
RESEARCH-U.S.A., INC., and THE
TOBACCO INSTITUTE, INC.,
Defendants.
WHEREAS, the State of Minnesota, by its Attorney General, Hubert H.
Humphrey III, and Blue Cross and Blue Shield of Minnesota filed their Complaint
herein on August 17, 1994, and their Second Amended Complaint on January 6,
1998;
EXHIBIT A
1
<PAGE>
WHEREAS, Defendants have contested the claims in the Plaintiffs' Complaint
and Second Amended Complaint;
WHEREAS, the parties recognize that Congress is considering national
tobacco legislation and have agreed to settle this case on a basis which
acknowledges possible federal legislation, but which guarantees to the people of
Minnesota the relief granted herein;
WHEREAS, Settling Defendants, in the Settlement Agreement and Stipulation
for Entry of Consent Judgment, have waived as specified therein their right to
challenge the terms of this Consent Judgment as being superseded or preempted by
future Congressional enactments; and
WHEREAS, the Attorney General believes the entry of this Consent Judgment
is appropriate and in the public interest;
NOW THEREFORE, IT IS HEREBY ORDERED, ADJUDGED AND DECREED AS FOLLOWS:
I. JURISDICTION AND VENUE
The Court has jurisdiction over the subject matter of this action and
over the Settling Defendants under Minn. Stat. SECTIONS 8.31, 325D.15, 325D.45,
325D.58, 325F.70 and 484.01 (1994). Venue is proper in Ramsey County pursuant to
Minn. Stat. SECTIONS 325D.65 and 542.09 (1994) in that Settling Defendants do
business in Ramsey County.
II. DEFINITIONS
The definitions set forth in the Settlement Agreement and Stipulation for
Entry of Consent Judgment ("Settlement Agreement") are incorporated by reference
herein.
2
<PAGE>
III. APPLICABILITY
This Consent Judgment applies only to Settling Defendants in their
corporate capacity acting through their respective successors and assigns,
directors, officers, employees, agents, subsidiaries, divisions, or other
internal organizational units of any kind or any other entities acting in
concert or participation with them. The remedies and penalties in Sections XD.
and E. herein for a violation of this Consent Judgment shall apply only to
Settling Defendants, and shall not be imposed or assessed against any employee,
officer or director of Settling Defendants or other person or entity as a
consequence of such a violation, and there shall be no jurisdiction under this
Consent Judgment to do so.
IV. EFFECT ON THIRD PARTIES
This Consent Judgment is not intended to and does not vest standing in any
third party with respect to the terms hereof, or create for any person other
than the parties hereto a right to enforce the terms hereof.
V. INJUNCTIVE RELIEF
Settling Defendants are permanently enjoined from:
A. On and after December 31, 1998, marketing, licensing, distributing,
selling or offering, directly or indirectly, including by catalogue or direct
mail, in the State of Minnesota, any service or item (other than tobacco
products or any item the sole function of which is to advertise tobacco
products) which bears the brand name (alone or in conjunction with any other
word), logo, symbol, motto, selling message, recognizable color or pattern of
colors, or any other indicia or product identification identical or similar to,
or identifiable with, those used for any domestic brand of tobacco products.
3
<PAGE>
B. Making any material misrepresentation of fact regarding the health
consequence of using any tobacco product, including any tobacco additives,
filters, paper or other ingredients. Nothing in this paragraph shall limit the
exercise of any First Amendment right or any defense or position which persons
bound by this Consent Judgment may assert in any judicial, legislative, or
regulatory forum.
C. Entering into any contract, combination or conspiracy between or among
themselves, which has the purpose or effect of: (1) limiting competition in the
production or distribution of information about the health hazards or other
consequences of the use of their products; (2) limiting or suppressing research
into smoking and health; or (3) limiting or suppressing research into,
marketing, or development of new products.
D. Taking any action, directly or indirectly, to target children in
Minnesota in the advertising, promotion, or marketing of cigarettes, or taking
any action the primary purpose of which is to initiate, maintain or increase the
incidence of underage smoking in Minnesota.
VI. DISSOLUTION OF DEFENDANT COUNCIL FOR TOBACCO RESEARCH
Settling Defendants represent that they have the authority to effectuate
the following and will do so within 90 days of this Agreement: The Council for
Tobacco Research-U.S.A. Inc. shall cease all operations except as necessary to
comply with existing grants or contracts and to continue its defense of other
lawsuits and will be disbanded and dissolved within a reasonable time period
thereafter. To the extent not required elsewhere in this Consent Judgment, the
Council for Tobacco Research shall forward all smoking and health research in
its possession or control to the Food and Drug Administration subject to
appropriate confidentiality protection required by contracts between the Council
for Tobacco Research and any third party. Defendants shall preserve all other
records
4
<PAGE>
of the Council for Tobacco Research which relate in any way to issues raised in
this or any other Attorney General lawsuit. Defendants may not reconstitute the
Council for Tobacco Research or its function in any form.
VII. PUBLIC ACCESS TO DOCUMENTS AND COURT FILES
A. The Court's previous Protective Orders are hereby dissolved with
respect to all documents, including the 4A and 4B indices and the privilege
logs, which have been produced to the Plaintiffs and for which Defendants have
made no claim of privilege or Category II trade secret protection. Such
documents shall be made available to the public at the Depository, in the manner
provided as follows:
1. The public shall be given access to all non-privileged documents
contained in the Minnesota Depository, including all documents set forth in
Paragraph VII.A. above.
2. Plaintiffs and Settling Defendants shall meet with representatives
of the current Minnesota Depository administrators, Smart Legal Assistance
and Merrill Corporation, and/or other appropriate persons, to discuss
staffing issues and the procedures that should be implemented to continue
the operation of the Minnesota Depository, thereby to ensure broad and
orderly access to these documents.
3. Category II documents shall be returned to the Defendants as soon
as practical, provided that Defendants, upon receiving appropriate
assurances of trade secret protection from the Food and Drug
Administration, shall forward a copy of the Category II documents bearing
the Bates numbers from this action to said agency. Plaintiffs shall retain
the Bates stamp numbers of all Category II documents produced in this case.
5
<PAGE>
B. The documents produced in this case are not "government data" under
the Minnesota Government Data Practices Act.
C. For documents upon which a privilege was claimed and found not to
exist, including any briefs, memoranda and other pleadings filed by the parties
which include reference to such documents, Plaintiffs may seek court approval to
make such documents available to the public, provided that any such request be
made to the Court within 45 days of the date of entry of this Consent Judgment.
D. Defendant British-American Tobacco Company Limited shall maintain and
operate the Guildford Depository for a period of ten years. Defendant
British-American Tobacco Company Limited shall have the option of maintaining
such depository at its current location or at an appropriate alternative
location. All documents, except those identified in Paragraph VII.A.3 above,
which were selected by plaintiffs from the Guildford Depository in response to
the Plaintiffs' discovery requests shall be moved to and retained at the
Minnesota Depository.
E. The Minnesota Depository shall be maintained and operated at Settling
Defendants' sole expense, in the manner set forth above for ten years after the
date hereof, or such longer period as may be provided in federal legislation for
a national document depository. At the end of such period, or sooner, at the
State's discretion, the documents shall be transferred to the State Archives or
other appropriate state body, where they shall remain available for historical
and research purposes. The parties and the Depository staff shall cooperate with
the State Archivist or such other state officials as may be involved in
transferring the documents to the custody of the State.
6
<PAGE>
F. Settling Defendants shall provide to the State for the Depository a
copy of all existing CD-ROMs of documents produced in this action that do not
contain any privileged or work-product documents or information, to be placed in
the Depository.
G. Defendants shall produce to the Depository all documents produced by
such defendants in other United States smoking and health litigation but not
previously produced in Minnesota, within 30 days of their production such the
other litigation, provided Defendants do not claim privilege with respect to
such documents, and provided such documents are not subject to any protective
order.
VIII. EQUITABLE RELIEF: NATIONAL RESEARCH; DEPOSIT OF FUNDS.
A. In furtherance of the equitable relief sought by the State, pursuant
to the Court's equitable powers to shape appropriate injunctive relief, in light
of the public health interests demonstrated by the evidence in this case, and
pursuant to the agreement of the parties:
1. Consistent with the Prayer for Relief in the State's Complaint and
Amended Complaints that the Defendants fund cessation programs in the State
of Minnesota, the amount due in December, 1998 ($102 million), pursuant to
the Settlement Agreement, Section II.D, shall be deposited into a separate
cessation account and used to offer smoking cessation opportunities to
Minnesota smokers, and shall be administered as ordered by the Court.
2. In addition to other money paid under this Consent Judgment and the
Settlement Agreement and Stipulation for Entry of Consent Judgment, each
Settling Defendant shall pay pro rata in proportion to its Market Share, on
or before June 1, 1998, and no later than June 1 of each succeeding year
through and including June 1, 2007, its share of
7
<PAGE>
$10 million into a national research account, to be administered as ordered
by the Court. The parties envision that approximately 70% of the $100
million total will be used for research grants relating to the elimination
of tobacco use by children, and 30% for program implementation, evaluation
and other tobacco control purposes; provided, however, the administrator of
the national research account may, in its discretion, change the
allocation.
3. The State shall submit a plan for the administration and authorized
uses of the funds payable under this section within 45 days of the date of
entry of this Consent Judgment.
4. Monies payable under this section and Section V.B. of the
Settlement Agreement shall be deposited in interest bearing accounts at a
bank to be designated by the Commissioner of Finance. Settling Defendants'
payment of the amounts set forth above are Settling Defendants' sole
obligation under this section.
B. Except as specified in this section and Section V.B of the
Settlement Agreement, all monies payable under Sections II.B. and D. of the
Settlement Agreement between the parties shall be deposited into the general
fund of the State of Minnesota.
IX. FINAL DISPOSITION
This Consent Judgment resolves all claims set forth in the State's Second
Amended Complaint against Defendants, which are hereby dismissed with prejudice,
and shall constitute the final disposition of this action.
X. MISCELLANEOUS PROVISIONS
A. Jurisdiction of this case is retained for the purpose of enforcement
and enabling the continuing proceedings contemplated herein. Any party to this
Consent Judgment may apply to this
8
<PAGE>
Court at any time for such further orders and directions as may be necessary or
appropriate for the construction and enforcement of this Consent Judgment.
B. This Consent Judgment is not intended to be and shall not in any event
be construed as, or deemed to be, an admission or concession or evidence of
personal jurisdiction or any liability or any wrongdoing whatsoever on the part
of any Defendant. The Defendants specifically disclaim any liability or
wrongdoing whatsoever with respect to the claims and allegations asserted
against them in this action and Settling Defendnats have stipulated to entry of
this Consent Judgment solely to avoid the further expense, inconvenience, burden
and risk of litigation.
C. Except as provided in Section III.D. of the Settlement Agreement and
Stipulation for Entry of Consent Judgment, this Consent Judgment shall not be
modified unless the party seeking modification demonstrates, by clear and
convincing evidence, that it will suffer irreparable harm from new and
unforeseen conditions; provided, however, that the provisions of Section III of
this Consent Judgment shall in no event be subject to modification. Changes in
the economic conditions of the parties shall not be grounds for modification. It
is intended that Settling Defendants will comply with this Consent Judgment as
originally entered, even if Settling Defendants' obligations hereunder are
greater than those imposed under current or future law. Therefore, a change in
law that results, directly or indirectly, in more favorable or beneficial
treatment of any one or more of the Settling Defendants shall not support
modification of this Consent Judgment.
D. In enforcing this Consent Judgment the Attorney General shall have the
discovery powers of Minn. Stat. SECTION 8.31 (1996), as amended. Any Settling
Defendant which violates this Consent Judgment shall be subject to contempt and
to the remedies provided in Minn. Stat. SECTION 8.31 (1996), as amended. In
addition, in any proceeding which results in a finding that a Settling
9
<PAGE>
Defendant violated this Consent Judgment, the responsible Settling Defendant or
Settling Defendants shall pay the State's costs and attorneys' fees incurred in
such proceeding.
E. The remedies in this Consent Judgment are cumulative and in addition
to any other remedies the State may have at law or equity. Nothing herein shall
be construed to prevent the State from bringing any action for conduct not
released hereunder, even though that conduct may also violate this Consent
Judgment.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated:
-------------------------- -----------------------------
KENNETH J. FITZPATRICK
Judge of District Court
JUDGMENT
Pursuant to the foregoing Consent Judgment, judgment is hereby entered
accordingly.
Dated:
-------------------------- -----------------------------
Court Administrator
10
<PAGE>
EXHIBIT 10.3
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF RAMSEY SECOND JUDICIAL DISTRICT
THE STATE OF MINNESOTA, Court File No. C1-94-8565
BY HUBERT H. HUMPHREY, III,
ITS ATTORNEY GENERAL,
and
BLUE CROSS AND BLUE SHIELD
OF MINNESOTA,
Plaintiffs,
vs.
PHILIP MORRIS INCORPORATED,
R.J. REYNOLDS TOBACCO COMPANY,
BROWN & WILLIAMSON TOBACCO
CORPORATION, B.A.T. INDUSTRIES
P.L.C., BRITISH-AMERICAN TOBACCO
COMPANY LIMITED, BAT (U.K. &
EXPORT) LIMITED, LORILLARD
TOBACCO COMPANY, THE
AMERICAN TOBACCO COMPANY,
LIGGETT GROUP, INC., THE
COUNCIL FOR TOBACCO RESEARCH
U.S.A., INC. and THE TOBACCO
INSTITUTE, INC.,
Defendants.
SETTLEMENT AGREEMENT AND RELEASE
THIS SETTLEMENT AGREEMENT AND RELEASE ("Settlement Agreement") is made as
of the date hereof, by and among the parties hereto, as indicated by their
signatures below, to settle and resolve with finality all claims of BCBSM, Inc.
d/b/a Blue Cross and Blue Shield of
<PAGE>
Minnesota ("Blue Cross") relating to the subject matter of this action which
have been or could have been asserted by Blue Cross and Blue Shield of
Minnesota.
WHEREAS, Blue Cross is a nonprofit health service plan corporation
organized pursuant to Minnesota Statutes Chapter 62C, and as such fulfills a
variety of health related functions in the State of Minnesota;
WHEREAS, the general purposes of Blue Cross under its enabling
legislation and its Articles of Incorporation is "to make possible wide,
economic and timely availability of hospital, medical surgical, dental and other
health services for the people of Minnesota and others" and "advance public
health and the art and science of hospital, medical and health care under the
laws of the State of Minnesota;"
WHEREAS, Blue Cross in recognition and furtherance of its statutory
mandate and charter, and the State of Minnesota, through its Attorney General,
Hubert H. Humphrey III, commenced this action on August 17, 1994, asserting
various claims for monetary and injunctive relief on behalf of Blue Cross and
the State of Minnesota against certain tobacco manufacturers and others as
Defendants;
WHEREAS, Blue Cross brought this action with the objectives of seeking
disclosure of cigarette industry knowledge about Tobacco Products to help better
inform the public and banning the marketing of Tobacco Products to children;
WHEREAS, Blue Cross has achieved disclosure of millions of cigarette
industry documents that shall hereafter be available to the public in the
Minnesota depository;
WHEREAS, Blue Cross has, by this action, sought to affect conduct of
Defendants, including:
2
<PAGE>
-- to refrain from opposition to Minnesota legislative activity
intended to control tobacco use by children;
-- to refrain from challenging the enforceability of existing
Minnesota laws or rules relating to tobacco control;
-- to discontinue all billboard and transit advertisements of
Tobacco Products in the State of Minnesota;
-- to refrain from the payment for product placement within
motion pictures made within the United States;
-- to permanently cease the marketing of any service or item,
other than Tobacco Products and advertisements for such
products, which bears the brand name or other identifying mark
of any domestic Tobacco Product;
-- to disclose certain payments or provision of other benefits to
lobbyists, third parties and public officials; and
-- to cause The Council for Tobacco Research-U.S.A. to cease
operations.
WHEREAS, Blue Cross has specifically asserted various claims for
monetary relief against the tobacco manufacturers and other defendants to
recover amounts which Blue Cross has expended for the treatment of the
smoking-caused illnesses of its subscribers;
WHEREAS, Blue Cross is the first such health plan to undertake such
action against any of the Defendants with regard to issues of smoking and
health, and until 1998, was the only such health plan to have commenced such an
action;
3
<PAGE>
WHEREAS, the Defendants have denied each and every one of Plaintiffs'
allegations of unlawful conduct or wrongdoing and have asserted a number of
defenses to Plaintiffs' claims, which defenses have been contested by
Plaintiffs; and
WHEREAS, the parties hereto wish to avoid the further expense, delay,
inconvenience, burden and uncertainty of continued litigation of this matter
(including appeals from any verdict), Blue Cross and the Settling Defendants
have agreed to settle this litigation:
NOW, THEREFORE, BE IT KNOWN THAT, in consideration of the payments to
be made by the Settling Defendants, the dismissal and release of claims by Blue
Cross and such other consideration as described herein, the sufficiency of which
is hereby acknowledged, the parties hereto, acting by and through their
authorized agents, memorialize and agree as follows:
I. GENERAL PROVISIONS
A. Jurisdiction. Blue Cross and the Settling Defendants acknowledge
that this Court has jurisdiction over the subject matter of this action and over
each of the parties to this Settlement Agreement, and that this Court shall
retain jurisdiction for the purposes of implementing and enforcing this
Settlement Agreement. The parties hereto agree to present any disputes under
this Settlement Agreement, including without limitation any claims for breach or
enforcement of this Settlement Agreement, exclusively to this Court.
B. Voluntary Agreement of the Parties. Blue Cross and the Settling
Defendants acknowledge and agree that this Settlement Agreement is voluntarily
entered into by all parties hereto as the result of arm's-length negotiations
during which all such parties were represented by counsel. Blue Cross and
Settling Defendants understand that Congress may enact legislation dealing with
some of the issues addressed in this Agreement. Settling Defendants and their
assigns, affiliates, agents,
4
<PAGE>
and successors, hereby waive any right to challenge this Agreement, directly or
through third parties, on the ground that any term hereof is unconstitutional,
outside the power or jurisdiction of the Court, preempted by or in conflict with
any current or future federal legislation (except where non-economic terms of
future federal legislation are irreconcilable).
C. Definitions.
For the purposes of this Settlement Agreement, the following terms
shall have the meanings set forth below:
1. "State" or "State of Minnesota" means the State of
Minnesota acting by and through its Attorney General;
2. "Blue Cross" means BCBSM, Inc., d/b/a Blue Cross and Blue
Shield of Minnesota, and all of its employees, directors, officers,
attorneys, parents, and divisions. BCBSM, Inc. represents that it is an
independent corporation operating under license from Blue Cross and
Blue Shield Association, an association of independent Blue Cross and
Blue Shield Plans (the "Association"), permitting BCBSM, Inc. to use
the Blue Cross and Blue Shield service marks in Minnesota, and that
BCBSM, Inc. is not serving as an agent of the Association or any other
Blue Cross/Blue Shield Plans in entering into this Settlement
Agreement;
3. "Settling Defendants" means those Defendants in this action
that are signatories hereto;
4. "Defendants" means Philip Morris Incorporated, R.J.
Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation,
B.A.T. Industries P.L.C., British- American Tobacco Company Limited,
BAT (U.K. and Export) Limited, Lorillard Tobacco
5
<PAGE>
Company, The American Tobacco Company, The Council for Tobacco
Research-U.S.A., Inc., and the Tobacco Institute, Inc. and their
successors and assigns;
5. "Consumer Price Index" shall mean the Consumer Price Index
for All Urban Consumers for the most recent twelve-month period, as
published by the Bureau of Labor Statistics of the U.S. Department of
Labor;
6. "State Settlement Agreement" means the settlement agreement
entitled "Settlement Agreement and Stipulation for Entry of Consent
Judgment" entered into among the State and the Settling Defendants with
respect to the settlement of this action;
7. "State Escrow Agreement" means the escrow agreement so
entitled and entered into among State, the Settling Defendants and an
escrow agent;
8. "Court" means the District Court of the State of Minnesota,
County of Ramsey, Second Judicial District;
9. "Market Share" means a Settling Defendant's respective
share of sales of cigarettes by unit for consumption in the United
States during the calendar year immediately preceding the year in which
the payment at issue is due, regardless of when payment is made;
10. "Cigarettes" means any product which contains nicotine, is
intended to be burned or heated under ordinary conditions of use, and
consists of or contains (i) any roll of tobacco wrapped in paper or in
any substance not containing tobacco; or (ii) tobacco, in any form,
that is functional in the product, which, because of its appearance,
the type of tobacco used in the filler, or its packaging and labeling,
is likely to be offered to, or purchased by, consumers as a cigarette;
or (iii) any roll of tobacco wrapped in any substance containing
tobacco which, because of its appearance, the type of tobacco used in
the filler, or its
6
<PAGE>
packaging and labeling, is likely to be offered to, or purchased by,
consumers as a cigarette described in subparagraph (i) of this
Paragraph.;
11. "Smokeless Tobacco" means any powder that consists of cut,
ground, powdered, or leaf tobacco that contains nicotine and that is
intended to be placed in the oral cavity;
12. "Tobacco Products" means Cigarettes and Smokeless Tobacco;
13. "Depository," unless otherwise specified, means the
Minnesota document depository established by the Court's Order dated
June 16, 1995. "Depositories" includes both the Minnesota depository
and the Guildford, U.K. document depository established by the Court's
Order dated September 6, 1995.
14. "Private Counsel" means Robins, Kaplan, Miller &
Ciresi L.L.P.
15. "Final Settlement" means the date on which this Settlement
Agreement, is executed and a Stipulation of Dismissal with prejudice
is filed with the Court;
16. "Allocation Fraction" means that fraction of each of the
payments made to Blue Cross which is expressed as a fraction for which,
for each year, 1978-1996, the numerator is Blue Cross's damages for
that year and the denominator is Blue Cross's total damages for years
1978-1996. The Allocation Fractions for years 1978-1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
For year, 1978: 0.028166303;
For year, 1979: 0.032609439;
For year, 1980: 0.039670851;
For year, 1981: 0.040893991;
For year, 1982: 0.042167950;
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
For year, 1983: 0.037203831;
For year, 1984: 0.031715039;
For year, 1985: 0.040184252;
For year, 1986: 0.046644637;
For year, 1987: 0.048474365;
For year, 1988: 0.049674533;
For year, 1989: 0.058874757;
For year, 1990: 0.066059121;
For year, 1991: 0.068837235;
For year, 1992: 0.071286135;
For year, 1993: 0.066550282;
For year, 1994: 0.075199152;
For year, 1995: 0.075114815; and
For year, 1996: 0.080673311.
</TABLE>
D. Settlement Receipts. The payments to be made by the Settling
Defendants under this Settlement Agreement are in satisfaction of all of Blue
Cross's claims for damages, including, without limitation, those for punitive
damages, incurred by Blue Cross in the year of payment or earlier years, except
that no part of any payment under this Settlement Agreement is made in
settlement of an actual or potential liability for a fine, penalty (civil or
criminal) or enhanced damages. Blue Cross represents that it does not have
authority to bring: (1) claims attributable to or arising out of the payment of
benefits by self-funded employer-employee benefit plans for which Blue Cross
presently provides or has formerly provided administrative services, (2) claims
attributable to or arising out of
8
<PAGE>
the payment of benefits under any program or plan for the Minnesota
Comprehensive Health Association or under the Federal Employees Health Benefit
Act or any other federal health benefit plan, or (3) claims attributable to or
arising out of the payment of benefits by any employee benefit plan of any
political subdivision of the State of Minnesota for which Blue Cross provides or
has provided administrative services. Each payment set forth in this section
shall be in partial satisfaction of each year of damages incurred and alleged by
Blue Cross for the years 1978 through 1996 and each payment shall accordingly be
allocated to the satisfaction of each specific year of damages incurred by Blue
Cross according to the Allocation Fraction set forth above.
E. Settlement Payments to Blue Cross. Each Settling Defendant severally
shall cause to be paid to an account designated in writing by Blue Cross in
accordance with and subject to Paragraph I.F. of this Settlement Agreement, the
following amounts: the amount listed for it in Schedule A hereto, such amount
representing its share of $160,000,000, to be paid on or before September 5,
1998; pro rata in proportion to its Market Share, its share of $79,200,000, to
be paid on or before January 4, 1999; pro rata in proportion to its Market
Share, its share of $57,450,000, to be paid on or before January 3, 2000; pro
rata in proportion to its Market Share, its share of $57,450,000, to be paid on
or before January 2, 2001; pro rata in proportion to its Market Share, its share
of $57,450,000, to be paid on or before January 2, 2002; and pro rata in
proportion to its Market Share, its share of $57,450,000, to be paid on or
before January 2, 2003. The payments made by the Settling Defendants pursuant to
this Paragraph shall be adjusted upward by the greater of 3% or the percentage
increase in the Consumer Price Index applied each year on the previous year,
beginning with the payment due to be made on or before January 3, 2000. The
payments due to be made by the Settling Defendants pursuant to this Paragraph E
on or before January 3, 2000, on or
9
<PAGE>
before January 2, 2001, on or before January 2, 2002, and on or before January
2, 2003, will also be decreased or increased, as the case may be, in accordance
with the formula for adjustments of payments set forth in Appendix A. The
payments due to be made by the Settling Defendants pursuant to this Paragraph E
on or before September 5, 1998, and on or before January 4, 1999, shall not be
subject to the inflation escalation and volume adjustment described in the
preceding sentences.
In the event that any of the Settling Defendants (a "Defaulting
Defendant") fails to make any payment required of it pursuant to this Paragraph
E by the applicable date set forth in this Paragraph E (a "Missed Payment"),
Blue Cross shall provide notice to each of the Settling Defendants of such
non-payment. The Defaulting Defendant shall have 15 days after receipt of such
notice to pay the Missed Payment, together with interest accrued from the
original applicable due date at the prime rate as published in the Wall Street
Journal on the latest publication date on or before the date of default plus 3%.
If the Defaulting Defendant does not make such payment within such 15-day
period, Blue Cross shall provide notice to each of the Settling Defendants of
such continued non-payment. Any or all of the Settling Defendants (other than
the Defaulting Defendant) shall thereafter have 15 days after receipt of such
notice to elect (in such Settling Defendant's or such Settling Defendants' sole
and absolute discretion) to pay the Missed Payment, together with interest
accrued from the original applicable due date the rate of prime rate as
published in the Wall Street Journal on the latest publication date on or before
the date of default plus 3%.
In the event that Blue Cross does not receive the Missed Payment,
together with such accrued interest, within such additional 15-day period, all
payments required to be made by each of the respective Settling Defendants
pursuant to this Paragraph E shall at the end of such additional 15-day period
be accelerated and shall immediately become due and owing to Blue Cross from
each Settling
10
<PAGE>
Defendant pro rata in proportion to its Market Share; provided, however, that
any such accelerated payments (a) shall all be adjusted upward by the greater of
(i) the rate of 3% per annum or (ii) the actual total percent change in the CPI,
in either instance for the period between January 1 of the year in which the
acceleration of payments pursuant to this Paragraph occurs and the date on which
such accelerated payments are due pursuant to this subsection, and (b) shall all
immediately be adjusted in accordance with the formula for adjustments of
payments set forth in Appendix A.
Nothing in this Paragraph E shall be deemed under any circumstance to
create any obligation in any of the Settling Defendants to pay any amount owed
or payable to Blue Cross from any other Settling Defendant. All obligations of
the Settling Defendants pursuant to this Paragraph E are intended to be and
shall remain several, and not joint.
F. Payment of Settlement Proceeds. Any payment made pursuant to the
Settlement Agreement shall be made to an account designated in writing by Blue
Cross.
G. Blue Cross's Dismissal of Claims. Upon execution of this Settlement
Agreement Blue Cross shall file a Stipulation of Dismissal dismissing with
prejudice all claims as to all Defendants.
H. Blue Cross's Release and Discharge. Upon Final Approval, Blue Cross
shall release and forever discharge all Defendants and their present and former
parents, subsidiaries (whether or not wholly owned) and affiliates, and their
divisions, organizational units, affiliates, officers, directors, employees,
representatives, insurers, suppliers, agents, attorneys and distributors (and
the predecessors, heirs, executors, administrators, successors and assigns of
each of the foregoing) ("Releasees") from any and all manner of civil claims,
demands, actions, suits and causes of action, damages whenever incurred,
liabilities of any nature whatsoever, including civil penalties, as well as
costs, expenses and attorneys' fees, known or unknown, suspected or unsuspected,
accrued or
11
<PAGE>
unaccrued, whether legal, equitable or statutory ("Claims") that Blue Cross
(including any of its past, present or future parents, subsidiaries (whether or
not wholly owned) and their respective representatives, employees, directors,
trustees, officers, attorneys, Private Counsel, agents, representatives,
divisions, organizational units (and the predecessors, heirs, executors,
administrators, successors and assigns of each of the foregoing, and whether or
not any such person or entity participates in the settlement), whether directly,
indirectly, representatively, derivatively or in any other capacity, ever had,
now has or hereafter can, shall or may have as to any claims relating to the
subject matter of this action (including damages not incurred as of the date of
this Settlement); provided, however, that the foregoing shall not operate as a
release of any person, party or entity (whether or not a signatory to this
Agreement) as to any of the monetary obligations undertaken in this Agreement in
connection with a breach or default of this Agreement.
Blue Cross hereby covenants and agrees that it shall not hereafter sue
or seek to establish civil liability against any person or entity covered by the
release provided under this Paragraph H based, in whole or in part, upon any of
the Released Claims, and Blue Cross agrees that this covenant and agreement
shall be a complete defense to any such civil action or proceeding. .
Notwithstanding the foregoing, if the Settling Defendants enter into
any future pre-verdict settlement of any action brought by any insurer, health
maintenance organization, Blue Cross plan, Blue Shield plan, employee welfare
benefit plan, union trust fund providing health care benefits and/or coverage
for health care benefits, or any other third-party payor (hereinafter
collectively referred to as "Third-Party Payors") of health care coverage or
benefits that does not release claims for damages not incurred as of the date of
such settlement relating to the subject matter of such action, the scope
12
<PAGE>
of the release provided herein shall be revised so as to permit Blue Cross to
assert claims for damages not incurred as of the date hereof relating to the
subject matter of this action.
I. Settling Defendants' Release and Discharge. Upon Final Approval,
Settling Defendants shall release and forever discharge Blue Cross from any and
all manner of civil claims, demands, actions, suits and causes of action,
damages whenever incurred, liabilities of any nature whatsoever, including
costs, expenses, penalties and attorneys' fees, known or unknown, suspected or
unsuspected, accrued or unaccrued, whether legal, equitable or statutory,
arising out of or in any way related to, in whole or in part, the subject matter
of the litigation of this lawsuit, that Settling Defendants (including any of
their present and former parents, subsidiaries, divisions, affiliates, officers,
directors, employees, witnesses (fact or expert), representatives, insurers,
agents, attorneys and distributors and the predecessors, heirs, executors,
administrators, successors and assigns of each of the foregoing, and whether or
not any such person participates in the settlement), whether directly,
indirectly, representatively, derivatively or in any other capacity, ever had,
now has or hereafter can, shall or may have.
J. Pierringer Release. Without limiting the terms or effect of
Paragraph I.H. of this Settlement Agreement, Blue Cross hereby expressly
releases and discharges each Releasee from its respective fraction(s),
portion(s), or percentage(s) of any of the Released Claims that shall hereafter
be determined at trial or other disposition to be the fault of such Releasee.
Blue Cross expressly agrees to indemnify and hold harmless all Releasees from
any claims, demands, damages or causes of action for contribution or
indemnification that may be made by any person or entity with respect to any
Released Claim, and to satisfy such fraction, portion or percentage of any
judgment, settlement or other disposition with respect to any Released Claim
which is determined to be the fault of any of
13
<PAGE>
such Releasees. The parties to this Settlement Agreement specifically intend
that one of the purposes and legal effects of this Settlement Agreement is to
bar forever any right of contribution and/or indemnify against the Releasees,
and that it thus have the effect of a "Pierringer-type" release and be construed
in accordance with Pierringer v. Hoger, 124 N.W.2d 106 (Wisc. 1963);
Frey v. Snelgrove, 269 N.W.2d 918 (Minn. 1978); and Alumax Mill Products,
Inc. v. Congress Financial Corp., 912 F.2d 996 (8th Cir. 1990).
K. Limited Most-Favored Nation Provision. In partial consideration for
the monetary payments to be made by the Settling Defendants pursuant to this
Settlement Agreement, Blue Cross agrees that if the Settling Defendants enter
into any future pre-verdict settlement agreement of other similar litigation
brought by a Third-Party Payor on terms more favorable to such Third-Party Payor
than the terms of this Settlement Agreement, the terms of this Settlement
Agreement shall not be revised except as follows: to the extent, if any, such
other pre-verdict settlement agreement includes terms that provide (a) for joint
and several liability among the Settling Defendants with respect to monetary
payments to be made pursuant to such agreement or (b) a guarantee by the parent
company of any of the Settling Defendants or other assurances of payment or
creditors' remedies with respect to monetary payments to be made pursuant to
such agreement, then this Settlement Agreement shall, at the option of Blue
Cross, be revised to include terms comparable to such terms.
II. PUBLIC ACCESS TO DOCUMENTS AND COURT FILES
In connection with the settlement of this action, Blue Cross
has insisted that the Settling Defendants enter into a Consent Judgment with the
State of Minnesota providing for the maintenance of the Minnesota and Guildford
Depositories, thereby achieving continued public access to millions of industry
documents for the public benefit.
14
<PAGE>
III. MISCELLANEOUS PROVISIONS
A. Settling Defendants and the Law Firm of Robins, Kaplan, Miller &
Ciresi L.L.P. ("RKM&C") have reached separate agreement for the payment of the
Blue Cross' costs and attorneys' fees. In consideration for said agreement,
RKM&C has released Blue Cross from its obligation to pay costs and attorneys'
fees under the retainer agreement entered into between the Blue Cross and RKM&C.
B. Representations of Parties. The respective parties hereto hereby
represent that this Settlement Agreement has been duly authorized and, upon
execution, will constitute a valid and binding contractual obligation,
enforceable in accordance with its terms, of each of the parties hereto. Blue
Cross represents that all of its outside counsel that have represented it in
connection with this action are, by and through their authorized
representatives, signatories to this Settlement Agreement.
C. Obligation Several, Not Joint. All obligations of the Settling
Defendants pursuant to this Settlement Agreement are intended to be and shall
remain several, and not joint.
D. Headings. The headings of the paragraphs of this Settlement
Agreement are not binding and are for reference only and do not limit, expand or
otherwise affect the contents of this Settlement Agreement.
E. No Determination or Admission. This Settlement Agreement and any
proceedings taken hereunder are not intended to be and shall not in any event be
construed as, or deemed to be, an admission or concession or evidence of any
liability or any wrongdoing whatsoever on the part of any party hereto or any
person covered by the releases provided under Paragraphs I.H. and I.I. hereof.
The Settling Defendants specifically disclaim and deny any liability or
wrongdoing whatsoever with respect to the allegations and claims asserted
against them in this action and enter
15
<PAGE>
into this Settlement Agreement solely to avoid the further expense,
inconvenience, burden and uncertainty of litigation.
F. Non-Admissibility. The settlement negotiations resulting in this
Settlement Agreement have been undertaken by the parties hereto in good faith
and for settlement purposes only, and neither this Settlement Agreement nor any
evidence of negotiations hereunder shall be offered or received in evidence in
this action, or any other action or proceeding, for any purpose other than in an
action or proceeding arising under this Settlement Agreement.
G. Amendment; Waiver. This Settlement Agreement may be amended only by
a written instrument executed by Blue Cross, and the Settling Defendants. 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 Settlement Agreement shall not be deemed to be or construed as a
waiver of any other breach, whether prior, subsequent or contemporaneous, of
this Settlement Agreement.
H. Notices. All notices or other communications to any party to this
Settlement Agreement shall be in writing (and shall include telex, telecopy or
similar writing) and shall be given to the respective parties hereto at the
following addresses. Any party hereto may change the name and address of the
person designated to receive notice on behalf of such party by notice given as
provided in this paragraph.
For Blue Cross:
Thomas F. Gilde
Associate Corporate Counsel
Blue Cross and Blue Shield of Minnesota
3535 Blue Cross Road
Eagan, MN 55122
16
<PAGE>
or
P. O. Box 64560
St. Paul, MN 55164
Fax: 612.456.6017
with a copy to:
Michael V. Ciresi
Robins, Kaplan, Miller & Ciresi L.L.P.
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, MN 55402-2015
Fax: 612.339.4181
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
17
<PAGE>
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:
F. Anthony Burke
Brown & Williamson Tobacco Corporation
200 Brown & Williamson Tower
401 South Fourth Avenue
Louisville, KY 40202
Fax: 502.568.7297
With a copy to:
Stephen R. Patton
Kirkland & Ellis
200 East Randolph Dr.
Chicago, IL 60601
Fax: 312.861.2200
For Lorillard Tobacco Company:
Arthur J. Stevens
Lorillard Tobacco Company
714 Green Valley Road
Greensboro, NC 27408
Fax: 910.335.7707
I. Cooperation. The parties hereto agree to use their best efforts and
to cooperate with each other to cause this Settlement Agreement to become
effective, to obtain all necessary approvals, consents and authorizations, if
any, and to execute all documents and to take such other action as may be
appropriate in connection therewith. Consistent with the foregoing, the parties
hereto agree that they will not directly or indirectly assist or encourage any
challenge to this Settlement Agreement by
18
<PAGE>
any other person. All parties hereto agree to support the integrity and
enforcement of the terms of this Settlement Agreement.
J. Governing Law. This Settlement Agreement shall be governed by
the laws of the State of Minnesota, without regard to the conflicts of law rules
of such state.
K. Construction. None of the parties hereto shall be considered to be
the drafter of this Settlement Agreement or any provision hereof for the purpose
of any statute, case law or rule of interpretation or construction that would or
might cause any provision to be construed against the drafter hereof.
L. Intended Beneficiaries. This action was brought by the Blue Cross,
through its Attorney General, and by Blue Cross to recover certain monies and to
promote the health and welfare of the people of Minnesota. No portion of this
Settlement Agreement shall provide any rights to, or be enforceable by, any
person or entity that is neither a party hereto nor a person encompassed by the
releases provided in Paragraphs I.H. and I.I. of this Settlement Agreement.
Except as expressly provided in this Settlement Agreement, no portion of this
Settlement Agreement shall bind any non-party or determine, limit or prejudice
the rights of any such person or entity. None of the rights granted or
obligations assumed under this Settlement Agreement by the parties hereto may be
assigned or otherwise conveyed without the express prior written consent of all
of the parties hereto.
M. Counterparts. This Settlement Agreement may be executed in
counterparts. Facsimile or photocopied signatures shall be considered as valid
signatures as of the date hereof, although the original signature pages shall
thereafter be appended to this Settlement Agreement.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto, through their fully authorized
representatives, have agreed to this Comprehensive Settlement Agreement and
Release as of this 8th day of May, 1998.
BLUE CROSS AND BLUE SHIELD OF
MINNESOTA
By: /s/ Andrew P. Czajkowski
----------------------------------------
Andrew P. Czajkowski
Chief Executive Officer
Blue Cross and Blue Shield of Minnesota
By: /s/ Thomas F Gilde
----------------------------------------
Thomas F. Gilde
Associate Corporate Counsel
By: /s/ Michael V. Ciresi
----------------------------------------
Michael V. Ciresi
Robins, Kaplan, Miller & Ciresi L.L.P.
PHILIP MORRIS INCORPORATED
By: /s/Meyer G. Koplow
----------------------------------------
Meyer G. Koplow
Counsel
By: /s/ Martin J. Barrington
----------------------------------------
Martin J. Barrington
General Counsel
R.J. REYNOLDS TOBACCO COMPANY
By: /s/ D. Scott Wise
----------------------------------------
D. Scott Wise
Counsel
20
<PAGE>
By: /s/ Charles A. Blixt
----------------------------------------
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO
CORPORATION
By: /s/ Stephen R. Patton
----------------------------------------
Stephen R. Patton
Counsel
By: /s/ F. Anthony Burke
----------------------------------------
F. Anthony Burke
Vice President and General Counsel
LORILLARD TOBACCO COMPANY
By: /s/ Arthur J. Stevens
----------------------------------------
Arthur J. Stevens
Senior Vice President & General Counsel
21
<PAGE>
SCHEDULE A
AMOUNTS PAYABLE BY SETTLING DEFENDANTS ON OR
BEFORE SEPTEMBER 5, 1998 PURSUANT TO
PARAGRAPH I.E OF THE SETTLEMENT AGREEMENT
<TABLE>
<CAPTION>
<S> <C>
Philip Morris Incorporated........................ $108,800,000
R.J. Reynolds Tobacco Company..................... $ 10,880,000
Brown & Williamson Tobacco
Corporation....................................... $ 28,640,000
Lorillard Tobacco Company......................... $ 11,680,000
Total Amount...................................... $160,000,000
</TABLE>
1
<PAGE>
APPENDIX A
FORMULA FOR CALCULATING
BLUE CROSS VOLUME ADJUSTMENTS
Any payment that by the terms of the Settlement Agreement is to be adjusted
pursuant to this Appendix (the "Applicable Base Payment") shall be adjusted
pursuant to this Appendix in the following manner:
(A) in the event the aggregate number of units of Tobacco Products sold
domestically by the Settling Defendants in the Applicable Year (as defined
hereinbelow) (the "Actual Volume") is greater than the aggregate number of
units of Tobacco Products sold domestically by the Settling Defendants in
1997 (the "Base Volume"), the Applicable Base Payment shall be multiplied
by the ratio of the Actual Volume to the Base Volume;
(B) in the event the Actual Volume is less than the Base Volume,
(i) the Applicable Base Payment shall be multiplied by the ratio of
the Actual Volume to the Base Volume, and the resulting product shall
be divided by 0.98; and
(ii) if a reduction of the Applicable Base Payment results from the
application of subparagraph (B)(i) of this Appendix, but the Settling
Defendants' aggregate net operating profits from domestic sales of
Tobacco Products for the Applicable Year (the "Actual Net Operating
Profit") is greater than the Settling Defendants' aggregate net
operating profits from domestic sales of Tobacco Products in 1997 (the
"Base Net Operating Profit") (such Base Net Operating Profit being
adjusted upward by the greater of the rate of 3% per annum or the
actual total percent change in the Consumer Price Index, in either
instance for the period between January 1, 1998 and the date on which
the payment at issue is made), then the amount by which the Applicable
Base Payment is reduced by the application of subparagraph (B)(i)
shall be reduced (but not below zero) by 0.9129% of 25% of such
increase in such profits. For purposes of this Appendix, "net
operating profits from domestic sales of Tobacco Products" shall mean
net operating profits from domestic sales of Tobacco Products as
reported to the United States Securities and Exchange Commission
("SEC") for the Applicable Year or, in the case of a Settling
Defendant that does not report profits to the SEC, as reported in
financial statements prepared in accordance with generally accepted
accounting principles and audited by a nationally recognized
accounting firm. The determination of the Settling Defendants'
aggregate net operating profits from domestic sales of Tobacco
Products shall
1
<PAGE>
be derived using the same methodology as was employed in deriving such
Settling Defendants' aggregate net operating profits from domestic
sales of Tobacco Products in 1997. Any increase in an Applicable Base
Payment pursuant to this subparagraph B(ii) shall be payable within
120 days after the date that the payment at issue was required to be
made.
(C) Applicable Year means the calendar year immediately preceding the year
in which the payment at issue is due, regardless of when such payment is
made.
2
<PAGE>
Exhibit 10.4
AGREEMENT TO PAY STATE OF MINNESOTA
ATTORNEYS' FEES AND COSTS
Philip Morris Incorporated (hereinafter "PM"), R.J. Reynolds
Tobacco Company (hereinafter "RJR"), Brown & Williamson Tobacco Corporation
(hereinafter "B&W"), and Lorillard Tobacco Company (hereinafter "Lorillard")
(collectively referred to as "The Settling Defendants"), hereby enter into this
Agreement To Pay Attorneys' Fees And Costs (hereinafter the "Agreement") with
Robins, Kaplan, Miller & Ciresi L.L.P. (hereinafter "RKM&C") providing for the
payment of all attorneys' fees and costs incurred in the prosecution of the
lawsuit captioned The State of Minnesota and Blue Cross and Blue Shield of
Minnesota vs. Philip Morris Incorporated, et al., Court File C1-94-8565
(hereinafter "The Case"), by The State of Minnesota.
BACKGROUND
1. On August 17, 1994, The State of Minnesota, together with
Blue Cross and Blue Shield of Minnesota (hereinafter "BCBS"), commenced The Case
in Ramsey County District Court in St. Paul, Minnesota.
2. From August 1994 until January 1998, RKM&C engaged in
extensive and unprecedented pretrial and discovery proceedings, which led to the
establishment of a document depository in Minneapolis, Minnesota, into which was
placed in excess of 28 million pages of documents. A second document depository
was established in Guildford, England, into which was placed in excess of six
million pages of documents. The majority of the documents in the U.S. and
Guildford depositories were never previously produced by defendants in any
lawsuit. Also included among the documents in the Minneapolis depository are in
excess of 40,000 documents obtained by
1
<PAGE>
RKM&C over which defendants had continuously maintained the claim of
attorney-client privilege. The production of the attorney-client privilege
documents was the subject of numerous appeals, including an appeal to the U.S.
Supreme Court.
3. RKM&C painstakingly reviewed the 34 million pages of
documents and selected those it deemed the most probative and relevant, which
set of documents became nationally known as the "Minnesota select" documents.
The Minnesota select documents have been provided to other litigants (including
state attorneys general and private parties), Congress and Governmental
authorities.
4. RKM&C took or defended the depositions of more than 300
fact and expert witnesses.
5. Throughout the pretrial proceedings, more than 190 motions
were prosecuted and defended by Defendants and RKM&C, resulting in 200 orders
being issued by the trial court.
6. Interlocutory appeals were taken by Defendants of numerous
trial court orders resulting in 12 appeals to the Minnesota Court of Appeals;
four appeals to the Minnesota Supreme Court; and two appeals to the U.S. Supreme
Court.
7. On January 20, 1998, trial of The Case began before the
Honorable Kenneth J. Fitzpatrick. The trial proceeded for 74 trial days until
May 4, 1998. Forty-one witnesses testified, and the transcript of the trial is
more than 15,000 pages in length.
8. On May 8, 1998, after all parties to the trial had rested,
but before submission of The Case to the jury, The Case was settled. After
settlement of the State's claims, RKM&C relinquished its right to receive
attorneys' fees and costs pursuant to the retainer agreement entered
2
<PAGE>
into between RKM&C and the State of Minnesota based upon the undertaking by The
Settling Defendants to negotiate directly with RKM&C for payment of attorneys'
fees and costs. This Agreement between The Settling Defendants and RKM&C is the
result of those negotiations and represents The Settling Defendants' undertaking
to pay attorneys' fees and costs to RKM&C.
AGREEMENT
Now, therefore, the undersigned parties agree as follows:
9. For and in consideration of the payment of attorneys' fees
and costs as set forth herein, RKM&C relinquishes its right to receive
attorneys' fees and costs pursuant to the retainer agreement entered into
between RKM&C and The State of Minnesota as part of the Special Attorney
Appointment dated May 23, 1994.
10. For and in consideration of the facts set forth above; and
(a) in consideration of RKM&C foregoing the offer of a comprehensive,
non-severable set of terms in connection with the payment of attorneys' fees
relating to this action, which terms included, without limitation, the
following: the determination of attorneys' fees by an arbitration panel of three
(3) members with no cap on the amount of fees to be awarded by such panel; a
Five Hundred Million Dollar ($500,000,000) annual cap on the payment in any one
year of fees awarded by all such arbitration panels nationwide in tobacco and
health litigation; provision that RKM&C's contractual rights, if any, for
payment of attorneys' fees by The State of Minnesota or any other plaintiff
would be unaffected by RKM&C's participation in such arbitration process; and a
"most-favored nation" clause applicable to the payment of attorneys' fees; and
(b) in consideration of RKM&C agreeing to relinquish its right to claim any fees
and costs under its retainer agreement with The State of Minnesota, and in
partial
3
<PAGE>
consideration for the settlement of The Case, The Settling Defendants agree to
pay to RKM&C attorneys' fees in connection with its representation of The State
of Minnesota in this action, over and above payments owed to The State of
Minnesota by virtue of the Settlement Agreement and Release, the sum of the
lodestar component described in paragraph 11.b., and the contingency component
described in paragraph 12, according to the schedule set forth in paragraph 15.
11. The lodestar component shall be calculated as follows:
a. RKM&C represents to The Settling Defendants that the
total amount of fees incurred as documented in its billing
records for all time spent prosecuting The Case on behalf of The
State of Minnesota is $27,500,000 for purposes of the initial
calculation in paragraph 11(b). This amount takes into account
continuing work on The Case up to and through Final Approval of
Settlement. Within ten (10) days of the execution of this
Agreement, The Settling Defendants may elect to require RKM&C to
submit to a mutually agreeable third party selected by The
Settling Defendants an accounting of hours reasonably worked in
connection with the RKM&C representation of The State of
Minnesota in this action, broken out by name of attorney and
including a description of the type of work done and the normal
hourly billing rate of each attorney in question and costs
reasonably expended and customarily charged to clients of the
firm. Such accounting shall also set forth the aggregate billable
amount by multiplying all hours reasonably worked in connection
with RKM&C's representation of The State of Minnesota in this
action times the normal hourly billing rate of the attorneys in
question, which hourly rates are actually charged to other
clients of RKM&C to determine whether the hours listed in such
accounting were reasonably
4
<PAGE>
worked and charged in connection with RKM&C's representation of The
State of Minnesota in this action. Determinations by such third party
shall be binding on the parties. If the third party determines that any
hours listed in such an accounting were not reasonably worked in
connection with RKM&C's representation of The State of Minnesota in
this action, or that hourly rates were overstated, the aggregate
billable amount shall be recalculated so as to exclude such hours or
recalculate the rates. If the third party determines that any costs
listed in such an accounting were not reasonably expended or not
customarily charged to clients of the firm, such costs will be
excluded. Nothing in this section which gives The Settling Defendants
the right to request a third-party review of RKM&C's time and costs
records entitles The Defendants to see a copy of the time and costs
records. Furthermore, the parties agree that in making the time and
costs records available for review by a third party for purposes of
paying attorneys' fees and costs in partial consideration for The
Settling Defendants' agreement to settle with The State of Minnesota,
neither RKM&C nor The State of Minnesota is waiving any right to claim
attorney-client or other privilege with regard to any RKM&C time and
costs records or any other document or matter pertaining to this
litigation.
b. The lodestar component shall be calculated by multiplying
the aggregate billable amount (as adjusted pursuant to subsection a.),
insofar as it does not exceed Thirty Million Dollars ($30,000,000)
times a multiplier derived as follows:
i. 6; plus
ii. 2, in that this action was filed prior to January 1,
1995, in the name of The State to recover health-care
costs allegedly associated with tobacco; plus
5
<PAGE>
iii. 2, in that this action was not predicated, in any
part, upon a state statute specifically directed at
tobacco companies or at a recovery of costs allegedly
associated with tobacco; plus
iv. 4, in that this action was tried to the conclusion.
12. The contingency component shall be composed of the sum of
the following:
a. One percent (1%) of the first Five Billion Dollars
($5,000,000,000) or less of nominal recovery to be paid to The State
over the first twenty-five (25) years (The "Nominal Recovery");
b. .5% times the amount by which the Nominal Recovery
exceeds Five Billion Dollars ($5,000,000,000) and is less than or
equal to Ten Billion Dollars ($10,000,000,000);
c. .2% times the amount by which the Nominal Recovery exceeds
Ten Billion Dollars ($10,000,000,000) and is less than or equal to
Fifteen Billion Dollars ($15,000,000,000); and
d. .1% times the amount by which the Nominal Recovery exceeds
Fifteen Billion Dollars ($15,000,000,000).
13. The Nominal Recovery for The State herein is Six Billion
One Hundred Sixty-five Million Dollars ($6,165,000,000). Accordingly, the
contingency component equals Fifty-five Million Eight Hundred Twenty-five
Thousand Dollars ($55,825,000).
14. The lodestar component equals Three Hundred Eighty-five
Million Dollars ($385,000,000).
6
<PAGE>
15. The sum of the lodestar and contingency components equals
Four Hundred Forty Million Eight Hundred Twenty-five Thousand Dollars
($440,825,000). The Defendants agree to pay this amount to RKM&C as and for
attorneys' fees pursuant to the following schedule:
a. Seventy-four Million Seven Hundred Fifty Thousand Dollars
($74,750,000) on or before September 5, 1998;
b. One Hundred Million Dollars ($100,000,000) on or before
January 31, 1999;
c. One Hundred Million Dollars ($100,000,000) on or before
April 15, 1999;
d. One Hundred Million Dollars ($100,000,000) on or before
January 31, 2000.
e. Sixty-six Million Seventy-five Thousand Dollars
($66,075,000) on or before July 1, 2000.
16. Defendants also agree to pay Four Million Dollars
($4,000,000) as and for costs due and owing by The State of Minnesota to RKM&C
on or before May 18, 1998.
17. The amount of fees and costs due and owing pursuant to
paragraphs 15 and 16 shall be paid by Settling Defendants pro rata in proportion
to their Market Share. No Settling Defendant shall be obligated to make any
payment due from any other Settling Defendant. All obligations of The Settling
Defendants pursuant to this Agreement are intended to be and shall remain
several, and not joint.
18. The payment of fees pursuant to paragraph 15 shall
constitute the entire obligation of The Settling Defendants with respect to
attorneys' fees in connection with the representation by RKM&C of The State of
Minnesota in connection with this action, and the exclusive means by which RKM&C
may seek payment of fees from defendants, or otherwise, in
7
<PAGE>
connection with its representation of The State of Minnesota in this action.
RKM&C represents that it has served as sole outside counsel to The State of
Minnesota in this action.
19. The Settling Defendants' obligation to pay attorneys' fees
pursuant to paragraph 15 is contingent upon approval of the Settlement Agreement
and Release between The Settling Defendants and The State of Minnesota and the
State Escrow Agreement. If the Court declines to approve the Settlement
Agreement between The Settling Defendants and The State of Minnesota or the
State Escrow Agreement, or, pursuant to paragraph VI.B. (Court Approval) of the
Settlement Agreement, either party withdraws from the Agreement before Court
approval, this Agreement shall become null and void and of no effect. Once the
Court has approved the Settlement Agreement between The State of Minnesota and
The Settling Defendants, The Settling Defendants are obligated to make the
payments set forth herein, unless there is a challenge to the Settlement
Agreement between The Settling Defendants and The State of Minnesota which
results in a payment required to be paid by Settling Defendants pursuant to the
Settlement Agreement with The State of Minnesota being paid into escrow.
20. In the event any payments due to The State of Minnesota
are required to be paid into escrow, then any unpaid attorneys' fees due under
this Agreement shall also be paid into a special escrow account (the "RKM&C
Escrow Account"). Any funds held in the RKM&C Escrow Account shall be
immediately released to RKM&C at the same time that funds are released from The
State of Minnesota Escrow Account to the State of Minnesota. Provided, however,
that in the event a court should determine that the Settlement Agreement between
The State of Minnesota and The Defendants is cancelled or terminated such that
no further payment obligations are due under The
8
<PAGE>
State Settlement Agreement, then any outstanding funds held in the RKM&C Escrow
Account shall be returned to The Defendants, and Defendants' obligations under
this Agreement shall become null and void and of no effect.
MISCELLANEOUS PROVISIONS
21. In the event either party to this Agreement is required to
seek enforcement of the terms of this Agreement in court, all attorneys' fees
and costs incurred in enforcing the Agreement shall be paid by the party against
whom enforcement is obtained.
22. Each Settling Defendant has all requisite corporate power
and authority to execute, deliver and perform this Agreement and to consummate
the transactions contemplated herein. This Agreement has been duly and validly
executed and delivered by each Settling Defendant and constitutes its legal,
valid and binding obligation.
23. This Agreement constitutes the entire agreement among the
parties with regard to the subject matter of the Agreement and supersedes any
previous agreements and understandings between the parties with respect to the
subject matter. This Agreement may not be modified or amended except in writing
and signed by all parties.
24. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
25. Except as otherwise specifically provided for in this
Agreement, no party shall be liable for any costs or expenses incurred by or on
behalf of any other party in connection with this Agreement and the actions
contemplated hereby.
9
<PAGE>
26. This Agreement shall be construed in accordance with and
governed by the laws of The State of Minnesota applicable to agreements made and
to be performed in Minnesota.
27. Any disputes regarding the interpretation of this
Agreement and any actions to enforce its terms shall be venued in Ramsey County
District Court in the State of Minnesota.
28. The parties agree that the payment of attorneys' fees and
costs provided for in this Agreement shall be made strictly according to its
terms. The Settling Defendants agree not to support, directly or indirectly, in
Congress or any forum, legislation, rules or other policies which would preempt,
override, abrogate or diminish their obligations under this Agreement.
29. This Agreement is not intended to, and does not, vest
standing in any third party with respect to the terms hereof, or create for any
person other than the parties hereto a right to enforce the terms hereof.
30. For and in consideration for the payment of fees as
provided herein, RKM&C hereby releases Settling Defendants from any and all
claims (other than a claim to enforce this Agreement) arising out of or in any
way related to the litigation or settlement of The Case.
31. Unless otherwise specified, the terms used in this
Agreement are subject to the definitions contained in the Settlement Agreement.
IN WITNESS WHEREOF, the parties hereto, through their fully authorized
representatives, have agreed to this Agreement as of this 8th day of May,
1998.
ROBINS, KAPLAN, MILLER & CIRESI L.L.P.
By: /s/ Michael V. Ciresi
Michael V. Ciresi
10
<PAGE>
PHILIP MORRIS INCORPORATED
By: /s/ Meyer G. Koplow
Meyer G. Koplow
Counsel
By: /s/ Martin J. Barrington
Martin J. Barrington
General Counsel
R.J. REYNOLDS TOBACCO COMPANY
By: /s/ D. Scott Wise
D. Scott Wise
Counsel
By: /s/ Charles A. Blixt
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO
CORPORATION
By: /s/ Stephen R. Patton
Stephen R. Patton
Counsel
By: /s/ F. Anthony Burke
F. Anthony Burke
Vice President and General Counsel
11
<PAGE>
LORILLARD TOBACCO COMPANY
By: /s/ Arthur J. Stevens
Arthur J. Stevens
Senior Vice President & General Counsel
12
<PAGE>
EXHIBIT 10.5
AGREEMENT TO PAY
BLUE CROSS AND BLUE SHIELD OF MINNESOTA
ATTORNEYS' FEES AND COSTS
Philip Morris Incorporated (hereinafter "PM"), R.J. Reynolds
Tobacco Company (hereinafter "RJR"), Brown & Williamson Tobacco Corporation
(hereinafter "B&W"), and Lorillard Tobacco Company (hereinafter "Lorillard")
(collectively referred to as "The Settling Defendants"), hereby enter into this
Agreement To Pay Blue Cross and Blue Shield of Minnesota Attorneys' Fees And
Costs (hereinafter the "Agreement") with Robins, Kaplan, Miller & Ciresi L.L.P.
(hereinafter "RKM&C") providing for the payment of all attorneys' fees and costs
incurred in the prosecution of the lawsuit captioned The State of Minnesota and
Blue Cross and Blue Shield of Minnesota vs. Philip Morris Incorporated, et al.,
Court File C1-94-8565 (hereinafter "The Case"), by BCBS, Inc., d/b/a Blue Cross
and Blue Shield of Minnesota (hereinafter "BCBS").
BACKGROUND
1. On August 17, 1994, The State of Minnesota, together with
BCBS, commenced The Case in Ramsey County District Court in St. Paul, Minnesota.
2. From August 1994 until January 1998, RKM&C engaged in
extensive and unprecedented pretrial and discovery proceedings, which led to the
establishment of a document depository in Minneapolis, Minnesota, into which was
placed in excess of 28 million pages of documents. A second document depository
was established in Guildford, England, into which was placed in excess of six
million pages of documents. The majority of the documents in the U.S. and
Guildford depositories were never previously produced by defendants in any
lawsuit. Also included among the documents in the Minneapolis depository are in
excess of 40,000 documents obtained by RKM&C over which defendants had
continuously maintained the claim of attorney-client privilege.
1
<PAGE>
The production of the attorney-client privilege documents was the subject of
numerous appeals, including an appeal to the U.S. Supreme Court.
3. RKM&C painstakingly reviewed the 34 million documents and
selected those it deemed the most probative and relevant, which set of documents
became nationally known as the "Minnesota select" documents. The Minnesota
select documents have been provided to other litigants (including state
attorneys general and private parties), Congress and Governmental authorities.
4. RKM&C took or defended the depositions of more than
300 fact and expert witnesses.
5. Throughout the pretrial proceedings, more than 190 motions
were prosecuted and defended by Defendants and RKM&C, resulting in 200 orders
being issued by the trial court.
6. Interlocutory appeals were taken by Defendants of numerous
trial court orders resulting in 12 appeals to the Minnesota Court of Appeals;
four appeals to the Minnesota Supreme Court; and two appeals to the U.S. Supreme
Court.
7. On January 20, 1998, trial of The Case began before the
Honorable Kenneth J. Fitzpatrick. The trial proceeded for 74 trial days until
May 4, 1998. Forty-one witnesses testified, and the transcript of the trial is
more than 15,000 pages in length.
8. On May 8, 1998, after all parties to the trial had rested,
but before the case was submitted to the jury, The Case was settled. After
settlement of the BCBS's claims, RKM&C relinquished its right to receive
attorneys' fees and costs pursuant to the retainer agreement entered into
between RKM&C and BCBS based upon the undertaking by The Settling Defendants to
negotiate directly with RKM&C for payment of attorneys' fees and costs. This
Agreement between
2
<PAGE>
The Settling Defendants and RKM&C is the result of those negotiations and
represents The Settling Defendants' undertaking to pay attorneys' fees and
costs to RKM&C
AGREEMENT
Now, therefore, the undersigned parties agree as follows:
9. For and in consideration of the payment of attorneys' fees
and costs as set forth herein, RKM&C relinquishes its right to receive
attorneys' fees and costs pursuant to the retainer agreement entered into
between RKM&C and BCBS.
10. For and in consideration of the facts set forth above and
in consideration of RKM&C agreeing to relinquish its right to claim any fees and
costs under its retainer agreement with BCBS, and in partial consideration for
the settlement of The Case, The Defendants agree to pay to RKM&C attorneys' fees
in the amount of One Hundred Seventeen Million Two Hundred Fifty Thousand
Dollars ($117,250,000) to be paid as follows: Sixty Million Dollars
($60,000,000) on July 1, 1998; Fifty-seven Million Two Hundred Fifty Thousand
Dollars ($57,250,000) on September 4, 1998.
11. Defendants also agree to pay Four Million Dollars
($4,000,000) as and for costs due and owing by BCBS to RKM&C on or before May
18, 1998.
12. The amount of fees and costs due and owing pursuant to
paragraphs 10 and 11 shall be paid by Settling Defendants pro rata in proportion
to their Market Share. No Settling Defendant shall be obligated to make any
payment due from any other Settling Defendant. All obligations of The Settling
Defendants pursuant to this Agreement are intended to be and shall remain
several, and not joint.
13. The payment of fees pursuant to paragraph 10 shall
constitute the entire obligation of The Settling Defendants with respect to
attorneys' fees in connection with the
3
<PAGE>
representation by RKM&C of BCBS in connection with this action, and the
exclusive means by which RKM&C may seek payment of fees from defendants, or
otherwise, in connection with its representation of BCBS in this action. RKM&C
represents that it has served as sole outside counsel to BCBS in connection with
this action.
MISCELLANEOUS PROVISIONS
14. In the event either party to this Agreement is required to
seek enforcement of the terms of this Agreement in court, all attorneys' fees
and costs incurred in enforcing the Agreement shall be paid by the party against
whom enforcement is obtained.
15. Each Defendant has all requisite corporate power and
authority to execute, deliver and perform this Agreement and to consummate the
transactions contemplated herein. This Agreement has been duly and validly
executed and delivered by each Defendant and constitutes its legal, valid and
binding obligation.
16. This Agreement constitutes the entire agreement among the
parties with regard to the subject matter of the Agreement and supersedes any
previous agreements and understandings between the parties with respect to the
subject matter. This Agreement may not be modified or amended except in writing
and signed by all parties.
17. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
18. Except as otherwise specifically provided for in this
Agreement, no party shall be liable for any costs or expenses incurred by or on
behalf of any other party in connection with this Agreement and the actions
contemplated hereby.
19. This Agreement shall be construed in accordance with and
governed by the laws of Minnesota applicable to agreements made and to be
performed in Minnesota.
4
<PAGE>
20. Any disputes regarding the interpretation of this
Agreement and any actions to enforce its terms shall be venued in Ramsey County
District Court in the State of Minnesota.
21. The parties agree that the payment of attorneys' fees and
costs provided for in this Agreement shall be made strictly according to its
terms. The Settling Defendants will not seek to avoid through legislation any of
their obligations under this Agreement.
22. This Agreement is not intended to, and does not, vest
standing in any third party with respect to the terms hereof, or create for any
person other than the parties hereto a right to enforce the terms hereof.
23. For and in consideration for the payment of fees as
provided herein, RKM&C hereby releases Settling Defendants from any and all
claims (other than a claim to enforce this Agreement) arising out of or in any
way related to the litigation or settlement of The Case.
24. Unless otherwise specified, the terms used in this
Agreement are subject to the definitions contained in the Settlement Agreement.
IN WITNESS WHEREOF, the parties hereto, through their fully
authorized representatives, have agreed to this Agreement To Pay Blue Cross and
Blue Shield of Minnesota Attorneys' Fees and Costs as of this 8th day of May,
1998.
ROBINS, KAPLAN, MILLER & CIRESI L.L.P.
By: /s/ MICHAEL V. CIRESI
Michael V. Ciresi
PHILIP MORRIS INCORPORATED
By: /s/ MEYER G. KOPLOW
Meyer G. Koplow
Counsel
5
<PAGE>
By: /s/ MARTIN J. BARRINGTON
Martin J. Barrington
General Counsel
R.J. REYNOLDS TOBACCO COMPANY
By: /s/ D. SCOTT WISE
D. Scott Wise
Counsel
By: /s/ CHARLES A. BLIXT
Charles A. Blixt
General Counsel
BROWN & WILLIAMSON TOBACCO
CORPORATION
By: /s/ STEPHEN R. PATTON
Stephen R. Patton
Counsel
By: /s/ F. ANTHONY BURKE
F. Anthony Burke
Vice President and General Counsel
LORILLARD TOBACCO COMPANY
By: /s/ ARTHUR J. STEVENS
Arthur J. Stevens
Senior Vice President &
General Counsel
6
<PAGE>
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
-------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
------------------
<S> <C>
Earnings before income taxes $2,319
Add (Deduct):
Equity in net earnings of less than 50% owned
affiliates (49)
Dividends from less than 50% owned
affiliates 28
Fixed charges 346
Interest capitalized, net of amortization (1)
------
Earnings available for fixed charges $2,643
------
------
Fixed charges:
Interest incurred:
Consumer products $ 290
Financial services 19
------
309
Portion of rent expense deemed to represent
interest factor 37
------
Fixed charges $ 346
-------
-------
Ratio of earnings to fixed charges 7.6
-------
-------
</TABLE>
<PAGE>
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
-------------------
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Earnings before income
taxes and cumulative
effect of accounting
changes $10,611 $10,683 $ 9,347 $ 8,216 $ 6,196
Add (Deduct):
Equity in net earnings
of less than 50%
owned affiliates (207) (227) (246) (184) (164)
Dividends from less
than 50% owned
affiliates 138 160 202 165 151
Fixed charges 1,438 1,421 1,495 1,537 1,716
Interest capitalized,
net of amortization (16) 13 2 (1) (13)
------- ------- ------- ------- -------
Earnings available for
fixed charges $11,964 $12,050 $10,800 $ 9,733 $ 7,886
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Fixed charges:
Interest incurred:
Consumer products $ 1,224 $ 1,197 $ 1,281 $ 1,317 $ 1,502
Financial services
and real estate 67 81 84 78 87
------- ------- ------- ------- -------
1,291 1,278 1,365 1,395 1,589
Portion of rent expense
deemed to represent
interest factor 147 143 130 142 127
------- ------- ------- ------- -------
Fixed charges $ 1,438 $ 1,421 $ 1,495 $ 1,537 $ 1,716
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Ratio of earnings to
fixed charges 8.3 8.5 7.2 6.3 4.6
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Pages 3-5 of
the Company's Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,454
<SECURITIES> 0
<RECEIVABLES> 5,135
<ALLOWANCES> 161
<INVENTORY> 9,719
<CURRENT-ASSETS> 18,964
<PP&E> 20,356
<DEPRECIATION> 8,599
<TOTAL-ASSETS> 57,358
<CURRENT-LIABILITIES> 15,829
<BONDS> 12,465
0
0
<COMMON> 935
<OTHER-SE> 14,307
<TOTAL-LIABILITY-AND-EQUITY> 57,358
<SALES> 18,383
<TOTAL-REVENUES> 18,383
<CGS> 6,707
<TOTAL-COSTS> 10,934
<OTHER-EXPENSES> 4,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244
<INCOME-PRETAX> 2,319
<INCOME-TAX> 937
<INCOME-CONTINUING> 1,382
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,382
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Pages 2-3 of
the Company's consolidated financial statements for the year ended December 31,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,282
<SECURITIES> 0
<RECEIVABLES> 4,456
<ALLOWANCES> 162
<INVENTORY> 9,039
<CURRENT-ASSETS> 17,440
<PP&E> 20,002
<DEPRECIATION> 8,381
<TOTAL-ASSETS> 55,947
<CURRENT-LIABILITIES> 15,071
<BONDS> 12,430
0
0
<COMMON> 935
<OTHER-SE> 13,985
<TOTAL-LIABILITY-AND-EQUITY> 55,947
<SALES> 72,055
<TOTAL-REVENUES> 72,055
<CGS> 26,689
<TOTAL-COSTS> 42,630
<OTHER-EXPENSES> 17,762
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,052
<INCOME-PRETAX> 10,611
<INCOME-TAX> 4,301
<INCOME-CONTINUING> 6,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,310
<EPS-PRIMARY> 2.61<F1>
<EPS-DILUTED> 2.58<F1>
<FN>
<F1>Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share," which establishes standards for computing and presenting EPS. In
addition, the Company's Board of Directors declared a three-for-one split of
the Company's common stock in 1997.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Pages 3-5 of
the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended
September 30, June 30, and March 31, 1997 and from Pages 2-3 of the Company's
consolidated financial statements for the year ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996
<CASH> 779 317 321 240
<SECURITIES> 0 0 0 0
<RECEIVABLES> 5,211 5,335 5,371 4,636
<ALLOWANCES> 161 160 162 170
<INVENTORY> 8,925 8,860 8,812 9,002
<CURRENT-ASSETS> 16,151 15,919 15,826 15,190
<PP&E> 19,999 19,929 19,534 19,972
<DEPRECIATION> 8,390 8,382 8,158 8,221
<TOTAL-ASSETS> 55,043 54,972 54,722 54,871
<CURRENT-LIABILITIES> 14,028 14,100 14,080 14,867
<BONDS> 13,283 13,135 13,979 12,961
0 0 0 0
0 0 0 0
<COMMON> 935 935 935 935
<OTHER-SE> 13,706 13,513 12,882 13,283
<TOTAL-LIABILITY-AND-EQUITY> 55,043 54,972 54,722 54,871
<SALES> 54,722 36,630 18,217 69,204
<TOTAL-REVENUES> 54,722 36,630 18,217 69,204
<CGS> 19,978 13,407 6,717 26,560
<TOTAL-COSTS> 32,326 21,654 10,841 41,211
<OTHER-EXPENSES> 13,154 8,346 4,110 16,224
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 815 566 287 1,086
<INCOME-PRETAX> 8,427 6,064 2,979 10,683
<INCOME-TAX> 3,412 2,455 1,206 4,380
<INCOME-CONTINUING> 5,015 3,609 1,773 6,303
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 5,015 3,609 1,733 6,303
<EPS-PRIMARY> 2.07<F1> 1.49<F1> 0.73<F1> 2.57<F1>
<EPS-DILUTED> 2.05<F1> 1.48<F1> 0.72<F1> 2.54<F1>
<FN>
<F1>Effective December 31, 1997, the Company adopted SFAS 128, "Earnings per
Share," which establishes standards for computing and presenting EPS. In
addition, the Company's Board of Directors declared a three-for-one split of
the Company's common stock in 1997. EPS data above have been restated to
reflect these changes.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Pages 3-5 of
the Company's Quarterly Reports on Form 10-Q for the quarterly periods ended
September 30, June 30, and March 31, 1996 and from Pages 2-6 of the Company's
consolidated financial statements for the year ended December 31, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995
<PERIOD-END> SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995
<CASH> 459 1,165 680 1,138
<SECURITIES> 0 0 0 0
<RECEIVABLES> 5,277 5,340 5,283 4,677
<ALLOWANCES> 172 172 174 169
<INVENTORY> 8,601 8,201 8,547 7,862
<CURRENT-ASSETS> 15,380 15,773 15,700 14,879
<PP&E> 19,493 19,221 19,054 18,601
<DEPRECIATION> 8,081 7,928 7,778 7,485
<TOTAL-ASSETS> 54,721 55,026 54,752 53,811
<CURRENT-LIABILITIES> 13,823 14,525 14,121 14,273
<BONDS> 14,233 14,009 14,156 13,107
0 0 0 0
0 0 0 0
<COMMON> 935 935 935 935
<OTHER-SE> 13,440 13,288 13,235 13,050
<TOTAL-LIABILITY-AND-EQUITY> 54,721 55,026 54,752 53,811
<SALES> 52,414 35,000 17,491 66,071
<TOTAL-REVENUES> 52,414 35,000 17,491 66,071
<CGS> 20,001 13,405 6,745 26,685
<TOTAL-COSTS> 31,233 20,911 10,502 39,617
<OTHER-EXPENSES> 12,167 8,146 4,060 15,928
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 824 543 277 1,179
<INCOME-PRETAX> 8,190 5,400 2,652 9,347
<INCOME-TAX> 3,358 2,214 1,087 3,869
<INCOME-CONTINUING> 4,832 3,186 1,565 5,478
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 (28)
<NET-INCOME> 4,832 3,186 1,565 5,450
<EPS-PRIMARY> 1.96<F1> 1.29<F1> 0.63<F1> 2.17<F1>
<EPS-DILUTED> 1.94<F1> 1.28<F1> 0.62<F1> 2.15<F1>
<FN>
<F1>Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share," which establishes standards for computing and presenting EPS. In
addition, the Company's Board of Directors declared a three-for-one split of
the Company's common stock in 1997. EPS data above has been restated to
reflect these changes.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99
CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS
As described in Note 3 ("Note 3") to the Condensed Consolidated Financial
Statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q,
there are legal proceedings covering a wide range of matters pending in various
U.S. and foreign jurisdictions against the Company, its subsidiaries and
affiliates, including PM Inc. and PMI, and their respective indemnitees.
Various types of claims are raised in these proceedings, including products
liability, consumer protection, antitrust, securities law, tax, patent
infringement, employment matters and claims for contribution. Pending claims
related to tobacco products generally fall within three categories: (i) smoking
and health cases alleging personal injury brought on behalf of individual
plaintiffs, (ii) smoking and health cases alleging personal injury and
purporting to be brought on behalf of a class of individual plaintiffs, and
(iii) health care cost recovery cases, including class actions, brought by state
and local governments, unions, federal and state taxpayers, HMOs, native
American tribes and others seeking reimbursement for Medicaid and/or other
health care expenditures allegedly caused by cigarette smoking. The following
lists the pending claims included in the latter two of these categories.
Certain developments in these cases since January 1, 1998 are also described.
SMOKING AND HEALTH LITIGATION
The following lists the smoking and health class actions pending against PM Inc.
and, in some cases, the Company and/or its other subsidiaries and affiliates,
including PMI, as of May 1, 1998, and describes certain developments since
January 1, 1998.
CASTANO, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, LOUISIANA, FILED MARCH 29, 1994. In January 1998, PM
Inc. and certain other members of the United States tobacco industry agreed with
plaintiffs to dismiss this action without prejudice and to toll the statute of
limitations. In connection with that agreement, PM Inc. paid $5.9 million to
reimburse costs and expenses of plaintiffs' counsel, such reimbursement to be
credited against any award of costs and expenses incurred in connection with
this action that such counsel may obtain in the future resulting from federal
legislation implementing the proposed Resolution, or against any judgment or
settlement such counsel may obtain in the future in similar actions.
ENGLE, ET AL. V. R.J. REYNOLDS TOBACCO CO., ET AL., CIRCUIT COURT, DADE COUNTY,
FLORIDA, FILED MAY 5, 1994. In January 1998, the court denied a motion to
decertify the class (consisting of all Florida citizens and residents and their
survivors who have suffered injury "caused by their addiction to cigarettes that
contain nicotine"), but expressed reservations and concerns about the
manageability of the class action, and postponed the trial date to permit an
appeal of that decision. The appeals court dismissed the appeal on the grounds
that the lower court's ruling could only be appealed after final judgment in the
case. Trial is scheduled for July 1998.
GRANIER, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, LOUISIANA, FILED SEPTEMBER 26, 1994.
CAPUTO (formerly LETOURNEAU) V. IMPERIAL TOBACCO LIMITED, ET AL., ONTARIO COURT
OF JUSTICE, TORONTO, CANADA, FILED JANUARY 13, 1995.
THE SMOKER HEALTH DEFENSE ASSOCIATION, ET AL. V. SOUZA CRUZ, S.A. AND PHILIP
MORRIS MARKETING, S.A., 19TH LOWER CIVIL COURT OF THE CENTRAL COURTS OF THE
JUDICIARY DISTRICT OF SAO PAULO, BRAZIL, FILED JULY 25, 1995.
NORTON, ET AL. V. RJR NABISCO HOLDINGS CORPORATION, ET AL., SUPERIOR COURT,
MADISON COUNTY, INDIANA, FILED MAY 3, 1996.
<PAGE>
RICHARDSON, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT,
BALTIMORE CITY, MARYLAND, FILED MAY 24, 1996. In January 1998, the court
certified a class consisting of certain persons in Maryland who are
nicotine-dependent and certain Maryland residents who have suffered injury as a
result of using tobacco products. Trial is scheduled for September 1999.
SCOTT, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., DISTRICT COURT, ORLEANS
PARISH, LOUISIANA, FILED MAY 24, 1996.
FROSINA, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPREME COURT, NEW YORK
COUNTY, NEW YORK, FILED JUNE 19, 1996. Trial may commence during the summer or
fall of 1998.
REED, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, DISTRICT OF
COLUMBIA, FILED JUNE 21, 1996. In August 1997, the court denied plaintiffs'
motion for class certification.
BARNES (formerly ARCH), ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED
STATES DISTRICT COURT, EASTERN DISTRICT, PENNSYLVANIA, FILED AUGUST 8, 1996.
LYONS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT, ALABAMA, FILED AUGUST 8, 1996.
CHAMBERLAIN, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES
DISTRICT COURT, NORTHERN DISTRICT, OHIO, FILED AUGUST 14, 1996.
THOMPSON, ET AL. V. AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, MINNESOTA, FILED SEPTEMBER 4, 1996.
PERRY/CHAMPION, ET AL. V. AMERICAN TOBACCO CO., INC., ET AL., CIRCUIT COURT FOR
COFFEE COUNTY, TENNESSEE, AT MANCHESTER, FILED SEPTEMBER 6, 1996.
CONNOR, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., SECOND JUDICIAL DISTRICT
COURT, BERNALILLO COUNTY, NEW MEXICO, FILED OCTOBER 10, 1996.
RUIZ, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, PUERTO RICO, FILED OCTOBER 23, 1996. In March 1998, the court denied
plaintiffs' motion for class certification.
HANSEN, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, ARKANSAS, FILED NOVEMBER 4, 1996.
MCCUNE, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT OF KANAWHA
COUNTY, WEST VIRGINIA, FILED JANUARY 31, 1997.
BAKER, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT, WAYNE COUNTY,
MICHIGAN, FILED FEBRUARY 4, 1997.
WOODS (formerly INGLE), ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT
COURT, MCDOWELL COUNTY, WEST VIRGINIA, FILED FEBRUARY 4, 1997.
EMIG, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT,
KANSAS, FILED FEBRUARY 6, 1997.
PETERSON, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, HAWAII, FILED FEBRUARY 6, 1997.
2
<PAGE>
WALLS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NORTHERN DISTRICT, OKLAHOMA, FILED FEBRUARY 6, 1997.
SELCER, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NEVADA, FILED MARCH 3, 1997.
INSOLIA, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT
COURT, WESTERN DISTRICT, WISCONSIN, FILED APRIL 21, 1997.
WHITE, ET AL. V. PHILIP MORRIS, INC., ET AL., CHANCERY COURT, JEFFERSON COUNTY,
MISSISSIPPI, FILED APRIL 18, 1997. In March 1998, plaintiffs voluntarily
dismissed, without prejudice, the health care cost reimbursement claims in their
complaint.
GEIGER, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPREME COURT, QUEENS
COUNTY, NEW YORK, FILED APRIL 30, 1997.
COLE, ET AL. V. THE TOBACCO INSTITUTE, INC., ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, TEXAS, TEXARKANA DIVISION, FILED MAY 5, 1997.
CLAY, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, SOUTHERN DISTRICT, ILLINOIS, BENTON DIVISION, FILED MAY 22,
1997. In April 1998, the court vacated the August 1998 trial date, and
scheduled the trial to begin during August 1999.
ANDERSON, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, EASTERN DISTRICT, TENNESSEE, FILED MAY 23, 1997.
TAYLOR, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., CIRCUIT COURT,
WAYNE COUNTY, MICHIGAN, FILED MAY 23, 1997.
LYONS, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES
DISTRICT COURT, NORTHERN DISTRICT, GEORGIA, FILED MAY 27, 1997.
COSENTINO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT,
MIDDLESEX COUNTY, NEW JERSEY, FILED MAY 28, 1997.
ENRIGHT, ET AL. V. AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT,
CAMDEN COUNTY, NEW JERSEY, FILED MAY 28, 1997.
TEPPER, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, BERGEN
COUNTY, NEW JERSEY, FILED MAY 28, 1997.
BROWN, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT, SAN
DIEGO COUNTY, CALIFORNIA, FILED JUNE 10, 1997.
LIPPINCOTT, ET AL. V. AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT,
CAMDEN COUNTY, NEW JERSEY, FILED JUNE 13, 1997.
BRAMMER, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT, IOWA, FILED JUNE 20, 1997.
KNOWLES, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, LOUISIANA, FILED JUNE 30, 1997.
DALEY, ET AL. V. AMERICAN BRANDS, INC., ET AL., CIRCUIT COURT, COOK COUNTY,
ILLINOIS, FILED JULY 7, 1997.
3
<PAGE>
PISCITELLO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT,
MIDDLESEX COUNTY, NEW JERSEY, FILED JULY 28, 1997.
MCCAULEY, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED
STATES DISTRICT COURT, NORTHERN DISTRICT, GEORGIA, FILED AUGUST 15, 1997. In
March 1998, the court entered an order SUA SPONTE that dismissed the class
allegations in plaintiffs' complaint.
DASILVA, ET AL. V. NIGERIAN TOBACCO COMPANY, ET AL., HIGH COURT OF LAGOS STATE,
NIGERIA, FILED SEPTEMBER 8, 1997.
BUSH, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, TEXAS, FILED SEPTEMBER 10, 1997.
NWANZE, ET AL. V. PHILIP MORRIS COMPANIES INC., ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT, NEW YORK, FILED SEPTEMBER 29, 1997.
BADILLO, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NEVADA, FILED OCTOBER 8, 1997.
NEWBORN, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES
DISTRICT COURT, WESTERN DISTRICT, TENNESSEE, FILED OCTOBER 9, 1997.
YOUNG, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIVIL DISTRICT COURT,
ORLEANS PARISH, STATE OF LOUISIANA, FILED NOVEMBER 12, 1997.
AKSAMIT, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES
DISTRICT COURT, SOUTH CAROLINA, FILED NOVEMBER 20, 1997.
LANGDEAU, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL COURT, LOWER
BRULE SIOUX TRIBE, REFILED ON NOVEMBER 25, 1997. In March 1998, plaintiffs
voluntarily dismissed the case without prejudice.
DIENNO, ET AL. V. LIGGETT GROUP, INC., ET AL., UNITED STATES DISTRICT COURT,
NEVADA, FILED DECEMBER 22, 1997.
HERRERA, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, CENTRAL DISTRICT, UTAH, FILED JANUARY 28, 1998.
JACKSON, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT
COURT, CENTRAL DISTRICT, UTAH, FILED FEBRUARY 13, 1998.
PARSONS, ET AL. V. A C & S, INC., ET AL. CIRCUIT COURT, KANAWHA COUNTY, WEST
VIRGINIA, FILED FEBRUARY 27, 1998.
NATIONAL ASSOCIATION FOR ASSISTANCE TO CONSUMERS AND WORKERS V. SOUZA CRUZ S.A.
AND PHILIP MORRIS BRASIL S.A., THE FIFTH COURT OF BANKRUPTCIES AND
REORGANIZATIONS OF THE CAPITAL DISTRICT OF THE STATE OF RIO DE JANEIRO, BRAZIL,
FILED MARCH 16, 1998.
MENDYS, ET AL. V. LORILLARD TOBACCO COMPANY, ET AL., CIRCUIT COURT OF COOK
COUNTY, ILLINOIS, FILED MARCH 17, 1998.
DANIELS, ET AL. V. PHILIP MORRIS COMPANIES, INC., ET AL., SUPERIOR COURT OF THE
STATE OF CALIFORNIA, COUNTY OF SAN DIEGO, FILED APRIL 2, 1998.
4
<PAGE>
CHRISTIANSON, ET AL. V. PHILIP MORRIS COMPANIES, INC., ET AL., UNITED STATES
DISTRICT COURT, NEVADA, FILED APRIL 3, 1998.
-----------------------------------------------
In March 1998, counsel for plaintiffs in a pending smoking and health class
action filed a Motion for Transfer and Coordination or Consolidation before the
Judicial Panel on Multidistrict Litigation. The motion seeks to transfer and
coordinate or consolidate for pretrial proceedings more than 130 purportedly
related individual and class action smoking and health cases pending in 37
federal judicial districts.
-----------------------------------------------
HEALTH CARE COST RECOVERY LITIGATION
The following lists the health care cost recovery actions pending against PM
Inc. and, in some cases, the Company and/or its other subsidiaries and
affiliates as of May 1, 1998, and describes certain developments since January
1, 1998.
MOORE V. THE AMERICAN TOBACCO COMPANY, ET AL., CHANCERY COURT, JACKSON COUNTY,
MISSISSIPPI, FILED MAY 23, 1994. The parties entered into a settlement
agreement in July 1997 (see the Company's 1997 Form 10-K).
STATE OF MINNESOTA, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., DISTRICT
COURT, RAMSEY COUNTY, MINNESOTA, FILED AUGUST 17, 1994. The parties entered into
settlement agreements in May 1998 (see Note 3. Contingencies).
MCGRAW V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT, KANAWHA COUNTY,
WEST VIRGINIA, FILED SEPTEMBER 20, 1994.
THE STATE OF FLORIDA, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT
COURT, PALM BEACH COUNTY, FLORIDA, FILED FEBRUARY 21, 1995. The parties entered
into a settlement agreement in September 1997 (see the Company's 1997 Form
10-K). In April 1998, the court issued an order incorporating additional
provisions into the settlement agreement pursuant to its "most favored nations"
clause. Under the court's order, the settling defendants are required to pay
$50,000,000 on May 18, 1998, to the state's contingency fee counsel as an
advance on attorneys' fees to be awarded in arbitration proceedings that will
commence in November 1998. Also in April 1998, the court dismissed the
remaining equitable claims without prejudice.
COMMONWEALTH OF MASSACHUSETTS V. PHILIP MORRIS INC., ET AL., SUPERIOR COURT,
MIDDLESEX COUNTY, MASSACHUSETTS, FILED DECEMBER 19, 1995. Trial is scheduled
for February 1999.
IEYOUB V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT,
WESTERN DISTRICT, LOUISIANA, FILED MARCH 13, 1996.
THE STATE OF TEXAS V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES
DISTRICT COURT, EASTERN DISTRICT, TEXAS, FILED MARCH 28, 1996. The parties
entered into a settlement agreement in January 1998 (see the Company's 1997 Form
10-K).
STATE OF MARYLAND V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT,
BALTIMORE CITY, MARYLAND, FILED MAY 1, 1996. Trial is scheduled for April 1999.
In April 1998, the Maryland legislature amended the statute governing recovery
for health care costs to permit the state to pursue claims for health care costs
without proceeding via subrogation. The statute also permits the state to use a
statistical model to prove causation and the amount of medical assistance
expenditures attributable to the use of a tobacco product. The amendment takes
effect on July 1, 1998.
5
<PAGE>
STATE OF WASHINGTON V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPERIOR COURT,
KING COUNTY, WASHINGTON, FILED JUNE 5, 1996. Trial is scheduled for September
1998.
CITY AND COUNTY OF SAN FRANCISCO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL.,
UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED JUNE 6, 1996.
In March 1998, the court denied defendants' motion to dismiss the negligent
breach of special duty and fraud counts of the complaint, but granted the motion
to dismiss the claim for intentional breach of special duty.
STATE OF CONNECTICUT V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT,
LITCHFIELD DISTRICT, CONNECTICUT, FILED JULY 18, 1996.
COUNTY OF LOS ANGELES V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., SUPERIOR COURT,
SAN DIEGO COUNTY, CALIFORNIA, FILED AUGUST 5, 1996. Trial is scheduled for
February 1999.
HOLMES (formerly CROZIER) V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT
COURT, MONTGOMERY COUNTY, ALABAMA, FILED AUGUST 8, 1996. In April 1998, the
court denied defendants' motion to dismiss in most respects, but required
plaintiffs to file an amended complaint to address certain deficiencies.
Plaintiffs subsequently filed an amended complaint that deletes their health
care cost reimbursement claims. The amended complaint seeks class certification
on behalf of two subclasses, one directed to claims concerning youth smoking and
to comprise minors and parents, and the second directed to antitrust claims and
to comprise Alabama residents who have purchased tobacco products in Alabama
during a period to be set by the court. Trial has been scheduled for April
1999.
STATE OF ARIZONA V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPERIOR COURT,
MARICOPA COUNTY, ARIZONA, FILED AUGUST 20, 1996. In April 1998, the court
dismissed the state's claim for money damages under the Arizona RICO statute and
dismissed the state's claim for unjust enrichment/restitution. The court denied
defendants' motion to dismiss the state's claim for injunctive relief under
RICO. The court also changed the trial date from October 1998 to March 1999.
STATE OF KANSAS V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., DISTRICT COURT,
SHAWNEE COUNTY, KANSAS, FILED AUGUST 20, 1996.
KELLEY V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT, INGHAM COUNTY,
MICHIGAN, FILED AUGUST 21, 1996, BY THE ATTORNEY GENERAL OF MICHIGAN.
STATE OF OKLAHOMA, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., DISTRICT
COURT, CLEVELAND COUNTY, OKLAHOMA, FILED AUGUST 22, 1996. In January 1998, the
court denied motions by the Company and other defendant parent companies to
dismiss plaintiffs' complaint based on the court's lack of personal
jurisdiction. Trial is scheduled for November 1998.
PEOPLE OF THE STATE OF CALIFORNIA V. PHILIP MORRIS INCORPORATED, ET AL.,
SUPERIOR COURT, SAN FRANCISCO COUNTY, CALIFORNIA, FILED SEPTEMBER 5, 1996. This
action, based on state law consumer protection theories, is scheduled for trial
in March 1999. In April 1998, the court issued an order striking defendants'
equitable defenses and the defense of discriminatory prosecution.
STATE OF NEW JERSEY V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., SUPERIOR COURT,
MIDDLESEX COUNTY, NEW JERSEY, FILED SEPTEMBER 10, 1996. Trial is scheduled for
May 1999.
COYNE, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NORTHERN DISTRICT, OHIO, FILED SEPTEMBER 17, 1996. In February 1998, the
court granted defendants' motion to dismiss this action due to plaintiffs' lack
of standing. This case had been filed by private citizens in Ohio purportedly
on behalf of the State of Ohio and all Ohio taxpayers.
6
<PAGE>
PERRY, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT, COFFEE
COUNTY, TENNESSEE, FILED SEPTEMBER 30, 1996.
STATE OF UTAH V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, CENTRAL DIVISION, UTAH, FILED SEPTEMBER 30, 1996.
CITY OF NEW YORK, ET AL. V. THE TOBACCO INSTITUTE, ET AL., SUPREME COURT, NEW
YORK COUNTY, NEW YORK, FILED OCTOBER 17, 1996.
PEOPLE OF THE STATE OF ILLINOIS V. PHILIP MORRIS, INC., ET AL., CIRCUIT COURT,
COOK COUNTY, ILLINOIS, FILED NOVEMBER 12, 1996.
STATE OF IOWA V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., DISTRICT COURT, FIFTH
JUDICIAL DISTRICT, POLK COUNTY, IOWA, FILED NOVEMBER 27, 1996. In April 1998,
the Iowa Supreme Court affirmed the trial court's dismissal of plaintiff's
claims for deception, breach of assumed duty and indemnity.
COUNTY OF ERIE V. THE TOBACCO INSTITUTE, INC., ET AL., SUPREME COURT, ERIE
COUNTY, NEW YORK, FILED JANUARY 14, 1997.
STATE OF NEW YORK V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPREME COURT, NEW
YORK COUNTY, NEW YORK, FILED JANUARY 21, 1997. Trial is scheduled for May 1999.
STATE OF HAWAII V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., CIRCUIT
COURT, FIRST CIRCUIT, HAWAII, FILED JANUARY 31, 1997. Trial is scheduled for
September 1999.
STATE OF WISCONSIN V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT, DANE
COUNTY, WISCONSIN, FILED FEBRUARY 5, 1997. In March 1998, the court granted
defendants' motion to dismiss plaintiff's claims of undertaking and failure to
perform a special duty, restitution, and violation of Wisconsin's RICO statute,
but denied the motion with respect to claims of deceptive advertising,
fraudulent, intentional and negligent misrepresentations, strict responsibility
for negligent misrepresentations, conspiracy in restraint of trade, unjust
enrichment, public nuisance, and conspiracy and concert of action. Trial is
scheduled for September 1999.
STATE OF INDIANA V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, MARION
COUNTY, INDIANA, FILED FEBRUARY 19, 1997.
STATE OF ALASKA V. PHILIP MORRIS, INCORPORATED, ET AL., SUPERIOR COURT, FIRST
JUDICIAL DISTRICT, ALASKA, FILED APRIL 14, 1997. In April 1998, the court
granted defendants' motion to dismiss plaintiff's claims for public nuisance
(with leave to amend), unjust enrichment, restitution and breach of special
duty. Defendants' motion was denied with respect to claims for violations of
antitrust and consumer protection statutes, negligence PER SE and conspiracy.
COUNTY OF COOK V. PHILIP MORRIS, INCORPORATED, ET AL., CIRCUIT COURT, COOK
COUNTY, ILLINOIS, FILED APRIL 18, 1997.
COMMONWEALTH OF PENNSYLVANIA V. PHILIP MORRIS, INC., ET AL., COURT OF COMMON
PLEAS, PHILADELPHIA COUNTY, PENNSYLVANIA, FILED APRIL 23, 1997.
STATIONARY ENGINEERS LOCAL 39 HEALTH AND WELFARE TRUST FUND V. PHILIP MORRIS,
INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED
APRIL 25, 1997. In February 1998, plaintiffs voluntarily dismissed without
prejudice their claims for strict liability and breach of express and implied
warranties. In May 1998, the court granted defendants' motion to dismiss with
prejudice the RICO claims, the state and federal antitrust claims, the
intentional breach of special duty claim, the unfair business practices claim,
and the restitution and unjust enrichment claim. The court dismissed without
prejudice plaintiff's claim for
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fraud and misrepresentation. The court denied defendants' motion to dismiss
plaintiff's claim for negligent breach of special duty.
STATE OF ARKANSAS V. THE AMERICAN TOBACCO COMPANY, ET AL., CHANCERY COURT, SIXTH
DIVISION, PULASKI COUNTY, ARKANSAS, FILED MAY 5, 1997.
STATE OF MONTANA V. PHILIP MORRIS, INCORPORATED, ET AL., FIRST JUDICIAL COURT,
LEWIS AND CLARK COUNTY, MONTANA, FILED MAY 5, 1997.
STATE OF OHIO V. PHILIP MORRIS, INCORPORATED, ET AL., COURT OF COMMON PLEAS,
FRANKLIN COUNTY, OHIO, FILED MAY 8, 1997.
STATE OF TENNESSEE ET AL., EX. REL. BECKOM, ET AL. V. THE AMERICAN TOBACCO
COMPANY, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, TENNESSEE,
FILED MAY 8, 1997.
STATE OF MISSOURI V. AMERICAN TOBACCO COMPANY, INC., ET AL., CIRCUIT COURT, CITY
OF ST. LOUIS, MISSOURI, FILED MAY 12, 1997.
STATE OF SOUTH CAROLINA V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., COURT
OF COMMON PLEAS, RICHLAND COUNTY, SOUTH CAROLINA, FILED MAY 12, 1997.
IRON WORKERS LOCAL UNION NO. 17 INSURANCE FUND, ET AL. V. PHILIP MORRIS, INC.,
ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, OHIO, EASTERN DIVISION,
FILED MAY 20, 1997. Trial is scheduled for February 1999.
NORTHWEST LABORERS-EMPLOYERS HEALTH AND SECURITY TRUST FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT,
WASHINGTON, FILED MAY 21, 1997. In February 1998, the court denied defendants'
motion to certify for appeal the court's earlier decision to certify a class
consisting of "all existing jointly-administrating collectively bargained-for
health and welfare trusts in Washington, and/or the trustees of such entities,
that have provided or paid for health care and/or addiction treatment costs or
services for employees or other beneficiaries."
STATE OF NEVADA V. PHILIP MORRIS, INCORPORATED, ET AL., SECOND JUDICIAL
DISTRICT, WASHOE COUNTY, NEVADA, FILED MAY 21, 1997. In April 1998, the court
granted defendants' motion to dismiss plaintiff's claims for targeting minors in
violation of the Nevada Deceptive Trade Practices Act, negligent/intentional
breach of a special duty, public nuisance, negligence, negligence PER SE, strict
products liability and breach of express or implied warranties.
UNIVERSITY OF SOUTH ALABAMA V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED
STATES DISTRICT COURT, SOUTHERN DISTRICT, ALABAMA, FILED MAY 23, 1997.
STATE OF NEW MEXICO V. THE AMERICAN TOBACCO COMPANY, ET AL., FIRST JUDICIAL
DISTRICT COURT, SANTA FE COUNTY, NEW MEXICO, FILED MAY 27, 1997.
CITY OF BIRMINGHAM, ALABAMA, AND THE GREENE COUNTY RACING COMMISSION V. THE
AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, NORTHERN
DISTRICT, ALABAMA, FILED MAY 28, 1997. In March 1998, the court granted
defendants' motion to dismiss, but has allowed plaintiffs to amend their
complaint to pursue individual subrogation actions.
STATE OF VERMONT V. PHILIP MORRIS, INCORPORATED, ET AL., SUPERIOR COURT,
CHITTENDEN COUNTY, VERMONT, FILED MAY 29, 1997. Trial is scheduled for November
1999. In March 1998, the court denied defendants' motion to dismiss plaintiff's
claims under the Vermont Public Health Act and Consumer Fraud Act. Effective
April 23, 1998, Vermont enacted a statute permitting the state to seek recovery
from a "tobacco manufacturer" for the amount paid or likely to be paid in
Medicaid benefits for tobacco-related health
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conditions, and for punitive damages, costs, reasonable attorneys' fees, and
other relief. Among other things, the statute abrogated certain affirmative
defenses, listed elements of the state's new direct cause of action, and
authorized the use of statistical analysis to prove causation and damages. PM
Inc. and four other domestic cigarette manufacturers brought suit in federal
court in Vermont against state officials for declaratory and injunctive relief
on the grounds that enforcement of the statute would violate the United States
Constitution and federal law.
UNPINGCO, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, AGANA, GUAM, FILED MAY 29, 1997. In January 1998, plaintiffs
dismissed the complaint, voluntarily and without prejudice, in return for a
tolling agreement.
CENTRAL LABORERS WELFARE FUND, ET AL. V. PHILIP MORRIS INC., ET AL., UNITED
STATES DISTRICT COURT, SOUTHERN DISTRICT, ILLINOIS, FILED MAY 30, 1997.
MASSACHUSETTS LABORERS HEALTH AND WELFARE FUND V. PHILIP MORRIS INC., ET AL.,
UNITED STATES DISTRICT COURT, MASSACHUSETTS, FILED JUNE 2, 1997.
STATE OF NEW HAMPSHIRE V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., SUPERIOR COURT,
MERRIMACK COUNTY, NEW HAMPSHIRE, FILED JUNE 4, 1997.
THE LOWER BRULE SIOUX TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL
COURT, LOWER BRULE SIOUX TRIBE, FILED JUNE 4, 1997.
STATE OF COLORADO V. R.J. REYNOLDS TOBACCO CO., ET AL., DISTRICT COURT, CITY AND
COUNTY OF DENVER, COLORADO, FILED JUNE 5, 1997.
STATE OF OREGON V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT,
MULTNOMAH COUNTY, OREGON, FILED JUNE 9, 1997. In February 1998, the court
dismissed the special duty and conspiracy counts, dismissed (with leave to
replead) the public nuisance and unjust enrichment counts, and reserved decision
on the antitrust count. The court also granted defendants' motion dismissing
the damages and restitution remedy for the statutory consumer protection and
RICO counts. In March 1998, the court dismissed without leave to amend
plaintiff's claim of breach of an assumed duty. The court dismissed with leave
to amend plaintiff's claims of unjust enrichment and public nuisance, and for
damages under various Oregon statutes. The court also denied without prejudice
defendants' motions to dismiss based on preemption and to dismiss antitrust
claims, but invited defendants to resubmit these motions at a later time. Trial
is scheduled for April 1999.
THE CROW TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL COURT, CROW
TRIBE, FILED JUNE 10, 1997. In April 1998, plaintiff voluntarily dismissed the
case without prejudice.
STATE OF IDAHO V. PHILIP MORRIS, INC., ET AL., DISTRICT COURT, FOURTH JUDICIAL
DISTRICT, ADA COUNTY, IDAHO, FILED JUNE 11, 1997.
PEOPLE OF THE STATE OF CALIFORNIA V. PHILIP MORRIS, INC., ET AL., SUPERIOR
COURT, SACRAMENTO COUNTY, CALIFORNIA, FILED JUNE 12, 1997. In May 1998, the
court held that the state's reimbursement claims, which were based on a product
liability theory, were barred by a California statute, which, until amended in
1997, did not permit product liability claims to be asserted with respect to
tobacco products. The court held that the 1997 amendment of the law could not
be applied retroactively. In addition, the court held that the statute did not
permit claims that arose from pre-1987 conduct. However, the court further held
that the statute did not apply to fraud claims, and granted the state leave to
amend the complaint to assert a fraud claim. The court also dismissed without
leave to amend the state's request for punitive damages and the cause of action
alleging numerous violations of California's False Claims Act.
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HAWAII HEALTH AND WELFARE TRUST FUND FOR OPERATING ENGINEERS V. PHILIP MORRIS,
INC., ET AL., UNITED STATES DISTRICT COURT, HAWAII, FILED JUNE 13, 1997.
STATE OF MAINE V. PHILIP MORRIS, INCORPORATED, ET AL., SUPERIOR COURT, KENNEBEC
COUNTY, MAINE, FILED JUNE 17, 1997.
ROSSELLO, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED
STATES DISTRICT COURT, PUERTO RICO, FILED JUNE 17, 1997.
STATE OF RHODE ISLAND V. AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT,
PROVIDENCE, RHODE ISLAND, FILED JUNE 17, 1997.
LABORERS LOCAL 17 HEALTH AND BENEFIT FUND, ET AL. V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED JUNE 19,
1997. In March 1998, the court dismissed plaintiffs' antitrust, unjust
enrichment, negligence, strict liability and breach of warranty claims. The
court denied defendants' motion to dismiss plaintiffs' RICO, fraud and breach of
special duty claims.
MUSCOGEE CREEK NATION V. THE AMERICAN TOBACCO COMPANY, ET AL., DISTRICT COURT,
MUSCOGEE CREEK NATION, OKMULGEE DISTRICT, FILED JUNE 20, 1997. In February
1998, defendants' motion to dismiss on jurisdictional grounds was denied by the
court.
KENTUCKY LABORERS DISTRICT COUNCIL HEALTH AND WELFARE TRUST FUND, ET AL. V. HILL
& KNOWLTON, INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT,
KENTUCKY, LOUISVILLE DIVISION, FILED JUNE 20, 1997.
OREGON LABORERS -- EMPLOYERS HEALTH AND WELFARE TRUST FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, OREGON, FILED JUNE 20, 1997.
UNITED FEDERATION OF TEACHERS WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED JUNE 25,
1997. In March 1998, the court granted defendants' motion to dismiss
plaintiffs' antitrust and unjust enrichment claims, but denied the motion with
respect to RICO, fraud and special duty claims.
CONNECTICUT PIPE TRADES HEALTH FUND, ET AL. V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, CONNECTICUT, FILED JULY 1, 1997.
SEAFARERS WELFARE PLAN AND UNITED INDUSTRIAL WORKERS WELFARE PLAN V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, MARYLAND, SOUTHERN DIVISION,
FILED JULY 2, 1997. In March 1998, the court entered a stipulated order that
dismissed plaintiffs' negligence, breach of express warranty, breach of implied
warranty and strict liability claims.
LABORERS AND OPERATING ENGINEERS UTILITY AGREEMENT HEALTH AND WELFARE TRUST FUND
FOR ARIZONA V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT,
ARIZONA, FILED JULY 7, 1997.
WOODS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPERIOR COURT, WAKE
COUNTY, NORTH CAROLINA, FILED JULY 10, 1997. This case was voluntarily
dismissed by plaintiffs, without prejudice, in February 1998.
WEST VIRGINIA LABORERS' PENSION FUND V. PHILIP MORRIS, INC., ET AL., UNITED
STATES DISTRICT COURT, SOUTHERN DISTRICT, WEST VIRGINIA, HUNTINGTON DIVISION,
FILED JULY 11, 1997.
RHODE ISLAND LABORERS HEALTH AND WELFARE FUND V. PHILIP MORRIS INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT, RHODE ISLAND, FILED JULY 20, 1997.
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EASTERN STATES HEALTH AND WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED JULY 28, 1997.
ASBESTOS WORKERS LOCAL 53 HEALTH AND WELFARE FUND, ET AL. V. PHILIP MORRIS,
INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, LOUISIANA, FILED
AUGUST 15, 1997.
STEAMFITTERS LOCAL UNION NO. 420 WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, PENNSYLVANIA, FILED AUGUST
21, 1997. In April 1998, the court granted defendants' motion to dismiss this
case.
STATE OF GEORGIA V. PHILIP MORRIS, INC., ET AL., SUPERIOR COURT, FULTON COUNTY,
GEORGIA, FILED AUGUST 29, 1997.
CONSTRUCTION LABORERS OF GREATER ST. LOUIS WELFARE FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, MISSOURI,
FILED SEPTEMBER 2, 1997.
THE ARKANSAS CARPENTERS HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, ARKANSAS, FILED SEPTEMBER
4, 1997.
SOUTHEAST FLORIDA LABORERS DISTRICT COUNCIL HEALTH AND WELFARE TRUST FUND V.
PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT,
FLORIDA, FILED SEPTEMBER 11, 1997. In April 1998, the court granted defendants'
motion to dismiss this case.
WEST VIRGINIA--OHIO VALLEY AREA INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS
WELFARE FUND V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, WEST VIRGINIA, FILED SEPTEMBER 11, 1997.
TEAMSTERS UNION NO. 142 HEALTH AND WELFARE TRUST FUND AND SHEET METAL WORKERS
LOCAL UNION NO. 20 WELFARE AND BENEFIT FUND V. PHILIP MORRIS INCORPORATED, ET
AL., CIRCUIT COURT OF ST. JOSEPH COUNTY, INDIANA, FILED SEPTEMBER 12, 1997.
CROW CREEK SIOUX TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL COURT,
CROW CREEK SIOUX TRIBE, FILED SEPTEMBER 14, 1997.
OPERATING ENGINEERS LOCAL 12 HEALTH AND WELFARE TRUST V. AMERICAN TOBACCO
COMPANY, ET AL., SUPERIOR COURT OF CALIFORNIA, LOS ANGELES COUNTY, FILED
SEPTEMBER 16, 1997.
PUERTO RICAN ILGWU HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS INC., ET AL.,
UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED SEPTEMBER 17,
1997.
NEW JERSEY CARPENTERS' HEALTH FUND, ET AL. V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, NEW JERSEY, FILED SEPTEMBER 25, 1997.
ASBESTOS WORKERS LOCAL NO. 25 WELFARE FUND AND ITS TRUSTEES, ET AL. V. PHILIP
MORRIS, INC., ET AL., CIRCUIT COURT, WAYNE COUNTY, MICHIGAN, FILED OCTOBER 2,
1997. This case was dismissed without prejudice by the court for want of
prosecution (I.E., plaintiffs' failure to timely serve the summons and
complaint) in January 1998.
NEW MEXICO AND WEST TEXAS MULTI-CRAFT HEALTH AND WELFARE TRUST FUND, ET AL. V.
PHILIP MORRIS, INC., ET AL., SECOND JUDICIAL DISTRICT COURT, BERNALILLO COUNTY,
NEW MEXICO, FILED OCTOBER 10, 1997.
GOODPASTURE, ET AL. V. AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, KANSAS, FILED OCTOBER 15, 1997. This case was voluntarily
dismissed by plaintiffs, without prejudice, in February 1998.
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MOORE, ET AL. V. AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT,
KANSAS, FILED OCTOBER 15, 1997. This case was voluntarily dismissed by
plaintiffs, without prejudice, in February 1998.
REPUBLIC OF THE MARSHALL ISLANDS V. THE AMERICAN TOBACCO COMPANY, ET AL., HIGH
COURT, REPUBLIC OF THE MARSHALL ISLANDS, FILED OCTOBER 20, 1997. Plaintiff's
motion for default judgment was denied in January 1998.
CENTRAL STATES JOINT BOARD V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED OCTOBER 20, 1997.
INTERNATIONAL BROTHERHOOD OF TEAMSTERS, LOCAL 734 V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED OCTOBER
20, 1997.
TEXAS CARPENTERS HEALTH BENEFIT FUND, ET AL. V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, EASTERN DISTRICT, TEXAS, BEAUMONT DIVISION, FILED
OCTOBER 31, 1997.
UNITED FOOD AND COMMERCIAL WORKERS UNION AND EMPLOYERS HEALTH AND WELFARE FUND,
ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN
DISTRICT, ALABAMA, FILED NOVEMBER 13, 1997.
B.A.C. LOCAL 32 INSURANCE TRUST FUND, ET AL. V. PHILIP MORRIS, INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, MICHIGAN, FILED NOVEMBER
14, 1997.
SCREEN ACTORS GUILD-PRODUCERS HEALTH PLAN, ET AL. V. PHILIP MORRIS, INC., ET
AL., SUPERIOR COURT, LOS ANGELES COUNTY, CALIFORNIA, FILED NOVEMBER 20, 1997.
IBEW LOCAL 25 HEALTH AND BENEFIT FUND V. PHILIP MORRIS, INC., ET AL., UNITED
STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED NOVEMBER 25, 1997.
IBEW LOCAL 363 WELFARE FUND V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED NOVEMBER 25, 1997.
LOCAL 138, 138A AND 138B INTERNATIONAL UNION OF OPERATING ENGINEERS WELFARE FUND
V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT,
NEW YORK, FILED NOVEMBER 25, 1997.
LOCAL 840, INTERNATIONAL BROTHERHOOD OF TEAMSTERS HEALTH AND INSURANCE FUND V.
PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT,
NEW YORK, FILED NOVEMBER 25, 1997.
LONG ISLAND REGIONAL COUNCIL OF CARPENTERS WELFARE FUND V. PHILIP MORRIS, INC.,
UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED NOVEMBER 25,
1997.
DAY CARE COUNCIL - LOCAL 205 D.C. 1707 WELFARE FUND V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED DECEMBER
8, 1997.
LOCAL 1199 HOME CARE INDUSTRY BENEFIT FUND V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED DECEMBER 8,
1997.
LOCAL 1199 NATIONAL BENEFIT FUND FOR HEALTH AND HUMAN SERVICES EMPLOYEES V.
PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT,
NEW YORK, FILED DECEMBER 8, 1997.
MASON, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NORTHERN DISTRICT, TEXAS, FILED DECEMBER 23, 1997.
OPERATING ENGINEERS LOCAL 324 HEALTH CARE FUND, ET AL. V. PHILIP MORRIS, INC.,
ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, MICHIGAN, FILED DECEMBER
30, 1997.
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CARPENTERS & JOINERS WELFARE FUND, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL.,
UNITED STATES DISTRICT COURT, MINNESOTA, FILED DECEMBER 31, 1997.
STEAMFITTERS LOCAL UNION NO. 614 HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS,
INC., ET AL., CIRCUIT COURT, THIRTEENTH JUDICIAL DISTRICT, TENNESSEE, FILED
JANUARY 7, 1998.
WOODS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, MIDDLE DISTRICT, NORTH CAROLINA, FILED FEBRUARY 13, 1998.
STATE OF SOUTH DAKOTA, ET AL. V. PHILIP MORRIS, INC., ET AL., CIRCUIT COURT,
HUGHES COUNTY, SOUTH DAKOTA, FILED FEBRUARY 19, 1998.
BELK, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT,
SOUTHERN DISTRICT, ALABAMA, FILED FEBRUARY 20, 1998.
NATIONAL ASBESTOS WORKERS MEDICAL FUND, ET AL. V. PHILIP MORRIS INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK, FILED
FEBRUARY 27, 1998.
MILWAUKEE CARPENTERS, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED
STATES DISTRICT COURT, EASTERN DISTRICT, WISCONSIN, FILED MARCH 4, 1998.
GROUP HEALTH PLAN, ET AL. V. PHILIP MORRIS, INC., ET AL., DISTRICT COURT, RAMSEY
COUNTY, MINNESOTA, FILED MARCH 11, 1998.
WILLIAMS & DRAKE COMPANY, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED
STATES DISTRICT COURT, WESTERN DISTRICT, PENNSYLVANIA, FILED MARCH 23, 1998.
MANGINI, ON BEHALF OF THE GENERAL PUBLIC OF THE STATE OF CALIFORNIA V. BROWN &
WILLIAMSON TOBACCO CORPORATION, ET AL., SUPERIOR COURT, SAN FRANCISCO COUNTY,
CALIFORNIA, FILED MARCH 26, 1998. This action alleges that defendants'
advertising violated the California Business and Professions Code, a consumer
protection statute, and seeks various forms of injunctive and monetary relief
other than reimbursement of health care expenditures.
UNITED ASSOCIATION OF PLUMBING AND PIPEFITTING INDUSTRY LOCAL 467 V. PHILIP
MORRIS INCORPORATED, ET AL., SUPERIOR COURT, SAN MATEO, CALIFORNIA, FILED MARCH
31, 1998.
UNITED ASSOCIATION LOCAL NO. 467 HEALTH AND WELFARE TRUST FUND V. PHILIP MORRIS,
INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED
MARCH 31, 1998.
CONWED CORPORATION AND LEUCADIA, INC. V. RJ REYNOLDS TOBACCO COMPANY, ET AL.,
SECOND JUDICIAL DISTRICT COURT, RAMSEY COUNTY, MINNESOTA, FILED APRIL 10, 1998.
TEAMSTERS BENEFIT TRUST V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT
COURT, NORTHERN DISTRICT, CALIFORNIA, FILED APRIL 15, 1998.
UNITED ASSOCIATION LOCAL NO. 159 HEALTH AND WELFARE TRUST FUND V. PHILIP MORRIS,
INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED
APRIL 15, 1998.
NEWSPAPER PERIODICAL DRIVERS LOCAL 921 SAN FRANCISCO NEWSPAPER AGENCY HEALTH &
WELFARE FUND V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT,
NORTHERN DISTRICT, CALIFORNIA, FILED APRIL 15, 1998.
UNITED ASSOCIATION LOCAL NO. 343 HEALTH AND WELFARE TRUST FUND V. PHILIP MORRIS,
INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED
APRIL 16, 1998.
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BAY AREA AUTOMOTIVE GROUP WELFARE FUND V. PHILIP MORRIS, INC., ET AL., UNITED
STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED APRIL 16, 1998.
PIPE TRADES DISTRICT COUNCIL NO. 36 HEALTH & WELFARE TRUST FUND V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT,
CALIFORNIA, FILED APRIL 16, 1998.
SIGN, PICTORIAL AND DISPLAY INDUSTRY WELFARE FUND V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED APRIL
16, 1998.
SAN FRANCISCO NEWSPAPER PUBLISHERS AND NORTHERN CALIFORNIA NEWSPAPER GUILD
HEALTH & WELFARE TRUST V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT
COURT, NORTHERN DISTRICT, CALIFORNIA, FILED APRIL 17, 1998.
ARKANSAS BLUE CROSS AND BLUE SHIELD, ET AL. V. PHILIP MORRIS INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED APRIL 29,
1998.
BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC., ET AL. V. PHILIP MORRIS,
INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, NEW YORK,
FILED APRIL 29, 1998.
REGENCE BLUESHIELD, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, WESTERN DISTRICT, WASHINGTON, FILED APRIL 29, 1998.
In addition to the foregoing actions, other foreign, state and local government
entities and others, including unions, have announced they are considering
filing health care cost recovery actions.
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