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 September 30, 1999
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 (917) 663-5000
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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 October 29, 1999, there were 2,366,138,770 shares outstanding of the
registrant's common stock, par value $0.33 1/3 per share.
<PAGE>
PHILIP MORRIS COMPANIES INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 3 - 4
Condensed Consolidated Statements of Earnings for the
Nine Months Ended September 30, 1999 and 1998 5
Three Months Ended September 30, 1999 and 1998 6
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 1998 and the
Nine Months Ended September 30, 1999 7
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 8 - 9
Notes to Condensed Consolidated Financial Statements 10 - 23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 24 - 44
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 45
Item 6. Exhibits and Reports on Form 8-K. 45
Signature 46
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
September 30, December 31,
1999 1998
------- -------
ASSETS
Consumer products
Cash and cash equivalents $ 5,876 $ 4,081
Receivables, net 4,711 4,691
Inventories:
Leaf tobacco 4,220 4,729
Other raw materials 1,843 1,728
Finished product 2,874 2,988
------- -------
8,937 9,445
Other current assets 2,369 2,013
------- -------
Total current assets 21,893 20,230
Property, plant and equipment, at cost 21,445 21,234
Less accumulated depreciation 9,272 8,899
------- -------
12,173 12,335
Goodwill and other intangible assets
(less accumulated amortization of
$5,742 and $5,436) 17,138 17,566
Other assets 3,543 3,309
------- -------
Total consumer products assets 54,747 53,440
Financial services
Finance assets, net 7,433 6,324
Other assets 140 156
------- -------
Total financial services assets 7,573 6,480
------- -------
TOTAL ASSETS $62,320 $59,920
======= =======
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>
September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
LIABILITIES
Consumer products
Short-term borrowings $ 268 $ 225
Current portion of long-term debt 1,340 1,822
Accounts payable 2,318 3,359
Accrued marketing 2,666 2,637
Accrued taxes, except income taxes 1,671 1,408
Accrued settlement charges 3,760 1,135
Other accrued liabilities 3,413 3,576
Income taxes 1,440 1,144
Dividends payable 1,147 1,073
-------- --------
Total current liabilities 18,023 16,379
Long-term debt 12,160 11,906
Deferred income taxes 1,033 929
Accrued postretirement health care costs 2,604 2,543
Other liabilities 6,573 7,019
-------- --------
Total consumer products liabilities 40,393 38,776
Financial services
Long-term debt 963 709
Deferred income taxes 4,302 4,151
Other liabilities 767 87
-------- --------
Total financial services liabilities 6,032 4,947
-------- --------
Total liabilities 46,425 43,723
Contingencies (Note 5)
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 28,819 26,261
Accumulated other comprehensive earnings (including
currency translation of $1,830 and $1,081) (1,855) (1,106)
-------- --------
27,899 26,090
Less cost of repurchased stock
(427,745,177 and 375,426,742 shares) 12,004 9,893
-------- --------
Total stockholders' equity 15,895 16,197
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 62,320 $ 59,920
======== ========
</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)
For the Nine Months Ended
September 30,
-------------------------
1999 1998
------- -------
Operating revenues $59,185 $55,948
Cost of sales 22,198 20,119
Excise taxes on products 12,992 12,635
------- -------
Gross profit 23,995 23,194
Marketing, administration and research costs 13,307 12,440
Settlement charges (Note 5) 1,116
Amortization of goodwill 434 433
------- -------
Operating income 10,254 9,205
Interest and other debt expense, net 627 682
------- -------
Earnings before income taxes 9,627 8,523
Provision for income taxes 3,809 3,425
------- -------
Net earnings $ 5,818 $ 5,098
======= =======
Per share data:
Basic earnings per share $ 2.42 $ 2.10
======= =======
Diluted earnings per share $ 2.41 $ 2.09
======= =======
Dividends declared $ 1.36 $ 1.24
======= =======
See notes to condensed consolidated financial statements.
-5-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
For the Three Months Ended
September 30,
--------------------------
1999 1998
------- -------
Operating revenues $19,878 $18,587
Cost of sales 7,451 6,529
Excise taxes on products 4,386 4,216
------- -------
Gross profit 8,041 7,842
Marketing, administration and research costs 4,383 4,086
Settlement charges (Note 5) 111
Amortization of goodwill 142 143
------- -------
Operating income 3,516 3,502
Interest and other debt expense, net 199 200
------- -------
Earnings before income taxes 3,317 3,302
Provision for income taxes 1,316 1,322
------- -------
Net earnings $ 2,001 $ 1,980
======= =======
Per share data:
Basic earnings per share $ 0.84 $ 0.81
======= =======
Diluted earnings per share $ 0.84 $ 0.81
======= =======
Dividends declared $ 0.48 $ 0.44
======= =======
See notes to condensed consolidated financial statements.
-6-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1998 and
the Nine Months Ended September 30, 1999
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Comprehensive Earnings
--------------------------------
Earnings Total
Reinvested Currency Cost of Stock-
Common in the Translation Repurchased holders'
Stock Business Adjustments Other Total Stock Equity
--------- --------- ----------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1998 $ 935 $ 24,924 $ (1,109) $ (1,109) $ (9,830) $ 14,920
Comprehensive earnings:
Net earnings 5,372 5,372
Other comprehensive earnings,
net of income taxes:
Currency translation adjustments 28 28 28
Additional minimum pension liability $ (25) (25) (25)
--------- --------- --------- --------
Total other comprehensive earnings 28 (25) 3 3
--------- --------- --------- --------
Total comprehensive earnings 5,375
Exercise of stock options and
issuance of other stock awards 50 287 337
Cash dividends
declared ($1.68 per share) (4,085) (4,085)
Stock repurchased (350) (350)
--------- --------- --------- --------- --------- --------- --------
Balances, December 31, 1998 935 26,261 (1,081) (25) (1,106) (9,893) 16,197
Comprehensive earnings:
Net earnings 5,818 5,818
Other comprehensive earnings,
net of income taxes:
Currency translation adjustments (749) (749) (749)
--------- --------- --------
Total other comprehensive earnings (749) (749) (749)
--------- --------- --------
Total comprehensive earnings 5,069
Exercise of stock options and
issuance of other stock awards 9 105 114
Cash dividends
declared ($1.36 per share) (3,269) (3,269)
Stock repurchased (2,216) (2,216)
--------- --------- --------- --------- --------- --------- --------
Balances, September 30, 1999 $ 935 $ 28,819 $ (1,830) $ (25) $ (1,855) $ (12,004) $ 15,895
========= ========= ========= ========= ========= ========= ========
</TABLE>
Total comprehensive earnings, which represents net earnings partially offset by
currency translation adjustments, were $1,855 million and $2,214 million,
respectively, for the quarters ended September 30, 1999 and 1998, and $5,111
million for the first nine months of 1998.
See notes to condensed consolidated financial statements.
-7-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
1999 1998
------- -------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $ 5,714 $ 5,010
- Financial services 104 88
------- -------
Net earnings 5,818 5,098
Adjustments to reconcile net earnings to
operating cash flows:
Consumer products
Depreciation and amortization 1,254 1,242
Deferred income tax (benefit) provision (51) 135
Gain on sale of a business (20)
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (280) (875)
Inventories 189 (28)
Accounts payable (943) (811)
Income taxes 332 656
Accrued liabilities and other current assets 2,831 136
Other (74) 682
Financial services
Deferred income tax provision 151 111
Other 37 70
------- -------
Net cash provided by operating activities 9,244 6,416
------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures (1,151) (1,228)
Purchases of businesses, net of acquired cash (434) (13)
Proceeds from sales of businesses 48 6
Other (240) 40
Financial services
Investments in finance assets (490) (568)
Proceeds from finance assets 54 133
------- -------
Net cash used in investing activities (2,213) (1,630)
------- -------
See notes to condensed consolidated financial statements.
-8-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
1999 1998
------- -------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net issuance of short-term borrowings $ 60 $ 526
Long-term debt proceeds 1,300 2,037
Long-term debt repaid (1,384) (1,244)
Financial services
Long-term debt proceeds 500
Long-term debt repaid (200)
Dividends paid (3,195) (2,913)
Issuance of common stock 108 157
Repurchase of common stock (2,213)
Other (110) (166)
------- -------
Net cash used in financing activities (5,134) (1,603)
------- -------
Effect of exchange rate changes on cash and
cash equivalents (102) 59
------- -------
Cash and cash equivalents:
Increase 1,795 3,242
Balance at beginning of period 4,081 2,282
------- -------
Balance at end of period $ 5,876 $ 5,524
======= =======
See notes to condensed consolidated financial statements.
-9-
<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. For interim reporting purposes, certain expenses are
charged to results of operations as a percentage of sales. 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, 1998 (the "1998 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:
In 1998, the American Institute of Certified Public Accountants' Accounting
Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") No.
98-5, "Reporting on the Costs of Start-Up Activities." SOP No. 98-5 established
standards on accounting for start-up and organization costs and, in general,
requires such costs to be expensed as incurred. The Company adopted SOP No. 98-5
effective January 1, 1999. Neither the adoption of SOP No. 98-5 nor its
application for the nine months or the quarter ended September 30, 1999 had an
effect on the Company's financial position or results of operations.
Note 3. Earnings Per Share:
Basic and diluted earnings per share ("EPS") were calculated using the
following:
For the Nine Months Ended
September 30,
-------------------------
1999 1998
------ ------
(in millions)
Net earnings $5,818 $5,098
====== ======
Weighted average shares for
basic EPS 2,406 2,428
Plus incremental shares from conversions:
Restricted stock and stock rights 1 1
Stock options 10 15
------ ------
Weighted average shares for
diluted EPS 2,417 2,444
====== ======
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the Three Months Ended
September 30,
--------------------------
1999 1998
------ ------
(in millions)
Net earnings $2,001 $1,980
====== ======
Weighted average shares for
basic EPS 2,386 2,430
Plus incremental shares from conversions:
Restricted stock and stock rights 2 1
Stock options 8 17
------ ------
Weighted average shares for
diluted EPS 2,396 2,448
====== ======
Options on shares of common stock were excluded from the calculation of weighted
average shares for diluted EPS because their effects were antidilutive, as
follows:
1999 1998
---- ----
(in millions)
For the three months ended September 30, 58 15
For the nine months ended September 30, 25 15
Note 4. Segment Reporting:
The Company's products include cigarettes, food (consisting principally of
coffee, cheese, chocolate confections, processed meat products and various
packaged grocery products) and beer. A subsidiary of the Company, Philip Morris
Capital Corporation, invests in leveraged and direct finance leases, other
tax-oriented financing transactions and third-party financial instruments. These
products and services constitute the Company's reportable segments of domestic
tobacco, international tobacco, North American food, international food, beer
and financial services.
The Company's management reviews operating companies income to evaluate segment
performance and allocate resources. Operating companies income for the
reportable segments excludes general corporate expenses, minority interest and
amortization of goodwill. Interest and other debt expense, net (consumer
products) and provision for income taxes are centrally managed at the corporate
level and, accordingly, such items are not presented by segment since they are
excluded from the measure of segment profitability reviewed by the Company's
management. Goodwill and amortization of goodwill are principally attributable
to the North American food segment.
-11-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Reportable segment data were as follows:
For the Nine Months Ended
September 30,
-------------------------
1999 1998
-------- --------
Operating revenues: (in millions)
Domestic tobacco $ 14,352 $ 11,204
International tobacco 21,419 21,253
North American food 13,193 12,921
International food 6,601 7,115
Beer 3,361 3,247
Financial services 259 208
-------- --------
Total operating revenues $ 59,185 $ 55,948
======== ========
Operating companies income:
Domestic tobacco $ 3,436 $ 2,340
International tobacco 3,922 4,044
North American food 2,404 2,408
International food 785 769
Beer 454 404
Financial services 168 137
-------- --------
Total operating companies income 11,169 10,102
Amortization of goodwill (434) (433)
General corporate expenses (386) (370)
Minority interest (95) (94)
-------- --------
Total operating income 10,254 9,205
Interest and other debt expense, net (627) (682)
-------- --------
Total earnings before income taxes $ 9,627 $ 8,523
======== ========
For the Three Months Ended
September 30,
--------------------------
1999 1998
------- -------
Operating revenues: (in millions)
Domestic tobacco $ 5,157 $ 4,142
International tobacco 7,153 6,979
North American food 4,171 4,016
International food 2,155 2,310
Beer 1,153 1,071
Financial services 89 69
------- -------
Total operating revenues $19,878 $18,587
======= =======
-12-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the Three Months Ended
September 30,
--------------------------
1999 1998
------- -------
Operating companies income: (in millions)
Domestic tobacco $ 1,367 $ 1,279
International tobacco 1,239 1,374
North American food 773 722
International food 264 262
Beer 140 118
Financial services 58 44
------- -------
Total operating companies income 3,841 3,799
Amortization of goodwill (142) (143)
General corporate expenses (151) (122)
Minority interest (32) (32)
------- -------
Total operating income 3,516 3,502
Interest and other debt expense, net (199) (200)
------- -------
Total earnings before income taxes $ 3,317 $ 3,302
======= =======
Operating companies income for the first nine months and the third quarter of
1999 includes pre-tax charges of $183 million and $8 million, respectively, in
the domestic tobacco segment primarily related to the cost for separation
programs covering approximately 1,500 employees at the Philip Morris
Incorporated ("PM Inc.") Louisville, Kentucky manufacturing plant. Operating
companies income for the first nine months of 1999 also includes pre-tax charges
of $157 million related primarily to voluntary workforce reductions covering
approximately 1,100 employees in the Company's North American food segment. In
addition, during the first nine months and third quarter of 1999, operating
companies income for the international tobacco segment includes a pre-tax charge
of $136 million primarily related to the closure of a factory and the
corresponding reduction of cigarette production capacity in Brazil. During the
first nine months and third quarter of 1998, operating companies income for the
domestic tobacco segment included pre-tax tobacco litigation settlement charges
of $1,116 million and $111 million, respectively, related to settling health
care cost recovery litigation. In addition, 1998 operating companies income for
the domestic tobacco segment was further reduced by pre-tax charges of $319
million and $10 million for the first nine months and third quarter of 1998,
respectively, related to voluntary early retirement and separation programs.
General corporate expenses for the first nine months of 1998 also included a
pre-tax charge of $18 million related to voluntary early retirement and
separation programs at the Company's corporate headquarters.
Note 5. Contingencies:
Legal proceedings covering a wide range of matters are pending or threatened in
various United States and foreign jurisdictions against the Company, its
subsidiaries and affiliates, including PM Inc., the Company's domestic tobacco
subsidiary, and 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 product liability,
consumer protection, antitrust, tax, patent infringement, employment matters,
claims for contribution and claims of competitors and distributors.
-13-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Overview of Tobacco-Related Litigation
Types and Number of Cases
Pending claims related to tobacco products generally fall within the following
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, (iii) health care cost recovery cases brought by governmental (both
domestic and foreign) and non-governmental plaintiffs seeking reimbursement for
health care expenditures allegedly caused by cigarette smoking and/or
disgorgement of profits, and (iv) other tobacco-related litigation, including
suits by former asbestos manufacturers seeking contribution or reimbursement for
amounts expended in connection with the defense and payment of asbestos claims
that were allegedly caused in whole or in part by cigarette smoking. Damages
claimed in some of the smoking and health class actions, health care cost
recovery cases and asbestos contribution cases range into the billions of
dollars. Plaintiffs' theories of recovery and the defenses raised in the smoking
and health and health care cost recovery cases are discussed below. Exhibit 99.1
hereto lists the smoking and health class actions, health care cost recovery
cases and certain other actions pending as of November 1, 1999, and discusses
certain developments in such cases since July 1, 1999.
In recent years, there has been a substantial increase in the number of
tobacco-related cases being filed.
As of November 1, 1999, there were approximately 400 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, compared with approximately 450 such
cases on November 1, 1998, and approximately 365 such cases on November 1, 1997.
Many of these cases are pending in New York, West Virginia and Florida. Twelve
of the individual cases involve allegations of various personal injuries
allegedly related to exposure to environmental tobacco smoke ("ETS").
In addition, as of November 1, 1999, there were approximately 50 smoking and
health putative class actions pending in the United States against PM Inc. and,
in some cases, the Company (including eight that involve allegations of various
personal injuries related to exposure to ETS), compared with approximately 65
such cases on November 1, 1998, and approximately 45 such cases on November 1,
1997. 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 federal district court's certification of a purported
nationwide class action on behalf of persons who were allegedly "addicted" to
tobacco products.
As of November 1, 1999, there were approximately 60 health care cost recovery
actions pending in the United States (excluding the cases covered by the 1998
Master Settlement Agreement discussed below), compared with approximately 140
health care cost recovery cases pending on November 1, 1998, and 95 cases on
November 1, 1997.
There are also a number of tobacco-related actions pending outside the United
States against PMI and its affiliates and subsidiaries, including approximately
45 smoking and health cases initiated by one or more individuals (Argentina
(31), Brazil (2), Canada (1), Germany (3), Ireland (1), Italy (1), Japan (1),
the Philippines (1), Poland (1), Scotland (1), Spain (1) and Turkey (2)),
compared with approximately 20 such cases on November 1, 1998. In addition,
there are nine smoking and health putative class actions pending outside the
United States (Australia (2), Brazil (2), Canada (3), Israel (1) and Nigeria
(1)), compared with four in November 1998. In addition, during the past two
years, health care cost recovery actions have been brought in Israel, the
Marshall Islands, British Columbia, Canada and France (by a local agency of the
French social security health insurance system) and, in the United States, by
Bolivia, Guatemala, Panama,
-14-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nicaragua, Thailand (voluntarily dismissed), Venezuela and the States of Goias
(not served) and Rio de Janeiro, Brazil.
Federal Government's Lawsuit
On September 22, 1999, the U.S. government filed a lawsuit in the U.S. District
Court for the District of Columbia against various cigarette manufacturers and
others, including the Company and PM Inc., asserting claims under three federal
statutes, the Medical Care Recovery Act, the Medicare Secondary Payer provisions
of the Social Security Act, and the Racketeer Influenced and Corrupt
Organizations Act ("RICO"). The lawsuit seeks to recover an unspecified amount
of health care costs for tobacco-related illnesses allegedly caused by
defendants' fraudulent and tortious conduct and paid for by the government under
various federal health care programs, including Medicare, military and veterans'
health benefits programs, and the Federal Employees Health Benefits Program. The
complaint alleges that such costs total more than $20 billion annually. It also
seeks various types of equitable and declaratory relief, including disgorgement,
an injunction prohibiting certain actions by the defendants, and a declaration
that the defendants are liable for the federal government's future costs of
providing health care resulting from defendants' alleged past tortious and
wrongful conduct. The Company and PM Inc. believe that they have a number of
valid defenses to the lawsuit and will vigorously defend it.
Industry Trial Results
There have been several jury verdicts in tobacco-related litigation during the
past three years. On July 9, 1999, a Louisiana jury returned a verdict in favor
of defendants in an individual smoking and health case against other cigarette
manufacturers. On July 7, 1999, the jury in the Engle smoking and health class
action pending in Florida returned a verdict against PM Inc. and several other
tobacco companies in "Phase One" of the trial, which concerned certain issues
determined by the trial court to be "common" to the causes of action of the
plaintiff class. Liability and damages in relation to any individual class
member were not decided in Phase One (see "Engle Trial" below for a more
detailed discussion of the Phase One verdict and certain other developments in
this case). In June 1999, a Mississippi jury returned a verdict in favor of
defendants, including PM Inc., in an action brought on behalf of an individual
who died allegedly as a result of exposure to ETS. In May 1999, a Missouri jury
returned a verdict in favor of defendant in an individual smoking and health
case against another cigarette manufacturer. Also in May 1999, a Tennessee jury
returned a verdict in favor of defendants, including PM Inc., in two of three
individual smoking and health cases consolidated for trial. In the third case
(not involving PM Inc.), the jury found liability against defendants and
apportioned fault between plaintiff and defendants equally. Under Tennessee's
system of modified comparative fault, because the jury found plaintiff's fault
equal to that of the defendants, recovery was not permitted. In March 1999, an
Oregon jury awarded $800,000 in actual damages, $21,500 in medical expenses and
$79.5 million in punitive damages against PM Inc. In February 1999, a California
jury awarded $1.5 million in compensatory damages and $50 million in punitive
damages against PM Inc. The punitive damage awards in the Oregon and California
actions have been reduced to $32 million and $25 million, respectively. PM Inc.
is appealing the verdicts and the damage awards in these cases. In March 1999, a
jury returned a verdict in favor of defendants, including PM Inc., on all counts
in a union health care cost recovery action brought on behalf of approximately
114 employer-employee trust funds in Ohio.
Previously, juries had returned verdicts for defendants in three individual
smoking and health cases and in one individual ETS smoking and health case. In
January 1999, a Florida court set aside a jury award totaling approximately $1
million in a smoking and health case against another United States cigarette
manufacturer and ordered a new trial in the case. In June 1998, a Florida
appeals court reversed a $750,000 jury verdict awarded in August 1996 against
another United States cigarette manufacturer and the Florida Supreme Court has
heard oral arguments on this ruling. In 1997, a court in Brazil awarded
plaintiffs in a smoking and health case the Brazilian
-15-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
currency equivalent of $81,000, attorneys' fees and a monthly annuity for 35
years equal to two-thirds of the deceased smoker's last monthly salary. In March
1999, an appeals court reversed the trial court's award and dismissed the case.
Neither the Company nor its affiliates were parties to that action.
Engle Trial
Trial in this Florida smoking and health class action case began in July 1998.
The plaintiff class seeks compensatory and punitive damages, each in excess of
one hundred billion dollars, as well as attorneys' fees and court costs. The
class consists of all Florida residents and citizens, and their survivors, who
have suffered, presently suffer or have died from diseases and medical
conditions caused by their addiction to cigarettes that contain nicotine.
On July 7, 1999, the jury returned a verdict against defendants in Phase One of
the three phase trial plan. The Phase One verdict concerned certain issues
determined by the trial court to be "common" to the causes of action of the
plaintiff class. Among other things, the jury found that smoking cigarettes
causes twenty diseases or medical conditions, that cigarettes are addictive or
dependence producing, defective and unreasonably dangerous, that defendants made
materially false statements with the intention of misleading smokers, that
defendants concealed or omitted material information concerning the health
effects and/or the addictive nature of smoking cigarettes and agreed to
misrepresent and conceal the health effects and/or the addictive nature of
smoking cigarettes, and that defendants were negligent and engaged in extreme
and outrageous conduct or acted with reckless disregard with the intent to
inflict emotional distress. The jury also found that defendants' conduct "rose
to a level that would permit a potential award or entitlement to punitive
damages."
Liability and damages in relation to any individual class member were not
decided in Phase One. Phase Two of the trial commenced on November 1, 1999.
During this phase the claims of two, or possibly three, of the named plaintiffs
are being adjudicated in a consolidated trial before the same jury which
returned the verdict in Phase One. Under the trial plan, the jury in Phase Two
will determine issues of specific causation, reliance, affirmative defenses, and
other individual-specific issues related to the claims of the named plaintiffs
and their entitlement to damages, if any.
Phase Three of the trial plan would address other class members' claims,
including issues of specific causation, reliance, affirmative defenses and other
individual-specific issues regarding entitlement to damages, in individual
trials before separate juries.
By order dated July 30, 1999 and supplemented on August 2, 1999 (together, the
"order"), the trial judge amended the trial plan in respect of the manner of
determining punitive damages, if any. The order provides that the jury in Phase
Two will determine punitive damages, if any, on a dollar amount basis for the
entire qualified class. By order of September 3, 1999, the Third District Court
of Appeal quashed the July 30, 1999 and August 2, 1999 orders of the trial judge
and stated that both compensatory and punitive damages must be tried on an
individual as opposed to class-wide basis. On September 17, 1999, the Third
District Court of Appeal, on its own motion, vacated its September 3 order, and,
on October 20, 1999, ruled that defendants could not challenge the trial plan
for determining punitive damages at this stage of the proceedings; the ruling
expressly declined to address the merits of whether a class-wide determination
of punitive damages is permissible but deferred the court's review of that issue
for any appropriate subsequent appeal. Defendants sought review by the Florida
Supreme Court of the Third District Court of Appeal's ruling, and the Florida
Supreme Court has ordered the plaintiffs to respond to defendants' petition,
effectively staying any trial court proceedings relating to the determination of
punitive damages.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
If the trial court's order is not reversed at this stage, it is unclear how the
order would be implemented. The order provides that the punitive damage amount,
if any, should be standard as to each class member and acknowledges that the
actual size of the class will not be known until the last case has withstood
appeal, i.e., the punitive damage amount, if any, determined for the entire
qualified class, would be divided equally among those plaintiffs who are
ultimately successful. The order does not address whether defendants would be
required to pay the punitive damage award, if any, prior to a determination of
claims of all class members, a process that could take years to conclude. PM
Inc. and the Company do not believe that an adverse class-wide punitive damage
award in Phase Two would permit entry of a judgment at that time that would
require the posting of a bond to stay its execution pending appeal or that any
party would be entitled to execute on such a judgment in the absence of a bond.
However, in a worst case scenario, it is possible that a judgment for punitive
damages could be entered in an amount not capable of being bonded, resulting in
an execution of the judgment before it could be set aside on appeal. PM Inc. and
the Company believe that such a result would be unconstitutional and would also
violate Florida laws. PM Inc. and the Company will take all appropriate steps to
seek to prevent this worst case scenario from occurring and believe these
efforts should be successful.
In other developments, on August 4, 1999, the trial judge denied a motion filed
by PM Inc. and other defendants to disqualify the judge. The motion asserted,
among other things, that the trial judge was required to disqualify himself
because he has a serious medical condition of a type that the plaintiffs claim
and the jury has now found is caused by smoking, making him financially
interested in the result of the case and, under plaintiffs' theory of the case,
a potential member of the plaintiff class. On August 18, 1999, the Third
District Court of Appeal denied defendants' petition to disqualify the trial
judge. The defendants have filed motions seeking reconsideration of this
decision and to supplement the record with the deposition testimony of an expert
witness. The Third District Court of Appeal has asked the plaintiff to respond
to defendants' motions.
PM Inc. and the Company remain of the view that the Engle case should not have
been certified as a class action. That certification is inconsistent with the
overwhelming majority of federal and state court decisions which have held that
mass smoking and health claims are inappropriate for class treatment. PM Inc.
intends to challenge the class certification, as well as other numerous
reversible errors that it believes occurred during the Phase One trial, at the
earliest time that an appeal of these issues is permissible under Florida law.
In any event, PM Inc. believes it would be able to raise these issues in an
appeal following any verdict in favor of an individual named or absent class
member plaintiff. PM Inc. and the Company believe that such an appeal should
prevail.
Upcoming Trial Dates
As set forth in Exhibit 99.3, additional cases against PM Inc. and, in some
cases, the Company as well, are scheduled for trial through the end of 2000,
including five health care cost recovery actions, two purported smoking and
health class actions, three asbestos contribution cases (discussed below), two
"Proposition 65" cases (discussed below) and approximately 17 individual smoking
and health cases. Cases against other tobacco companies are also scheduled for
trial during this period. Trial dates, however, are subject to change.
Litigation Settlements
In November 1998, PM Inc. and certain other United States tobacco product
manufacturers entered into the Master Settlement Agreement (the "MSA") with 46
states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the
United States Virgin Islands, American Samoa and the Northern Marianas to settle
asserted and unasserted health care cost recovery and other claims. PM Inc. and
certain other United States tobacco product manufacturers had previously settled
similar claims brought by Mississippi, Florida, Texas and Minnesota (together
with the MSA, the "State Settlement Agreements") and an ETS smoking and health
class action brought on behalf
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
of airline flight attendants. The State Settlement Agreements and certain
ancillary agreements are filed as exhibits to various of the Company's reports
filed with the Securities and Exchange Commission, and such agreements and the
ETS settlement are discussed in detail therein.
The settlement agreements require that the domestic tobacco industry make
substantial annual payments in the following amounts (excluding future annual
payments contemplated by the agreement with tobacco growers discussed below),
subject to adjustment for several factors, including inflation, market share and
industry volume: 1999, $4.2 billion (of which PM Inc. has paid a majority of its
share); 2000, $9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9
billion; 2004 through 2007, $8.4 billion; and, thereafter, $9.4 billion. In
addition, the domestic tobacco industry is required to pay settling plaintiffs'
attorneys' fees, subject to an annual cap of $500 million, as well as additional
amounts as follows: 1999, $450 million; 2000, $416 million; and 2001 through
2002, $250 million. These payment obligations are the several and not joint
obligations of each settling defendant. PM Inc.'s portion of the future adjusted
payments and legal fees, which is not currently estimable, will be based on its
share of domestic cigarette shipments in the year preceding that in which the
payment is due.
The State Settlement Agreements also include provisions, discussed below in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, relating to advertising and marketing restrictions, public
disclosure of certain industry documents, limitations on challenges to certain
tobacco control and underage use laws, lobbying activities and other provisions.
As set forth in Exhibit 99.2, the MSA has been initially approved by trial
courts in all settling jurisdictions. If a jurisdiction does not obtain "final
judicial approval" (as defined in Exhibit 99.2) of the MSA by December 31, 2001,
then, unless the settling defendants and the relevant jurisdiction agree
otherwise, the agreement will be terminated with respect to such jurisdiction.
As part of the MSA, the settling defendants committed to work cooperatively with
the tobacco-growing states to address concerns about the potential adverse
economic impact of the MSA on tobacco growers and quota-holders. To that end,
four of the major domestic tobacco product manufacturers, including PM Inc., and
the grower states, have established a trust fund to provide aid to the
tobacco-growing community. The trust will be funded by these four manufacturers
over 12 years, beginning in 1999 with payments, prior to application of various
adjustments, scheduled to total $5.15 billion. PM Inc. has agreed to pay $300
million into the trust in 1999, which amount was charged against 1998 operating
companies income. Future industry payments (in 2000, $280 million; 2001, $400
million; 2002 through 2008, $500 million; 2009 and 2010, $295 million) are
subject to adjustments for several factors, including inflation, United States
cigarette volume and certain other contingent events, and are to be allocated
based on each manufacturer's relative market share.
The Company believes that the State Settlement Agreements may materially
adversely affect the business, volume, results of operations, cash flows or
financial position of PM Inc. and the Company in future periods. The degree of
the adverse impact will depend, among other things, on the rates of decline in
United States cigarette sales in the premium and discount segments, PM Inc.'s
share of the domestic premium and discount cigarette segments, and the effect of
any resulting cost advantage of manufacturers not subject to the MSA and the
other State Settlement Agreements. As of August 1, 1999, manufacturers
representing almost all domestic shipments in 1998 had agreed to become subject
to the terms of the MSA.
Certain litigation has arisen out of the State Settlement Agreements, including
the actions described below.
In December 1998, a putative class action was filed against PM Inc. and certain
other domestic tobacco manufacturers on behalf of a class consisting of citizens
of the United States who consume tobacco products manufactured by defendants.
One count of the complaint alleges that defendants conspired to raise the prices
of
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
their tobacco products in order to pay the costs of the MSA in violation of the
federal antitrust laws. The other two counts allege that the actions of
defendants amount to an unconstitutional deprivation of property without due
process of law and an unlawful burdening of interstate trade. The complaint
seeks unspecified damages (to be trebled under the antitrust count), injunctive
and declaratory relief, costs and attorneys' fees. In April 1999, the court
granted defendants' motions for summary judgment and plaintiffs have appealed.
In February 1999, a putative class action was filed on behalf of tobacco
consumers in the United States against the States of California and Utah, other
public entity defendants, certain domestic tobacco manufacturers, including PM
Inc., and others, challenging the MSA. Plaintiffs are seeking, among other
things, an order (i) prohibiting the states from collecting any monies under the
MSA, (ii) restraining the domestic tobacco manufacturers from further collection
of price increases related to the MSA and compelling them to reimburse to
plaintiffs all monies paid by plaintiffs in the form of price increases related
to the MSA, and (iii) declaring the MSA "unfair, discriminatory,
unconstitutional and unenforceable."
In April 1999, a putative class action was filed on behalf of all firms who
directly buy cigarettes in the United States from defendant tobacco
manufacturers. The complaint alleges violation of antitrust law, based in part
on the MSA. Plaintiffs seek treble damages computed as three times the
difference between current prices and the price plaintiffs would have paid for
cigarettes in the absence of an alleged conspiracy to restrain and monopolize
trade in the domestic cigarette market, together with attorneys' fees.
Plaintiffs also seek injunctive relief against certain aspects of the MSA and
against PM Inc.'s acquisition of the U.S. rights to manufacture and market three
cigarette trademarks, L&M, Lark and Chesterfield.
In August 1999, five companies that import cigarettes or that are involved in
the re-importation of cigarettes into U.S. markets filed suit seeking to
invalidate the MSA and the 1998 Texas State Settlement Agreement on various
grounds, including violation of antitrust laws. Plaintiffs also seek monetary
relief, including treble damages in an unspecified amount and disgorgement of
profits.
In August 1999, after New York obtained final judicial approval of the MSA, four
alleged smokers in New York sought leave to intervene in litigation concerning
the MSA, alleging violations of antitrust laws and seeking injunctive relief,
including invalidating the settlements. The trial court denied the motion as
untimely, and they have appealed.
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 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 and smoking cessation 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.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In May 1996, the Fifth Circuit Court of Appeals in the Castano case held that a
class consisting of all "addicted" smokers nationwide did not meet the standards
and requirements of the federal rules governing class actions. Since this class
decertification, lawyers for plaintiffs have filed numerous putative 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 (although a few cases purport to be nationwide in scope) and raise
"addiction" claims similar to those raised in the Castano case and, in many
cases, claims of physical injury as well. As of November 1, 1999, smoking and
health class actions were pending in Alabama, California, Florida, Hawaii,
Illinois, Indiana, Iowa, Louisiana, Maryland, Massachusetts, Michigan,
Minnesota, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina,
Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah and West
Virginia, as well as in Australia, Brazil, Canada, Israel and Nigeria. Class
certification has been denied or reversed by courts in 17 smoking and health
class actions involving PM Inc. in Arkansas, Louisiana, District of Columbia,
Illinois, New York (2), Pennsylvania, Puerto Rico, New Jersey (6), Ohio,
Wisconsin and Kansas, while classes remain certified in three cases in Florida,
Louisiana and Maryland. A number of these class certification decisions are on
appeal. In October 1999, the state of New York's highest court affirmed without
dissent the decertification and dismissal of a class-action suit. In May 1999,
the United States Supreme Court declined to review the Third Circuit Court of
Appeals' decision to affirm a lower court's decertification of a class. Class
certification motions are pending in a number of the other putative smoking and
health class actions. As mentioned above, one ETS smoking and health class
action was settled in 1997.
Health Care Cost Recovery Litigation
In certain of the pending proceedings, domestic and foreign governmental
entities and non-governmental plaintiffs, including union health and welfare
funds ("unions"), native American tribes, insurers and self-insurers, taxpayers
and others are seeking reimbursement of health care cost 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 another, Blue Cross subscribers seek 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 include the
equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs'
payment of health care costs allegedly attributable to smoking, 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.
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, remoteness of injury, lack of statutory authority to bring suit 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)
can seek recovery of health care costs from a third party solely by "standing in
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
the shoes" of the injured party. Defendants argue that plaintiffs should be
required to bring any actions as subrogees of individual health care recipients
and should be subject to all defenses available against the injured party.
Excluding the cases covered by the MSA, as of November 1, 1999, there were
approximately 60 health care cost recovery cases pending in the United States
against PM Inc. and, in some cases, the Company, of which approximately 50 were
filed by unions. As discussed above under "Federal Government's Lawsuit", the
U.S. government filed a health care cost recovery action in September 1999
against various cigarette manufacturers and others, including the Company and PM
Inc., asserting claims under three federal statutes. Health care cost recovery
actions have also been brought in Israel, the Marshall Islands, British
Columbia, Canada and France and, in the United States, by Bolivia, Guatemala,
Panama, Nicaragua, Thailand (voluntarily dismissed), Venezuela and the States of
Goias and Rio de Janeiro, Brazil. The actions brought by Bolivia, Guatemala,
Nicaragua and Venezuela have been consolidated for pre-trial purposes and
transferred to the United States District Court for the District of Columbia.
Other foreign entities and others have stated that they are considering filing
health care cost recovery actions.
Recently, three federal appeals courts issued rulings in health care cost
recovery actions that were favorable to the tobacco industry. In March 1999, the
United States Third Circuit Court of Appeals affirmed the district court's final
judgment dismissing plaintiffs' complaint and ruling that "all of plaintiffs'
primary claims [were] too remote from any alleged wrongdoing of defendants, and
other claims [were] concomitantly lacking in merit" and failed on proximate
cause grounds. In April 1999, the United States Second Circuit Court of Appeals
reversed another district court's order denying defendants' motion to dismiss on
remoteness grounds and instructed the district court to dismiss the complaint.
Similarly, in July 1999, the United States Ninth Circuit Court of Appeals
affirmed the trial court's August 3, 1998 order that granted defendants' motion
for judgment on the pleadings. In its opinion, the Ninth Circuit ruled that
plaintiffs' claims were barred by the remoteness rule, stating that it agreed
with rulings by the Third and Second Circuit Courts of Appeals that "plaintiffs'
RICO and antitrust claims are 'too remote' from defendants' alleged wrongdoing
to allow recovery." The court further held that plaintiffs' claims were
predicated upon "personal injury" and are not recoverable under the Oregon
Unfair Trade Practices Act. The court went on to hold that plaintiffs' claims
for fraud were barred under Oregon law ("...for the same reasons that proximate
cause did not exist for plaintiffs' RICO and antitrust claims, proximate cause
is lacking for their fraud claim"). In addition, the court held that plaintiffs
could not assert their claims for unjust enrichment and for civil conspiracy.
Although there have been some decisions to the contrary, to date most lower
courts that have decided motions in these cases have dismissed all or most of
the claims against the industry. In March 1999, in the only union case to go to
trial thus far, the jury returned a verdict in favor of defendants on all
counts. Plaintiffs' motion for a new trial has been denied and an appeal of that
ruling is pending.
Certain Other Tobacco-Related Litigation
Asbestos Contribution Cases: As of August 1, 1999, eleven suits had been filed
by former asbestos manufacturers, asbestos manufacturers' personal injury
settlement trusts and an insurance company against domestic tobacco
manufacturers, including PM Inc. and others. These cases seek, among other
things, contribution or reimbursement for amounts expended in connection with
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. The aggregate amounts claimed in these cases range into the
billions of dollars. On November 2, 1999, one of these cases was dismissed by
the federal district court in the Eastern District of New York. Trial in another
of these cases is scheduled to begin in February 2000 in Mississippi.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Marlboro Light/Ultra Light Cases: As of August 1, 1999, there were seven
putative class actions pending against PM Inc. and the Company, in Arizona,
Florida, Massachusetts, New Jersey, Ohio, Pennsylvania and Tennessee, on behalf
of individuals who purchased and consumed Marlboro Lights and, in one case,
Marlboro Ultra Lights, as well. These cases allege, in connection with the use
of the term "Lights" and/or "Ultra Lights," among other things, deceptive and
unfair trade practices and unjust enrichment, and seek injunctive and equitable
relief, including restitution.
Retail Leaders Case: Three domestic tobacco manufacturers have filed suit
against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that
became available to retailers in October 1998. The complaint alleges that this
retail merchandising program is exclusionary and creates unreasonable restraint
of trade and unlawful monopolization. In addition to an injunction, plaintiffs
seek unspecified treble damages, attorneys' fees, costs and interest. In June
1999, the court issued a preliminary injunction enjoining PM Inc. from
prohibiting retail outlets that participate in the program at one of four levels
from installing competitive permanent signage in any section of the "industry
fixture" that displays or holds packages of cigarettes manufactured by a firm
other than PM Inc., requiring those outlets to allocate a percentage of
cigarette-related permanent signage to PM Inc. greater than PM Inc.'s market
share, or prohibiting retail outlets from advertising or conducting promotional
programs of cigarette manufacturers other than PM Inc. The preliminary
injunction applies only to certain accounts and does not affect any other aspect
or level of the Retail Leaders program.
Vending Machine Case: Plaintiffs, a purported nationwide class of cigarette
vending machine operators, allege that PM Inc. has violated the Robinson-Patman
Act in connection with its promotional and merchandising programs available to
retail stores and not available to cigarette vending machine operators.
Plaintiffs request actual damages, treble damages, injunctive relief, attorneys'
fees and costs, and other unspecified relief. In June 1999, the court denied
plaintiffs' motion for a preliminary injunction.
Proposition 65 Cases: In July 1998, two suits were filed in California courts
alleging that domestic cigarette manufacturers, including PM Inc. and others,
have violated a California statute known as "Proposition 65" by not informing
the public of the alleged risks of ETS to non-smokers. Plaintiffs also allege
violations of California's Business and Professions Code regarding unfair and
fraudulent business practices. Plaintiffs seek statutory penalties, injunctions
barring the sale of cigarettes or requiring issuance of appropriate warnings,
restitution, disgorgement of profits and other relief. The defendants' motions
to dismiss were denied in both of these cases. In October 1999, plaintiffs'
motion for a preliminary injunction was also denied. Trial in these cases is
scheduled to begin in February 2000.
Certain Other Actions
National Cheese Exchange Cases: In September 1997, a putative class action suit
consolidating several previously filed class actions was filed in Wisconsin
alleging that Kraft Foods, Inc. 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. Plaintiffs seek injunctive and equitable relief and
treble damages. In October 1999, the court granted Kraft's motion for summary
judgment. Two other putative class actions containing allegations similar to
those in the Wisconsin class action were recently dismissed on motion by courts
in Illinois and California.
----------------------
One hundred eighty-eight 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 alleged unpaid taxes assessed to date is the Italian lira
equivalent of $2.4 billion. In addition, the Italian lira equivalent of $3.4
billion in interest and penalties has been assessed. The
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Company anticipates that value-added and income tax assessments may also be
received with respect to subsequent years. All of the assessments are being
vigorously contested. To date, the Italian administrative tax court in Milan has
overturned 127 of the assessments. The decisions to overturn 66 assessments have
been appealed by the tax authorities. 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 and directors who are subject to the proceedings
believe they have complied with applicable Italian tax laws and are vigorously
contesting the pending assessments and 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. Two
individual smoking and health cases in which PM Inc. is a defendant have been
decided unfavorably at the trial court level and are in the process of being
appealed, and an unfavorable verdict has been returned in the first phase of the
Engle smoking and health class action trial underway in Florida. It is possible
that additional cases could be decided unfavorably and that there could be
further adverse developments in the Engle case. 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, volume, 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 or state tobacco legislation. 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 enter into discussions
in an attempt to settle particular cases if they believe it is in the best
interests of the Company's stockholders to do so.
Note 6. Recently Issued Accounting Pronouncements:
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which had an initial adoption date by the
Company of January 1, 2000. During the second quarter of 1999, the FASB
postponed the adoption date of SFAS No. 133 until January 1, 2001. SFAS No. 133
requires that all derivative financial instruments be recorded on the
consolidated balance sheets at their fair value. Changes in the fair value of
derivatives will be recorded each period in earnings or other comprehensive
earnings, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Gains and losses on
derivative instruments reported in other comprehensive earnings will be
reclassified as earnings in the periods in which earnings are affected by the
hedged item. The Company has not yet determined the impact that adoption or
subsequent application of SFAS No. 133 will have on its financial position or
results of operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
For the Nine Months Ended September 30,
Operating Revenues
---------------------------
(in millions)
1999 1998
------- -------
Domestic tobacco $14,352 $11,204
International tobacco 21,419 21,253
North American food 13,193 12,921
International food 6,601 7,115
Beer 3,361 3,247
Financial services 259 208
------- -------
Operating revenues $59,185 $55,948
======= =======
Operating Income
---------------------------
(in millions)
1999 1998
------- -------
Domestic tobacco $ 3,436 $ 2,340
International tobacco 3,922 4,044
North American food 2,404 2,408
International food 785 769
Beer 454 404
Financial services 168 137
-------- --------
Operating companies income 11,169 10,102
Amortization of goodwill (434) (433)
General corporate expenses (386) (370)
Minority interest (95) (94)
-------- --------
Operating income $ 10,254 $ 9,205
======== ========
For the Three Months Ended September 30,
Operating Revenues
---------------------------
(in millions)
1999 1998
------- -------
Domestic tobacco $ 5,157 $ 4,142
International tobacco 7,153 6,979
North American food 4,171 4,016
International food 2,155 2,310
Beer 1,153 1,071
Financial services 89 69
------- -------
Operating revenues $19,878 $18,587
======= =======
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For the Three Months Ended September 30, (continued)
Operating Income
---------------------------
(in millions)
1999 1998
------- -------
Domestic tobacco $ 1,367 $ 1,279
International tobacco 1,239 1,374
North American food 773 722
International food 264 262
Beer 140 118
Financial services 58 44
------- -------
Operating companies income 3,841 3,799
Amortization of goodwill (142) (143)
General corporate expenses (151) (122)
Minority interest (32) (32)
------- -------
Operating income $ 3,516 $ 3,502
======= =======
Amortization of goodwill is primarily attributable to the North American food
segment for all periods presented.
Results of Operations for the Nine Months Ended September 30, 1999
Operating revenues for the first nine months of 1999 increased $3.2 billion
(5.8%) over the comparable 1998 period, due primarily to an increase in revenues
from domestic tobacco operations. Excluding the revenues of several
international food businesses divested since 1998, underlying operating revenues
for the first nine months of 1999 increased $3.3 billion (6.0%) over the
comparable 1998 period.
Operating income for the first nine months of 1999 increased $1.0 billion
(11.4%) over the comparable 1998 period. Operating income for the first nine
months of 1999 includes pre-tax charges of $183 million, principally for the
cost of separation programs covering approximately 1,500 employees at the Philip
Morris Incorporated ("PM Inc.") Louisville, Kentucky manufacturing plant (the
"Louisville plant"), $157 million related to voluntary workforce reduction
programs covering approximately 1,100 employees at the Company's North American
food segment and $136 million in the international tobacco segment primarily
related to the closure of a factory and the corresponding reduction of cigarette
production capacity in Brazil. Operating income for the first nine months of
1998 includes pre-tax charges of $1,116 million related to tobacco litigation
settlements with the states of Minnesota, Mississippi, Texas and Florida and
$337 million related primarily to domestic tobacco voluntary early retirement
and separation programs. Excluding these pre-tax charges, as well as results
from operations divested since the beginning of 1998, operating income for 1999
increased $78 million (0.7%) from the first nine months of 1998, due primarily
to higher operating income from the Company's North American food operations. On
a reported basis, operating companies income, which is defined as operating
income before general corporate expenses, minority interest and amortization of
goodwill, increased $1.1 billion (10.6%) from the first nine months of 1998, due
primarily to a lower level of pre-tax charges, principally for tobacco
litigation settlements in the domestic tobacco segment during the first nine
months of 1999. Excluding the previously mentioned pre-tax charges, as well as
the results of divested operations, operating companies income increased $114
million (1.0%) over the first nine months of 1998.
Currency movements have decreased operating revenues by $159 million and
operating companies income by $48 million during the first nine months of 1999.
Declines in operating revenues and operating companies income arising from the
strength of the U.S. dollar against the euro, Eastern European and Latin
American currencies have been partially offset by the recent weakness of the
U.S. dollar against the Japanese yen. Although the Company cannot predict future
movements in currency rates, the continued strength of the dollar against the
euro, Eastern European and Latin American currencies, if sustained, could have
an adverse impact on operating revenues and operating companies income for the
remainder of 1999. In addition, the
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Company's businesses in Eastern European and certain Latin American markets have
been adversely affected by economic instability in those areas. Although the
Company cannot predict future economic developments, the Company anticipates
that economic instability may continue to adversely affect its businesses in
those markets.
Interest and other debt expense, net, decreased $55 million (8.1%) in the first
nine months of 1999 from the comparable 1998 period. This decrease was due
primarily to higher interest income, lower average debt outstanding and lower
average interest rates on the Company's consumer products debt portfolio during
the first nine months of 1999.
Diluted and basic EPS, which were $2.41 and $2.42 respectively, for the first
nine months of 1999, increased by 15.3% and 15.2%, respectively, over the first
nine months of 1998. These results reflect the charges for the previously
discussed 1999 factory closure in Brazil, the 1999 and 1998 charges for
separation programs and the 1998 tobacco-related litigation settlement charges.
Excluding the after-tax impact of these items, net earnings increased 2.1% to
$6.1 billion, and diluted and basic EPS increased 3.3% and 2.8% to $2.53 and
$2.54, respectively.
Results of Operations for the Three Months Ended September 30, 1999
Operating revenues for the third quarter of 1999 increased $1.3 billion (6.9%)
over the comparable 1998 period, due primarily to domestic tobacco operations.
Excluding the revenues of several international food businesses divested since
1998, underlying operating revenues for the third quarter of 1999 increased 7.2%
over the third quarter of 1998.
Operating income for the third quarter of 1999 increased $14 million (0.4%) over
the comparable 1998 period. Third quarter 1999 operating income includes the
previously mentioned pre-tax charge of $136 million related to the closure of a
factory and the corresponding reduction of cigarette production capacity in
Brazil and $8 million for a portion of the cost of PM Inc. separation programs.
Operating income for the third quarter of 1998 includes pre-tax charges of $111
million related to settling tobacco litigation with the state of Florida and $10
million related to domestic tobacco voluntary early retirement and separation
programs. Excluding these pre-tax charges, as well as the results from
operations divested since the beginning of 1998, operating income for 1999
increased $39 million (1.1%) from the third quarter of 1998 due primarily to
higher operating income from the Company's North American food operations. On a
reported basis, operating companies income, which is defined as operating income
before general corporate expenses, minority interest and amortization of
goodwill, increased $42 million (1.1%) from the third quarter of 1998, due
primarily to higher operating results from North American food. Excluding the
previously mentioned pre-tax charges as well as the results of divested
operations, operating companies income increased $67 million (1.7%) from the
third quarter of 1998.
During the third quarter of 1999, currency movements decreased operating
revenues by $149 million ($102 million after excluding excise taxes) and
operating companies income by $22 million versus the comparable 1998 period.
Declines in operating revenues and operating companies income arising from the
strength of the U.S. dollar against the euro, Eastern European and Latin
American currencies have been partially offset by the recent weakness of the
U.S. dollar against the Japanese yen. Although the Company cannot predict future
movements in currency rates, the continued strength of the dollar against the
euro, Eastern European and Latin American currencies, if sustained, could have
an adverse impact on operating revenues and operating companies income for the
remainder of 1999.
Diluted and basic EPS, both of which were $0.84 for the third quarter of 1999,
increased by 3.7% over the third quarter of 1998. These results reflect the
charges for the previously discussed 1999 factory closure in Brazil, the 1999
and 1998 charges for separation programs and the 1998 tobacco-related litigation
settlements. Excluding the after-tax impact of these items, net earnings
increased 2.0% to $2.1 billion, and diluted and basic EPS increased 3.6% and
3.5% to $0.87 and $0.88, respectively.
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<PAGE>
Year 2000
As many computer systems and other equipment with embedded chips or processors
(collectively, "Business Systems") use only two digits to represent the year,
they may be unable to process accurately certain data before, during or after
the year 2000. 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 ("Y2K") or Century
Date Change ("CDC") issue. The CDC issue can arise at any point in the Company's
supply, manufacturing, processing, distribution and financial chains.
As described below, the Company and each of its operating subsidiaries have been
implementing a CDC readiness program with the objective of having all
significant Business Systems, including those that affect facilities and
manufacturing activities, functioning properly with respect to the CDC issue
before January 1, 2000, and have been taking other appropriate measures to
minimize possible disruptions to their business operations due to the CDC issue.
During the first phase of the CDC readiness program, those internal Business
Systems of the Company and its operating subsidiaries that are susceptible to
system failures or processing errors as a result of the CDC issue were
identified and assessed. This effort is complete.
The second phase of the CDC readiness program involves the actual remediation
and replacement of internal Business Systems and the testing and certification
of individual systems for CDC readiness. The Company and its operating
subsidiaries are using both internal and external resources to complete this
process. As of September 30, 1999, this effort, as well as integration testing
and certification (i.e., the testing and certification of the interfaces among
individual Business Systems previously certified as Year 2000 ready and the
testing and certification of certain external linkages between the Company's
systems with those of third parties) were essentially complete. Remaining
testing and certification efforts relate to the receipt by the Company and its
operating subsidiaries of "more compliant" software releases for programs
previously certified as Year 2000 ready by software vendors and others.
As part of the CDC readiness program, significant service providers, vendors,
suppliers, customers and governmental entities ("Key Business Partners") that
are believed to be critical to continuing business operations have been
identified and steps have been undertaken in an attempt to assess their stage of
CDC readiness through questionnaires, interviews, on-site visits and other
available means. This initial evaluation is complete, although the monitoring
and reassessment of certain Key Business Partners continues. With the exception
of certain utilities and governmental entities (particularly outside the United
States), the Company currently believes that the vast majority of Key Business
Partners are making acceptable progress toward Year 2000 readiness and, in
general, should be able to provide required goods and services without material
disruptions. However, as of September 30, 1999, the Company considered
approximately 250 of its more than 6,000 Key Business Partners to be higher
risk, or likely to suffer some Year 2000 related failures, of which
approximately 180 are located outside the United States. As discussed below,
contingency plans have been developed that seek to address these higher risk Key
Business Partners.
Because of the vast number of Business Systems used by the Company and its
operating subsidiaries, the significant number of Key Business Partners, and the
extent of the Company's foreign operations, including operations within
countries that are not actively promoting remediation of the CDC issue, the
Company presently believes that its operating subsidiaries will experience some
disruption in their businesses due to the CDC issue. Because of the
interdependent nature of Business Systems, the Company and its operating
subsidiaries could be materially adversely affected if utilities, private
businesses and governmental entities with which they do business or that provide
essential services are not CDC ready. The Company currently believes that the
greatest risks of disruption in its operating subsidiaries' businesses exist in
certain international markets and with respect to the CDC readiness of certain
Key Business Partners. Each of the
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<PAGE>
Company's operating subsidiaries has developed its own risk assessment of the
possible impact of the CDC issue on its business operations. The Company
currently believes that the most reasonably likely worst case scenario entails
some localized CDC disruptions that may affect individual facilities or
operations for short periods of time rather than long-term, systemic problems.
The possible consequences of these disruptions include temporary plant closings,
delays in the delivery of products, delays in the receipt of supplies, invoice
and collection errors, and inventory and supply obsolescence. Depending on the
number and severity of CDC-related disruptions, it is possible that the business
and results of operations of the Company and its operating subsidiaries could be
materially adversely affected by the CDC issue. However, the Company believes
that its CDC readiness program, including the contingency plans discussed below,
should reduce the adverse effect any such disruptions may have.
The Company and its operating subsidiaries have developed contingency plans
intended to mitigate the possible business disruptions that may result from the
CDC issue, and are continuing to evaluate and modify these plans as additional
information becomes available. Contingency plans fall into two categories:
"event-triggered" and "preemptive." Event-triggered plans are those that are
implemented in response to actual Year 2000 events or disruptions as they arise,
whereas preemptive strategies are those that are implemented in advance of 2000
in order to avoid or minimize the impact of anticipated or potential Year 2000
problems. The Company's event-triggered and preemptive contingency plans include
stockpiling raw, packaging and promotional materials; increasing finished goods
inventories at the operating company, wholesale and retail levels; adjusting the
timing of promotional programs; securing alternate sources of supply,
distribution and warehousing; adjusting facility shut-down and start-up
schedules; utilizing manual workarounds; procuring back-up power generators and
heat supply for key plants; and other appropriate measures. The Company
estimates that the anticipated increases in year-end inventories and trade
receivables contemplated by the Company's preemptive contingency plans will
likely result in incremental cash outflows during 1999 of approximately $600
million, which should be reversed in early 2000. In addition, the incremental
cost of the preemptive measures currently planned is estimated to be $75
million. The Company cannot reasonably estimate the aggregate cost of
implementing its event-triggered contingency plans, since such costs will depend
on the nature and extent of future Year 2000 events. However, it currently does
not believe that such costs, together with its preemptive contingency costs,
should have a material adverse effect on the Company's future consolidated
results of operations. However, in any given reporting period, such costs may be
a factor in describing changes in operating companies income for the Company's
business segments and the Company's cash flows.
In connection with the contingency planning process, the Company and its
operating subsidiaries are actively preparing for the transition management
phase of the CDC readiness program. Transition management refers to the process
to be used to recover from CDC-related errors and interruptions that may occur
before and after the actual transition to 2000. During the transition management
phase, there will be command and control structures in place to capture, direct
and track responses to CDC-related problems through to resolution. Transition
management teams also are preparing employees for the anticipated impact of Year
2000 issues on their roles and have developed communication plans for the
transition period covering both the method in which communications will be
conveyed (e.g., radio, cell phone, fax) and the content of communications.
It is currently estimated that the aggregate cost of the Company's CDC readiness
efforts will be approximately $550 million, of which approximately $500 million
have been spent. The remaining costs relate to the final testing and
certification of Business Systems and transition management efforts, including
incremental costs associated with transition management that will be incurred in
2000. Generally, the above costs are being expensed as they are incurred and are
being funded through operating cash flow. These cost estimates do not include
amounts associated with the implementation of preemptive contingency plans
(approximately $75 million as discussed above) or event-triggered contingency
plans. The costs associated with the replacement of computerized systems,
hardware or equipment (approximately $150 million), substantially all of which
have been capitalized, are also not included in the above estimates. Other
non-Year 2000 information technology projects have not been materially affected
by the Company's Year 2000 initiatives.
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<PAGE>
The Company's CDC readiness program is an ongoing process and the risk
assessments and estimates of costs and completion dates for various components
of the CDC readiness program described above are forward-looking statements and
are subject to change. Factors that may cause such changes include, among
others, the continued availability of qualified personnel and other information
technology resources; the ability to identify and remediate all date-sensitive
lines of computer code and embedded chips; the adequacy of testing protocols
employed by the Company; the performance of Business Systems certified Year 2000
compliant by manufacturers, suppliers and other third parties; the continuing
receipt of "more compliant" software releases for programs previously certified
as Year 2000 compliant by software vendors and others; the timely receipt and
installation of CDC-ready replacement systems; the actions of governmental
agencies, utilities and other third parties with respect to the Year 2000 issue;
the ability to implement contingency plans; and the occurrence of broad-based or
systemic economic failures.
Euro
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency--the euro. At that time, the euro began
trading on currency exchanges and could be used in financial transactions.
Beginning in January 2002, new euro-denominated currency (bills and coins) will
be issued, and legacy currencies will be withdrawn from circulation. The
Company's operating subsidiaries affected by the euro conversion have
established and, where required, implemented plans to address the systems and
business issues raised by the euro currency conversion. These issues include,
among others, (1) the need to adapt computer and other business systems and
equipment to accommodate euro-denominated transactions; and (2) the competitive
impact of cross-border price transparency, which may make it more difficult for
businesses to charge different prices for the same products on a
country-by-country basis, particularly once the euro currency is issued in 2002.
The euro conversion has not had, and the Company currently anticipates that it
will not have, a material adverse impact on its financial condition or results
of operations.
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, results of operations, cash flows and financial position of PM Inc.,
Philip Morris International Inc. ("PMI") and the Company.
These issues, some of which are more fully discussed below, include legislation
or other governmental action seeking to ascribe to the industry responsibility
and liability for the adverse health effects associated with both smoking and
exposure to environmental tobacco smoke ("ETS"); increased smoking and health
litigation and recent jury verdicts against PM Inc., including in Phase One of
the Engle class action trial discussed above in Note 5. Contingencies; the
filing of a civil lawsuit by the U.S. federal government against various
cigarette manufacturers and others discussed above in Note 5. Contingencies;
price increases in the United States related to the settlement of certain
tobacco litigation; actual and proposed excise tax increases; an increase in
diversion into the United States market of product intended for sale outside the
United States; the issuance of final regulations by the United States Food and
Drug Administration (the "FDA") that, if upheld by the courts, would regulate
cigarettes as "drugs" or "medical devices"; governmental and grand jury
investigations; actual and proposed requirements regarding disclosure of
cigarette ingredients and other proprietary information; governmental and
private bans and restrictions on smoking; actual and proposed price controls and
restrictions on imports in certain jurisdictions outside the United States;
actual and proposed restrictions affecting tobacco manufacturing, marketing,
advertising and sales outside the United States; proposed legislation to
eliminate the U.S. tax
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<PAGE>
deductibility of tobacco advertising and promotional costs; proposed legislation
in the United States to require the establishment of ignition propensity
performance standards for cigarettes; the diminishing social acceptance of
smoking and increased pressure from anti-smoking groups and unfavorable press
reports; and other tobacco legislation that may be considered by the Congress,
the states and other jurisdictions inside and outside the United States.
Excise Taxes: Cigarettes are subject to substantial federal and state excise
taxes in the United States and to similar taxes in most foreign markets. The
United States federal excise tax on cigarettes is currently $0.24 per pack of 20
cigarettes and is scheduled to increase to $0.34 per pack on January 1, 2000 and
then to $0.39 per pack on January 1, 2002. In general, excise taxes and other
taxes on cigarettes 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 in the United States. Congress has
been considering significant increases in the federal excise tax or other
payments from tobacco manufacturers, and the Clinton Administration's fiscal
year 2000 budget proposal includes an additional increase of $0.55 per pack in
the federal excise tax. Increases in other cigarette-related taxes have been
proposed at the state and local level and in many jurisdictions outside the
United States.
In the opinion of PM Inc. and PMI, 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 cigarette
industry, including PM Inc. and PMI, and might cause sales to shift from the
premium segment to the discount segment.
Federal Trade Commission ("FTC"): In September 1997, the FTC issued a request
for public comments on its proposed revision of its "tar" and nicotine test
methodology and reporting procedures established by a 1970 voluntary agreement
among domestic cigarette manufacturers. In February 1998, PM Inc. and three
other domestic cigarette manufacturers filed comments on the proposed revisions.
In November 1998, the FTC wrote to the Department of Health and Human Services
requesting its assistance in developing specific recommendations on the future
of the FTC's program for testing the "tar," nicotine and carbon monoxide content
of cigarettes.
FDA Regulations: The FDA has promulgated regulations asserting jurisdiction over
cigarettes as "drugs" or "medical devices" under the provisions of the Food,
Drug and Cosmetic Act. These 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. 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
regulations, and could materially adversely affect the business, volume, results
of operations, cash flows and financial position of PM Inc. and the Company. In
August 1998, the Fourth Circuit Court of Appeals ruled that the FDA does not
have the authority to regulate tobacco products, and declared the FDA's
regulations invalid. In April 1999, the U.S. Supreme Court agreed to review the
Fourth Circuit's decision and oral argument is scheduled for December 1, 1999.
The ultimate outcome of this litigation cannot be predicted.
Ingredient Disclosure Laws: The Commonwealth of Massachusetts has enacted
legislation to require cigarette manufacturers to report yearly the flavorings
and other ingredients used in each brand style of cigarettes sold in the
Commonwealth, and on a qualified, by-brand basis to provide "nicotine-yield
ratings" for their products based on standards established by the Commonwealth.
Enforcement of the ingredient disclosure provisions of the statute could result
in the public disclosure of valuable proprietary information. In December 1997,
a federal district court in Boston granted the tobacco company plaintiffs a
preliminary injunction and enjoined the Commonwealth from enforcing the
ingredient disclosure provisions of the legislation. In November 1998, the First
Circuit Court of Appeals affirmed this ruling. In addition, both parties'
cross-motions for summary judgment are pending before the district court. The
ultimate outcome of this lawsuit cannot be predicted. Similar
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<PAGE>
legislation has been enacted or proposed in other states. Some jurisdictions
outside the United States have also enacted or proposed some form of ingredient
disclosure legislation or regulation.
Health Effects of Smoking and Exposure to ETS: Reports with respect to the
health risks of cigarette smoking have been publicized for many years, and the
sale, promotion and use of cigarettes continue to be subject to increasing
governmental regulation. Since 1964, the Surgeon General of the United States
and the Secretary of Health and Human Services have released a number of reports
linking cigarette smoking with a broad range of health hazards, including
various types of cancer, coronary heart disease and chronic lung disease, and
recommending various governmental measures to reduce the incidence of smoking.
The 1988, 1990, 1992 and 1994 reports focus upon the addictive nature of
cigarettes, the effects of smoking cessation, the decrease in smoking in the
United States, the economic and regulatory aspects of smoking in the Western
Hemisphere, and cigarette smoking by adolescents, particularly the addictive
nature of cigarette smoking in adolescence.
Studies with respect to the health risks of ETS to nonsmokers (including lung
cancer, respiratory and coronary illnesses, and other conditions) have also
received significant publicity. In 1986, the Surgeon General of the United
States and the National Academy of Sciences reported that nonsmokers were at
increased risk of lung cancer and respiratory illness due to ETS. In 1993, the
United States Environmental Protection Agency (the "EPA") issued a report
relating to certain health effects of ETS. The report included a risk assessment
relating to the association between ETS and lung cancer in nonsmokers, and a
determination by the EPA to classify ETS as a "Group A" carcinogen. In July
1998, a federal district court vacated those sections of the report relating to
lung cancer, finding that the EPA may have reached different conclusions had it
complied with certain relevant statutory requirements. The federal government
has appealed the court's ruling. The ultimate outcome of this litigation cannot
be predicted.
In October 1997, at the request of the United States Senate Judiciary Committee,
the Company 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 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 October 1999, the Company launched a web site which includes, among other
things, views of public health authorities on smoking, disease causation in
smokers and addiction. Consistent with the Company's position set forth in its
October 1997 submission to the United States Senate Judiciary Committee
(discussed above), the web site advises smokers and potential smokers to rely on
the messages of public health authorities in making all smoking related
decisions. The site furthers the Company's efforts to implement this position.
Other Legislative Initiatives: In recent years, various members of Congress have
introduced legislation, some of which has been the subject of hearings or floor
debate, that would subject cigarettes to various regulations under the
Department of Health and Human Services or regulation under the Consumer
Products Safety Act, establish anti-smoking educational campaigns or
anti-smoking programs, or provide additional funding for governmental
anti-smoking activities, further restrict the advertising of cigarettes,
including requiring additional warnings on packages and in advertising,
eliminate or reduce the tax deductibility of tobacco advertising, provide that
the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act
not be used as a defense against liability under state statutory or common law,
and allow state and local governments to restrict the sale and distribution of
cigarettes. Legislative initiatives adverse to the tobacco industry have also
been considered in a number of jurisdictions outside the United States.
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It is not possible to determine the outcome of the FDA regulatory initiative or
the related litigation discussed above, or to predict what, if any, other
foreign or domestic governmental legislation or regulations will be adopted
relating to the manufacturing, advertising, sale or use of cigarettes, or to the
tobacco industry generally. However, if any or all of the foregoing were to be
implemented, the business, volume, results of operations, cash flows and
financial position of PM Inc., PMI and the Company could be materially adversely
affected.
Governmental and Grand Jury Investigations: 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. Present and former employees of PM Inc. have testified in connection
with certain of these matters. The investigations include three grand jury
investigations being conducted by: the United States Department of Justice
Antitrust Division in the Eastern District of Pennsylvania relating to tobacco
leaf purchases; the United States Attorney for the Northern District of New York
relating to alleged contraband transactions primarily in Canadian-brand tobacco
products; and the United States Attorney for the Western District of New York
apparently relating to the sale of cigarettes by third parties upon which state
taxes had allegedly not been paid. PMI and its subsidiary, Philip Morris Duty
Free Inc., have also received subpoenas in connection with the investigation
being conducted by the United States Attorney for the Northern District of New
York. While the outcomes of these investigations cannot be predicted, PM Inc.,
PMI and Philip Morris Duty Free Inc. believe they have acted lawfully.
In September 1999, the United States Department of Justice announced that it had
concluded its investigation of matters relating to issues raised in testimony
provided by tobacco industry executives before Congress in 1994 and other
related matters, and that the investigation is closed.
Tobacco-Related Litigation: There is substantial litigation pending related to
tobacco products in the United States and certain foreign jurisdictions,
including a civil health care cost recovery action filed by the United States
Department of Justice in September 1999 against domestic tobacco manufacturers
and others, including the Company and PM Inc. (See Note 5. Contingencies, above
for a discussion of such litigation.)
State Settlement Agreements: As discussed in Note 5. Contingencies, during 1997
and 1998, PM Inc. and other major domestic tobacco product manufacturers entered
into agreements with states and various U.S. jurisdictions settling asserted and
unasserted health care cost recovery and other claims. These settlements provide
for substantial annual payments. They also place numerous restrictions on the
tobacco industry's conduct of its business operations, including restrictions on
the advertising and marketing of cigarettes. Among these are restrictions or
prohibitions on the following: targeting youth; use of cartoon characters; use
of brand name sponsorships and brand name non-tobacco products; outdoor and
transit brand advertising; payments for product placement; and free sampling. In
addition, the settlement agreements require companies to affirm corporate
principles to reduce underage use of cigarettes; impose requirements regarding
lobbying activities; mandate public disclosure of certain industry documents;
limit the industry's ability to challenge certain tobacco control and underage
use laws; and provide for the dissolution of certain tobacco-related trade
associations and place restrictions on the establishment of any replacement
organizations.
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Operating Results
For the Nine Months Ended September 30,
----------------------------------------------
Operating
Operating Revenues Companies Income
-------------------- --------------------
(in millions)
1999 1998 1999 1998
------- ------- ------- -------
Domestic tobacco $14,352 $11,204 $ 3,436 $ 2,340
International tobacco 21,419 21,253 3,922 4,044
------- ------- ------- -------
Total tobacco $35,771 $32,457 $ 7,358 $ 6,384
======= ======= ======= =======
Historical operating revenues and operating companies income for the domestic
tobacco and international tobacco operations were reclassified to reflect the
transfer of tobacco sales in certain U.S. territories from the international
tobacco business to the domestic tobacco business, consistent with the terms of
PM Inc.'s settlements of state health care cost recovery and other claims.
Domestic tobacco. During the first nine months of 1999, PM Inc.'s operating
revenues increased $3.1 billion (28.1%) over the comparable 1998 period, due
primarily to pricing ($4.3 billion), partially offset by lower volume ($1.1
billion).
During February 1999, PM Inc. announced plans to phase out cigarette production
at its Louisville plant. As a result, during the first nine months of 1999, PM
Inc. recorded pre-tax charges of $183 million, principally for the cost of
separation programs covering approximately 1,500 employees. During the first
nine months of 1998, PM Inc. recorded pre-tax charges of $319 million related to
separation programs and $1,116 million related to tobacco litigation settlements
with the states of Minnesota, Mississippi, Texas and Florida.
Operating companies income for the first nine months of 1999 increased $1.1
billion (46.8%) over the comparable 1998 period, due primarily to lower pre-tax
tobacco litigation settlement charges ($1,116 million), price increases, net of
cost increases ($1,114 million) and lower pre-tax charges for separation
programs ($136 million), partially offset by lower volume ($789 million) and
higher marketing, administration and research costs ($496 million, primarily
increased marketing related to consumer promotions). Excluding the impact of the
1998 tobacco litigation settlement charges and the separation programs in each
year, PM Inc.'s operating companies income of $3,619 million for the first nine
months of 1999 decreased 4.1% from $3,775 million during the comparable 1998
period.
Domestic tobacco industry shipment volume during the first nine months of 1999
declined 9.8% from the first nine months of 1998 primarily as a result of
settlement-related price increases and the trade's decisions to lower
inventories. PM Inc.'s shipment volume for the first nine months of 1999 was
155.8 billion units, a decrease of 9.9% from the comparable 1998 period, and its
shipment market share declined 0.1 share points to 49.5%. PM Inc. estimates that
its year-to-date shipments were adversely affected by the factors mentioned
above and by an unfavorable comparison to the corresponding period last year
when shipments were higher in advance of fourth-quarter consumer promotions.
Excluding the effects of the trade's decisions to lower its inventories and the
timing of shipments for consumer promotions, PM Inc. estimates that its volume
would have decreased by approximately 8.2% and that its shipment market share
would have increased by 0.5 share points to 49.7%. Marlboro shipment volume
declined 10.1 billion units (8.1%) from the first nine months of 1998 to 114.0
billion units for a 36.2% share of the total industry, an increase of 0.7 share
points over the comparable period of 1998.
Based on shipments, the premium segment accounted for approximately 73.4% of the
domestic cigarette industry volume in the first nine months of 1999, an increase
of 0.1 share points over the comparable period of 1998. In the premium segment,
PM Inc.'s volume decreased 8.6% during the first nine months of 1999, compared
with a 9.6% decrease for the industry, resulting in a premium segment share of
59.3%, an increase of 0.7 share points over the first nine months of 1998.
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<PAGE>
In the discount segment, PM Inc.'s shipments decreased 18.4% to 18.8 billion
units in the first nine months of 1999, compared with an industry decline of
10.2%, resulting in a discount segment share of 22.5%, a decrease of 2.3 share
points from the comparable period of 1998. Basic shipment volume for the first
nine months of 1999 was down 12.8% to 15.2 billion units, for an 18.1% share of
the discount segment, a decrease of 0.6 share points from the comparable 1998
period.
PM Inc. cannot predict future change or rates of change in domestic tobacco
industry volume, 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 may be materially adversely affected by price
increases related to tobacco litigation settlements and, if enacted, by
increased excise taxes or other tobacco legislation discussed under
"Tobacco--Business Environment" above.
In August 1999, PM Inc. announced a price increase of $9.00 per thousand
cigarettes on its domestic premium and discount brands. This followed similar
price increases of $22.50 per thousand in November 1998, $3.00 per thousand in
July 1998, $2.50 per thousand in May 1998, $2.50 per thousand in April 1998 and
$1.25 per thousand in January 1998. Each $1.00 per thousand increase by PM Inc.
equates to a $0.02 increase in the price to wholesalers of each pack of twenty
cigarettes.
In December 1998, PM Inc. paid $150 million for options to purchase the U.S.
rights to manufacture and market three cigarette trademarks, L&M, Lark and
Chesterfield, the international rights to which are already owned by PMI. During
the second quarter of 1999, PM Inc. substantially completed its acquisition of
these trademarks. Including the $150 million paid in December, the total
acquisition price for these trademarks was approximately $300 million.
International tobacco. During the first nine months of 1999, international
tobacco operating revenues, including excise taxes, increased $166 million
(0.8%) over the first nine months of 1998. Excluding excise taxes, operating
revenues decreased $370 million (3.3%) due primarily to unfavorable volume/mix
($462 million), partially offset by price increases ($138 million). Operating
companies income for the first nine months of 1999 decreased $122 million (3.0%)
from the comparable 1998 period due primarily to the pre-tax charge related to
the closure of a factory and the corresponding reduction of cigarette production
capacity in Brazil ($136 million) and unfavorable volume/mix ($181 million),
partially offset by price increases and favorable costs ($185 million).
Excluding the impact of the pre-tax charge related to Brazil, operating
companies income of $4,058 million for the first nine months of 1999 increased
0.3% over $4,044 million during the comparable 1998 period.
PMI's volume decreased 44.5 billion units (7.8%) from the first nine months of
1998 to 524.5 billion units. In its core markets of Western Europe and Japan,
PMI's volume collectively rose 5.2%. However, these gains were more than offset
by a 34.2% aggregate volume decline in the lower-margin markets of Russia and
the rest of Eastern Europe, reflecting weaker economic conditions, as well as
lower worldwide duty-free shipments. Volume advanced in a number of important
markets, including Germany, Italy, France, Spain, Portugal, the Benelux and
Scandinavian countries, Austria, Romania, Egypt, Turkey, Japan and Mexico. In
Asia, PMI recorded higher volume in the markets of Korea, Singapore, Malaysia
and Thailand. PMI recorded market share gains in virtually all of its major
markets. In Germany, share was slightly lower despite higher shipments. Volume
for Marlboro declined 1.7%, as weakness in Eastern Europe and worldwide
duty-free shipments more than offset volume gains in many of PMI's major
markets. Excluding Eastern Europe and worldwide duty-free markets, Marlboro
volume rose 3.9%.
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<PAGE>
For the Three Months Ended September 30,
----------------------------------------------
Operating
Operating Revenues Companies Income
-------------------- --------------------
(in millions)
1999 1998 1999 1998
------- ------- ------- -------
Domestic tobacco $ 5,157 $ 4,142 $ 1,367 $ 1,279
International tobacco 7,153 6,979 1,239 1,374
------- ------- ------- -------
Total tobacco $12,310 $11,121 $ 2,606 $ 2,653
======= ======= ======= =======
Historical operating revenues and operating companies income for the domestic
tobacco and international tobacco operations were reclassified to reflect the
transfer of tobacco sales in certain U.S. territories from the international
tobacco business to the domestic tobacco business, consistent with the terms of
PM Inc.'s settlements of state health care cost recovery and other claims.
Domestic tobacco. During the third quarter of 1999, PM Inc.'s operating revenues
increased $1.0 billion (24.5%) over the comparable 1998 period, due primarily to
pricing ($1.5 billion), partially offset by lower volume ($457 million).
Operating companies income for the third quarter of 1999 increased $88 million
(6.9%) from the comparable 1998 period, due to price increases, net of cost
increases (aggregating to $357 million) and 1998 pre-tax tobacco litigation
settlement charges ($111 million), partially offset by lower volume ($324
million) and higher marketing, administration and research costs ($46 million,
primarily increased marketing related to consumer promotions). Excluding the
impact of previously discussed charges for voluntary early retirement and
separation programs and tobacco litigation settlements, PM Inc.'s operating
companies income of $1,375 million for the third quarter of 1999 decreased $25
million (1.8%) from $1,400 million during the comparable 1998 period.
Domestic tobacco industry shipment volume during the third quarter declined 9.3%
from the comparable 1998 period, primarily as a result of settlement-related
price increases. PM Inc.'s shipment volume for the third quarter of 1999 was
54.8 billion units, a decrease of 10.6% from the third quarter of 1998. PM
Inc.'s shipment decline was driven by settlement-related price increases and by
the timing and nature of promotional activities in the corresponding period last
year when shipments were higher in advance of fourth-quarter Marlboro consumer
promotions. PM Inc.'s third quarter 1999 shipment market share was 49.3%, a
decline of 0.7 share points from the comparable period of 1998. However, PM Inc.
estimates that, after adjusting for the timing and nature of last year's
consumer promotions, its shipment share grew 0.1 share points to 49.5%. Third
quarter Marlboro shipment volume decreased 4.8 billion units (10.8%) to 39.6
billion units for a 35.7% share of the total industry, a decrease of 0.6 share
points from the third quarter of 1998. After adjusting for the timing and nature
of the 1998 Marlboro promotions mentioned above, PM Inc. estimates that the
brand's shipment share grew 0.2 percentage points.
Based on shipments, the premium segment accounted for approximately 73.1% and
73.9% of domestic cigarette industry volume in the third quarter of 1999 and
1998, respectively, the decrease from 1998 reflecting the previously mentioned
impact of the timing and nature of promotional activities. In the premium
segment, PM Inc.'s third quarter volume decreased 10.3%, equal to the decrease
for the industry. PM Inc.'s premium segment share was 59.0% during the third
quarters of 1999 and 1998.
In the discount segment, PM Inc.'s third quarter shipments decreased 12.7% to
6.8 billion units in 1999, compared with an industry decline of 6.5%, resulting
in a discount segment share of 22.9%, a decrease of 1.6 share points from the
comparable period of 1998. Basic third quarter shipment volume decreased 310
million units to 5.7 billion units, for a 19.0% share of the discount segment,
an increase of 0.3 share points from the comparable 1998 period.
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<PAGE>
PM Inc. cannot predict future change or rates of change in domestic tobacco
industry volume, 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 may be materially adversely affected by price
increases related to tobacco litigation settlements and, if enacted, by
increased excise taxes or other tobacco legislation discussed under
"Tobacco--Business Environment" above.
International tobacco. During the third quarter of 1999, international tobacco
operating revenues of PMI, including excise taxes, increased $174 million (2.5%)
from 1998. Excluding excise taxes, operating revenues decreased $52 million
(1.4%) from 1998, due primarily to unfavorable volume/mix ($90 million),
partially offset by price increases ($61 million). Operating companies income
for the third quarter of 1999 decreased $135 million (9.8%) from the comparable
1998 period due primarily to the pre-tax charge related to the closure of a
factory and the corresponding reduction of cigarette production capacity in
Brazil ($136 million). Excluding the impact of the pre-tax charges related to
Brazil, operating companies income of $1,375 million for the third quarter of
1999 increased slightly from $1,374 million during the comparable 1998 period.
PMI's volume in the third quarter of 1999 decreased 10.8 billion units (5.8%)
from the comparable 1998 period to 174.9 billion units. In its core markets of
Western Europe and Japan, PMI's volume collectively rose 5.5%. However, these
gains were more than offset by a 31.7% aggregate volume decline in the
lower-margin markets of Russia and the rest of Eastern Europe, reflecting weaker
economic conditions, as well as lower worldwide duty-free volume. Volume
advanced in a number of important markets, including Germany, Italy, France,
Portugal, the Benelux and Scandinavian countries, Austria, Romania, Egypt,
Japan, Australia and Mexico. In Asia, PMI continued to see volume recovery in a
number of key markets. Double-digit volume gains were recorded in Korea,
Malaysia, Thailand and Indonesia, and volume also advanced in the Philippines.
PMI recorded market share gains in virtually all of its major markets. In
Germany, share was slightly lower despite higher shipments. Volume for Marlboro
declined 1.3% for the third quarter of 1999, as weakness in Eastern Europe and
worldwide duty-free more than offset volume gains in many of PMI's major
markets. Excluding Eastern Europe and worldwide duty-free shipments, Marlboro
volume rose 5.1%.
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, including a trend toward increasing
consolidation in the retail trade and changing consumer preferences.
Additionally, 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.
Fluctuations in commodity costs can cause retail price volatility, intensify
price competition and influence consumer and trade buying patterns. The North
American and international food businesses are subject to fluctuating commodity
costs, particularly dairy, coffee bean and cocoa prices. During the second half
of 1998, the cost of certain United States dairy commodities reached record high
levels. Dairy commodity costs moderated during the first half of 1999, increased
briefly during the beginning of the third quarter of 1999 and have subsequently
begun to moderate again. Coffee bean prices were lower during 1998 and the first
nine months of 1999 after reaching a twenty-year high in May 1997. Lower coffee
bean prices have led to price reductions by Kraft, KFI and their competitors.
More recently, cocoa prices have also declined.
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<PAGE>
During the first nine months of 1999, Kraft recorded a pre-tax charge of
approximately $157 million, primarily for voluntary separation programs covering
approximately 1,100 employees.
During the latter part of the second quarter, the Belgian government and the
European Union banned the sale of poultry, poultry-derived products, beef, pork
and their derivative products produced in Belgium. The ban resulted from the
discovery in Belgium of dioxin contamination in animal feed. In some cases,
local European regulatory agencies were reluctant to allow products sourced from
Belgium to be sold, even though they were properly certified as safe. Although
none of KFI's products were contaminated, in the ensuing political, media and
consumer uncertainty, some of KFI's products in several countries were affected
by delays in production and transportation from plants to the trade.
During 1999 and 1998, KFI sold several small international food businesses. The
operating results of businesses divested were not material to consolidated
operating results in any of the periods presented. Also during 1998, Kraft
entered into a licensing agreement with the Starbucks coffee chain to market,
sell and distribute Starbucks coffee to grocery customers across the United
States. In addition, Kraft entered into a licensing agreement with the
California Pizza Kitchen restaurant chain to manufacture, market and sell
California Pizza Kitchen frozen pizza to grocery customers. Neither of these
agreements had a material impact on Kraft's 1999 operating results.
Operating Results
For the Nine Months Ended September 30,
----------------------------------------------
Operating
Operating Revenues Companies Income
-------------------- --------------------
(in millions)
1999 1998 1999 1998
------- ------- ------- -------
North American food $13,193 $12,921 $ 2,404 $ 2,408
International food 6,601 7,115 785 769
------- ------- ------- -------
Total food $19,794 $20,036 $ 3,189 $ 3,177
======= ======= ======= =======
North American food. During the first nine months of 1999, operating revenues
increased $272 million (2.1%) from the first nine months of 1998, due primarily
to higher volume ($176 million) and favorable pricing ($129 million), partially
offset by unfavorable currency movements. Operating companies income for the
first nine months of 1999 decreased $4 million (0.2%) from the first nine months
of 1998, due primarily to a 1999 pre-tax charge for voluntary separation
programs ($157 million) and higher marketing, administration and research costs
($174 million, the majority of which related to higher marketing expense),
partially offset by favorable net pricing (aggregating $263 million, driven by
lower manufacturing and commodity-related costs) and higher volume ($102
million). Excluding the impact of the pre-tax charge for voluntary separation
programs, operating companies income of $2,561 million in 1999 increased 6.4%
over $2,408 million for the first nine months of 1998.
Volume for the first nine months of 1999 increased over the comparable 1998
period. Volume gains were achieved by beverages, from the strength of
ready-to-drink products, powdered soft drinks and new product introductions;
frozen pizza, resulting from the continued success of rising crust pizza; meals,
primarily as a result of new product introductions during the second half of
1998; processed meats and cheese, each reporting increases across most product
categories; coffee, resulting from volume and share gains across its businesses
and the continued rollout of Starbucks coffee to grocery customers; and desserts
and snacks, from growth in frozen toppings and two-compartment snacks.
Offsetting the previously mentioned volume gains were volume declines in
enhancers, with lower shipments of spoonable dressings; and cereals, due to
aggressive competitive activity. In Canada, volume declined due to retailers'
decisions to lower their inventories, as well as aggressive competitive activity
in cheese.
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<PAGE>
International food. Operating revenues for the first nine months of 1999
decreased $514 million (7.2%) from the first nine months of 1998, due to lower
pricing ($223 million, primarily due to the effect of lower coffee commodity
costs), unfavorable volume/mix ($81 million), unfavorable currency movements
($121 million) and the impact of divestitures ($89 million). Operating companies
income for the first nine months of 1999 increased $16 million (2.1%) from the
first nine months of 1998, due primarily to favorable net pricing (aggregating
to $130 million, primarily related to lower commodity costs), partially offset
by higher marketing, administration and research costs ($86 million) and
unfavorable currency movements. Excluding the operating results of the
international food businesses divested in 1998 and 1999, operating revenues of
$6,549 million in the first nine months of 1999 decreased $425 million (6.1%)
from $6,974 million in 1998, driven by commodity-led price decreases, and
operating companies income of $784 million in 1999 increased $22 million (2.9%)
over $762 million in the first nine months of 1998.
KFI's coffee volume decreased from the comparable period of 1998, reflecting
continued price competition in Germany and wholesaler-driven trade inventory
reductions in Sweden. Despite an overall decrease in coffee volume, KFI
registered share gains in roast and ground coffee in France, Sweden, Denmark,
Austria and Spain. Confectionery volume was down due to the continued weak
business conditions in Russia and other parts of Eastern Europe, as well as
recent warmer than usual weather across Europe. However, KFI's chocolate tablet
shares were up in France, Italy, Austria, Sweden, Belgium and Norway, and
confectionery volume outside Eastern Europe benefited from new products and line
extensions. Volume grew in KFI's cheese and grocery business, driven by volume
and share advances in cream cheese products in Italy and Australia; lunch
combinations volume in the United Kingdom and Germany; spoonable dressings
volume in Germany; and powdered soft drink volume in the Middle East, Africa,
China and the Philippines. In Latin America, volume declined from the comparable
period of 1998 due primarily to lower confectionery shipments in Brazil and
lower powdered soft drink volume in Argentina, partially offset by higher
powdered soft drink volume in Brazil and higher mayonnaise and cheese volume in
Mexico.
For the Three Months Ended September 30,
----------------------------------------------
Operating
Operating Revenues Companies Income
-------------------- --------------------
(in millions)
1999 1998 1999 1998
------ ------ ------ ------
North American food $4,171 $4,016 $ 773 $ 722
International food 2,155 2,310 264 262
------ ------ ------ ------
Total food $6,326 $6,326 $1,037 $ 984
====== ====== ====== ======
North American food. During the third quarter of 1999, operating revenues
increased $155 million (3.9%) over the third quarter of 1998, due primarily to
higher volume ($120 million) and favorable pricing ($52 million). Operating
companies income for the third quarter of 1999 increased $51 million (7.1%)
over the third quarter of 1998, due primarily to volume increases in ongoing
operations ($66 million) and favorable net pricing ($38 million), partially
offset by higher marketing, administration and research costs ($42 million, the
majority of which related to higher marketing expense).
Volume for the third quarter of 1999 increased over the comparable 1998 period.
Volume gains were achieved by beverages, led by the continued success of
ready-to-drink products and new product introductions; coffee, resulting from
volume and share gains across its businesses and the continued rollout of
Starbucks to grocery customers; meals, driven by volume gains in macaroni and
cheese and dinner kits; frozen pizza, resulting from the continued success of
all of its major product lines; desserts and snacks, on gains from frozen
toppings, confectionery mints and two-compartment snacks; processed meats, led
by the growth of lunch combinations, which reflected the continued success of
new product introductions, and by increases in hot dogs, bacon and pickles;
cheese, with gains in a number of product lines including sandwich cheese,
recipe cheese and cottage cheese, as well as new product introductions; cereals,
despite an intense competitive environment, driven by new product introductions;
and enhancers, due to continued volume and share gains in
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<PAGE>
barbecue sauce, as well as strong performance from new salad dressing products.
Volume declined in Canada as a result of continued aggressive competitive
activity in the cheese business as well as lower shipments to food service
customers.
International food. Operating revenues for the third quarter of 1999 decreased
$155 million (6.7%) from the third quarter of 1998, due to lower pricing ($70
million, primarily due to the effect of lower coffee commodity costs),
unfavorable currency movements ($68 million) and the impact of divestitures ($47
million), partially offset by favorable volume/mix ($30 million). Operating
companies income for the third quarter of 1999 increased $2 million (0.8%) from
the third quarter of 1998, due primarily to favorable net pricing (aggregating
to $59 million, primarily related to lower commodity costs) essentially offset
by higher marketing, administration and research costs ($57 million). Excluding
the operating results of the international food businesses divested in 1998 and
1999, operating revenues of $2,155 million in the third quarter of 1999
decreased $108 million (4.8%) from $2,263 million in 1998, and operating
companies income of $264 million in 1999 increased $4 million (1.5%) from $260
million in the third quarter of 1998.
KFI's coffee volume was up despite soft industry volume in Europe, reflecting
strengthened marketing in Germany and Austria, as well as new soluble coffee
introductions in the United Kingdom and Spain. KFI's roast and ground coffees
gained share in many key markets, including France, Sweden, Denmark, Austria and
Spain. In confectionery, European industry volume was down, reflecting an
unusually warm summer and the impact of the Belgian dioxin issue. These external
factors, combined with the continued economic softness in Russia, negatively
affected KFI's confectionery volume. However, confectionery volume did benefit
from successful new product launches in several countries and shares were up in
most markets, including chocolate tablet shares in France, Italy, Austria,
Sweden, Belgium and Norway. Volume grew in KFI's cheese and grocery business,
benefiting from positive trends in several key markets, including Germany, the
United Kingdom, Spain and the Middle East. KFI continued its expansion of lunch
combinations products across Europe, with recent introductions in France. In
Australia, KFI reported share gains in cream cheese, process cheese slices and
spoonable and pourable dressings, and it successfully launched a line of
ready-to-eat snack products in cheese, peanut butter and Vegemite varieties.
Powdered soft drinks continued to perform well with strong volume in the
developing markets of China, Turkey, the Middle East, Poland and Bulgaria. In
Latin America, powdered soft drinks performed well in Brazil and Puerto Rico,
and mayonnaise and cheese volumes were higher in Mexico. However, operating
companies income in Latin America was unfavorably affected by lower powdered
soft drink volume in Argentina and unfavorable currency movements.
Beer
During April 1999, Miller Brewing Company ("Miller") purchased four trademarks
from the Pabst Brewing Company ("Pabst") and the Stroh Brewery Company
("Stroh"). Miller also agreed to increase its contract manufacturing of Pabst
products, including brands that Pabst acquired from Stroh in a separate
agreement. Miller began brewing and shipping the newly acquired brands during
the second quarter of 1999. In September 1999, Miller assumed ownership of the
former Pabst brewery in Tumwater, Washington as part of these agreements. Miller
expects to upgrade the brewery and purchase new equipment to increase the
brewery's capacity and efficiency. These agreements are expected to have a
positive impact on Miller's revenues and operating companies income for the
remainder of 1999.
Miller's license agreement for the rights to brew and sell Lowenbrau in the
United States expired on September 30, 1999. The expiration of this agreement is
not expected to have a material impact on Miller's future operating revenues and
operating companies income.
Nine Months Ended September 30
Miller's operating revenues for the first nine months of 1999 increased $114
million (3.5%) over the first nine months of 1998, due primarily to the
previously mentioned newly acquired brands and contract manufacturing
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<PAGE>
fees. Operating companies income for the first nine months of 1999 increased $50
million (12.4%) over the first nine months of 1998, due primarily to favorable
pricing and product costs and the impact of previously mentioned newly acquired
brands and contract manufacturing fees, partially offset by lower base volume.
Miller's domestic shipment volume of 33.6 million barrels for the first nine
months of 1999 increased 2.3% from the comparable 1998 period, reflecting the
commencement of shipments of the newly acquired brands (Olde English 800,
Hamm's, Mickey's and Henry Weinhard's). Excluding the shipments of the acquired
brands, domestic shipment volume declined 0.9% from the first nine months of
1998, reflecting lower domestic shipments of premium brands, primarily Miller
Genuine Draft and Molson, partially offset by increases for Icehouse, Foster's
and Miller Lite. Domestic shipments of near-premium products increased on higher
shipments of Miller High Life, while budget brand products decreased on lower
shipments across all brands. Wholesalers' sales to retailers in the first nine
months of 1999 decreased 0.5% from the comparable 1998 period, excluding the
acquired brands. This decline was due primarily to lower sales of Miller Genuine
Draft, Molson and the Milwaukee's Best franchise, partially offset by a
double-digit increase for Icehouse and higher sales of Foster's, Miller Lite and
Miller High Life.
Three Months Ended September 30
Miller's operating revenues for the third quarter of 1999 increased $82 million
(7.7%) over the third quarter of 1998, due primarily to the previously mentioned
newly acquired brands and contract manufacturing fees. Operating companies
income for the third quarter of 1999 increased $22 million (18.6%) over the
third quarter of 1998, due primarily to favorable pricing and product costs and
the impact of previously mentioned newly acquired brands and contract
manufacturing fees.
Miller's domestic shipment volume of 11.5 million barrels for the third quarter
of 1999 increased 4.2% over the comparable 1998 period, reflecting the
commencement of shipments of the acquired brands. Excluding the acquired brands,
domestic shipment volume declined 0.8% from the third quarter of 1998,
reflecting shipments of premium brands, primarily Miller Genuine Draft,
Lowenbrau and Molson, partially offset by increased domestic shipments of Miller
Lite, Icehouse and Foster's. Domestic shipments of near-premium products
increased slightly on higher shipments of Miller High Life, while budget brand
products decreased on lower shipments across all brands. Wholesalers' sales to
retailers in the third quarter of 1999 decreased 1.2% from the comparable 1998
period, excluding the acquired brands. This decrease was due primarily to lower
retail sales of Miller Genuine Draft, Milwaukee's Best and Molson, partially
offset by higher sales of Miller Lite, Miller High Life, Icehouse and Foster's.
Financial Services
Philip Morris Capital Corporation's ("PMCC") financial services operating
revenues and operating companies income for the first nine months of 1999
increased $51 million (24.5%) and $31 million (22.6%), respectively, over the
comparable 1998 period. During the third quarter of 1999, operating revenues and
operating companies income increased $20 million (29.0%) and $14 million
(31.8%), respectively, over the third quarter of 1998. These increases were due
primarily to increased leasing revenues and the continued growth of PMCC's
existing portfolio of finance assets.
Financial Review
Net Cash Provided by Operating Activities
During the first nine months of 1999, net cash provided by operating activities
was $9.2 billion compared with $6.4 billion in the comparable 1998 period. The
increase primarily reflects the collection of higher settlement-related domestic
tobacco revenues prior to the remittance of such amounts to state governments
under the terms of the various state settlements negotiated in 1998.
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<PAGE>
Net Cash Used in Investing Activities
During the first nine months of 1999, net cash used in investing activities was
$2.2 billion, up from $1.6 billion in 1998. The increase primarily reflects the
cash used during the first nine months of 1999 for the previously mentioned
domestic tobacco and beer acquisitions.
Net Cash Used in Financing Activities
During the first nine months of 1999, net cash of $5.1 billion was used in
financing activities, as compared with $1.6 billion used in financing activities
during the comparable 1998 period. This difference was primarily due to stock
repurchases and higher dividends paid during the first nine months of 1999, as
well as 1999 net debt issuances of $276 million compared with net debt issuances
of $1.3 billion in 1998.
Debt and Liquidity
The Company's total debt (consumer products and financial services) was $14.7
billion at both September 30, 1999 and December 31, 1998. Total consumer
products debt was $13.8 billion and $14.0 billion at September 30, 1999 and
December 31, 1998, respectively. The Company's ratio of consumer products debt
to total equity was 0.87 and 0.86 at September 30, 1999 and December 31, 1998,
respectively. The ratio of total debt to total equity was 0.93 and 0.91 at
September 30, 1999 and December 31, 1998, respectively.
The Company and its subsidiaries maintain credit facilities with a number of
lending institutions, amounting to approximately $12.2 billion. 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. Of these revolving bank
agreements, an agreement for $8.0 billion expires in 2002, enabling the Company
to reclassify short-term debt on a long-term basis. During September 1999, the
Company entered into a $2.0 billion revolving credit agreement expiring in
September 2000 which replaced an existing facility that expired in October 1999.
The Company may continue to refinance long-term and short-term debt from time to
time. Based upon the Company's ability and intent to refinance such debt, $800
million of debt, which matures in March 2000 depending upon the level of
interest rates at that time, was reclassified as long-term debt at September 30,
1999. 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.
The Company's credit ratings by Moody's at September 30, 1999 and December 31,
1998 were "P-1" in the commercial paper market and "A2" for long-term debt
obligations. The Company's credit ratings by Standard & Poor's at September 30,
1999 and December 31, 1998 were "A-1" in the commercial paper market and "A" for
long-term debt obligations.
As discussed in Note 5, PM Inc., along with other domestic tobacco companies,
has entered into tobacco litigation settlement agreements that will require the
domestic tobacco industry to make substantial annual payments in the following
amounts: 1999, $4.2 billion (of which PM Inc. has paid a majority of its share);
2000, $9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9
billion; 2004 through 2007, $8.4 billion; and thereafter, $9.4 billion. In
addition, the domestic tobacco industry is required to pay settling plaintiffs'
attorneys' fees, subject to an annual cap of $500 million, as well as additional
amounts as follows: 1999, $450 million; 2000, $416 million; and 2001 and 2002,
$250 million. As part of the MSA, the settling defendants committed to work
cooperatively with the tobacco-growing community to address concerns about the
potential adverse economic impact of the MSA on tobacco growers and
quota-holders. To that end, the four major domestic tobacco product
manufacturers, including PM Inc. and the grower states, have established a trust
fund to provide aid to the tobacco-growing community. The trust will be funded
by these four manufacturers over 12 years, beginning in 1999 with payments,
prior to application of various
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adjustments, scheduled to total $5.15 billion. PM Inc. has agreed to pay $300
million into the trust in 1999, which amount was charged against 1998 operating
companies income. Future industry payments to the trust are as follows: in 2000,
$280 million; 2001, $400 million; 2002 through 2008, $500 million; 2009 and
2010, $295 million. PM Inc.'s portion of the foregoing payments is subject to
adjustment for several factors, including inflation, relative market share and
industry volume. While PM Inc.'s share of future annual payments is not
currently determinable, it is anticipated that such future payments will be
funded primarily through price increases.
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.
Equity and Dividends
During the first nine months of 1999, the Company repurchased 56.6 million
shares of its common stock at a cost of $2.2 billion. The repurchases were made
under an existing $8 billion authority that expires in November 2001. At
September 30, 1999, cumulative repurchases under the $8 billion authority
totaled 64.4 million shares at an aggregate cost of $2.6 billion. The Company
did not repurchase any of its stock during the first nine months of 1998.
Dividends paid in the first nine months of 1999 and 1998 were $3.2 billion and
$2.9 billion, respectively. In August 1999, the Company's Board of Directors
approved a 9.1% increase in the current quarterly dividend rate to $0.48 per
share. As a result, the present annualized dividend rate is $1.92 per share.
Cash and Cash Equivalents
Cash and cash equivalents were $5.9 billion at September 30, 1999 and $4.1
billion at December 31, 1998, the increase being largely attributable to higher
levels of cash from operations, partially offset by the resumption of the
Company's share repurchase program.
Market Risk
The Company is exposed to market risk, primarily related to foreign exchange,
commodity prices and interest rates. These exposures are actively monitored by
management. To manage the volatility relating to these exposures, the Company
enters into a variety of derivative financial instruments. The Company's
objective is to reduce, where it is deemed appropriate to do so, fluctuations in
earnings and cash flows associated with changes in interest rates, foreign
currency rates and commodity prices. It is the Company's policy and practice to
use derivative financial instruments only to the extent necessary to manage
exposures. Since the Company uses currency rate-sensitive and commodity
price-sensitive instruments to hedge a certain portion of its existing and
anticipated transactions, the Company expects that any loss in value for those
instruments generally would be offset by increases in the value of those hedged
transactions. The Company does not hold or issue derivative financial
instruments for trading or speculative purposes.
Foreign exchange rates. The Company is exposed to foreign exchange movements,
primarily in European, Japanese, other Asian and Latin American currencies.
Consequently, it enters into various contracts, which change in value as foreign
exchange rates change, to preserve the value of commitments and anticipated
transactions. The Company uses foreign currency option and forward contracts to
hedge certain anticipated foreign currency cash flows and raw materials
purchases. The Company also enters into short-term currency forward contracts,
primarily to hedge intercompany financing transactions denominated in foreign
currencies and to hedge the purchase of commodities. At September 30, 1999 and
December 31, 1998, the Company had option and forward foreign exchange contracts
with an aggregate notional amount of $5.8 billion and $8.1 billion,
respectively, for both the purchase and sale of foreign currencies.
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The Company also seeks to protect its foreign currency net asset exposure,
primarily the Swiss franc and the euro, through the use of foreign-currency
denominated debt or currency swap agreements. At September 30, 1999 and December
31, 1998, the notional amounts of currency swap agreements aggregated $2.7
billion and $2.5 billion, respectively.
Commodities. The Company is exposed to price risk related to anticipated
purchases of certain commodities used as raw materials by the Company's food
businesses. Accordingly, the Company enters into commodity future, forward and
option contracts to manage fluctuations in prices of anticipated purchases,
primarily coffee, cocoa, sugar, wheat and corn. At September 30, 1999 and
December 31, 1998, the Company had net long commodity positions of $256 million
and $158 million, respectively. Unrealized gains/losses on net commodity
positions were immaterial at September 30, 1999 and December 31, 1998.
Interest rates. The Company manages its exposure to interest rate risk through
the proportion of fixed rate debt and variable rate debt in its total debt
portfolio. To manage this mix, the Company may enter into interest rate swap
agreements, in which it exchanges the periodic payments, based on a notional
amount and agreed-upon fixed and variable interest rates. At September 30, 1999
and December 31, 1998, the Company had an interest rate swap agreement which
converted $800 million of fixed rate debt to variable rate debt.
Use of the above-mentioned derivative financial instruments has not had a
material impact on the Company's financial position at September 30, 1999 and
December 31, 1998, or the Company's results of operations for the three and nine
months ended September 30, 1999 or the year ended December 31, 1998.
New Accounting Standards
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which had an initial adoption date by the
Company of January 1, 2000. During the second quarter of 1999, the FASB
postponed the adoption date of SFAS No. 133 until January 1, 2001. SFAS No. 133
requires that all derivative financial instruments be recorded on the
consolidated balance sheets at their fair value. Changes in the fair value of
derivatives will be recorded each period in earnings or other comprehensive
earnings, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Gains and losses on
derivative instruments reported in other comprehensive earnings will be
reclassified as earnings in the periods in which earnings are affected by the
hedged item. The Company has not yet determined the impact that adoption or
subsequent application of SFAS No. 133 will have on its financial position or
results of operations.
Contingencies
See Note 5 to the Condensed Consolidated Financial Statements for a discussion
of certain 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 actual and
potential excise tax increases, increasing marketing and
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regulatory restrictions, governmental regulation, privately imposed smoking
restrictions, governmental and grand jury investigations, litigation, and the
effects of price increases related to concluded tobacco litigation settlements
and excise tax increases on consumption rates. Each of the Company's consumer
products subsidiaries is subject to intense competition, changes in consumer
preferences, the effects of changing prices for its raw materials, local
economic conditions and the potential impact of the CDC issue, and their results
are dependant upon their continued ability to promote brand equity successfully,
to anticipate and respond to new consumer trends, to develop new products and
markets and to broaden brand portfolios, to compete effectively with lower
priced products in a consolidating environment at the retail and manufacturing
levels, and to improve productivity. In addition, PMI, KFI and Kraft are subject
to the effects of foreign economies, particularly the timing of economic
recoveries in Latin America and Eastern Europe and related shifts in consumer
preferences, currency movements and the conversion to the euro. 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.
See Note 5. Contingencies, of the Notes to the Condensed Consolidated
Financial Statements included in Part I, Item 1 of this report for a discussion
of legal proceedings pending against the Company and its subsidiaries. See also
Exhibits 99.1, 99.2, and 99.3 to this report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.2 By-Laws, as amended, of the Company.
12 Statement regarding computation of ratios of earnings to fixed
charges.
27 Financial Data Schedule.
99.1 Certain Pending Litigation Matters and Recent Developments.
99.2 Status of Master Settlement Agreement.
99.3 Trial Schedule for Certain Cases.
(b) Reports on Form 8-K. The Registrant filed a Current Report on Form
8-K on July 2, 1999, dated June 28, 1999, containing information
on the Registrant's meeting with security analysts, investors and
bankers.
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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
November 12, 1999
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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.
August 25, 1999
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.
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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 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
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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 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.
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 sixteen (16).
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
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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 Section 4. 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 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.
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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
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 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
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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.
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
6
<PAGE>
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.
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 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
7
<PAGE>
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.
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.
8
<PAGE>
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.
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 exercise
any and all powers of the Corporation as the holder of such stock or other
securities of such other corporation.
9
<PAGE>
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.
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
10
<PAGE>
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.
11
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
-------------------
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Earnings before income taxes $ 9,627 $ 3,317
Add (Deduct):
Equity in net earnings of less than 50% owned
affiliates (155) (63)
Dividends from less than 50% owned
affiliates 44 22
Fixed charges 1,026 351
Interest capitalized, net of amortization (6) (2)
-------- --------
Earnings available for fixed charges $ 10,536 $ 3,625
======== ========
Fixed charges:
Interest incurred:
Consumer products $ 856 $ 291
Financial services 63 24
-------- --------
919 315
Portion of rent expense deemed to represent
interest factor 107 36
-------- --------
Fixed charges $ 1,026 $ 351
======== ========
Ratio of earnings to fixed charges 10.3 10.3
======== ========
</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,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings before income
taxes and cumulative
effect of accounting
changes $ 9,087 $ 10,611 $ 10,683 $ 9,347 $ 8,216
Add (Deduct):
Equity in net earnings
of less than 50%
owned affiliates (195) (207) (227) (246) (184)
Dividends from less
than 50% owned
affiliates 70 138 160 202 165
Fixed charges 1,386 1,438 1,421 1,495 1,537
Interest capitalized,
net of amortization (5) (16) 13 2 (1)
-------- -------- -------- -------- --------
Earnings available for
fixed charges $ 10,343 $ 11,964 $ 12,050 $ 10,800 $ 9,733
======== ======== ======== ======== ========
Fixed charges:
Interest incurred:
Consumer products $ 1,166 $ 1,224 $ 1,197 $ 1,281 $ 1,317
Financial services 77 67 81 84 78
-------- -------- -------- -------- --------
1,243 1,291 1,278 1,365 1,395
Portion of rent expense
deemed to represent
interest factor 143 147 143 130 142
-------- -------- -------- -------- --------
Fixed charges $ 1,386 $ 1,438 $ 1,421 $ 1,495 $ 1,537
======== ======== ======== ======== ========
Ratio of earnings to
fixed charges 7.5 8.3 8.5 7.2 6.3
======== ======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<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 September
30, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,876
<SECURITIES> 0
<RECEIVABLES> 4,882
<ALLOWANCES> 171
<INVENTORY> 8,937
<CURRENT-ASSETS> 21,893
<PP&E> 21,445
<DEPRECIATION> 9,272
<TOTAL-ASSETS> 62,320
<CURRENT-LIABILITIES> 18,023
<BONDS> 13,123
0
0
<COMMON> 935
<OTHER-SE> 14,960
<TOTAL-LIABILITY-AND-EQUITY> 62,320
<SALES> 59,185
<TOTAL-REVENUES> 59,185
<CGS> 22,198
<TOTAL-COSTS> 35,190
<OTHER-EXPENSES> 13,741
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 627
<INCOME-PRETAX> 9,627
<INCOME-TAX> 3,809
<INCOME-CONTINUING> 5,818
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,818
<EPS-BASIC> 2.42
<EPS-DILUTED> 2.41
</TABLE>
Exhibit 99.1
CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS
As described in Note 5 ("Note 5") 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 product liability,
consumer protection, antitrust, tax, patent infringement, employment matters,
claims for contribution and claims of competitors and distributors. Pending
claims related to tobacco products generally fall within the following
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, (iii) health care cost recovery cases brought by governmental and
non-governmental plaintiffs seeking reimbursement for health care expenditures
allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv)
other tobacco-related litigation, including suits by former asbestos
manufacturers seeking contribution or reimbursement for amounts expended in
connection with the defense and payment of asbestos claims that were allegedly
caused in whole or in part by cigarette smoking. Governmental plaintiffs in the
health care cost recovery actions include the federal government, various cities
and counties in the United States and certain foreign governmental entities.
Non-governmental plaintiffs in these cases include union health and welfare
trust funds ("unions"), native American tribes, insurers and self-insurers,
taxpayers and others.
The following lists the pending claims included in the latter three of these
categories and certain other pending claims. Certain developments in these cases
since July 1, 1999, 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 November 1, 1999, and describes certain developments in
these cases since July 1, 1999.
Domestic Class Actions
Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Dade County,
Florida, filed May 5, 1994. In July 1999, the jury returned a verdict in favor
of plaintiffs in Phase One of the trial. Phase Two of the trial commenced on
November 1, 1999. (For a more detailed discussion of the Phase One verdict and
certain other recent developments in this case, see Note 5.)
Norton, et al. v. RJR Nabisco Holdings Corporation, et al., Superior Court,
Madison County, Indiana, filed May 3, 1996.
Richardson, et al. v. Philip Morris Incorporated, et al., Circuit Court,
Baltimore City, Maryland, filed May 24, 1996.
Scott, et al. v. The American Tobacco Company, et al., District Court, Orleans
Parish, Louisiana, filed May 24, 1996. In September 1999, the court denied
defendants' motion to modify the class definition. In addition, the court
granted plaintiffs' motion for separate trials on the issues of liability and
causation from issues of remedies and damages.
Frosina, et al. v. Philip Morris Incorporated, et al., Supreme Court, New York
County, New York, filed June 19, 1996. In October 1999, the New York Court of
Appeals affirmed the Appellate Division's decision decertifying this purported
class action.
Reed, et al. v. Philip Morris Incorporated, et al., Superior Court, District of
Columbia, filed June 21, 1996. In July 1999, the court denied plaintiff's second
motion for class certification.
<PAGE>
Lyons, et al. v. The American Tobacco Company, et al., United States District
Court, Southern District, Alabama, filed August 8, 1996.
Thompson, et al. v. The 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.
Hansen, et al. v. The American Tobacco Company, et al., United States District
Court, Eastern District, Arkansas, filed November 4, 1996. In July 1999, the
court denied plaintiffs' motion for class certification. The United States Court
of Appeals for the Eighth Circuit has declined review of the trial court's
ruling.
McCune, et al. v. The American Tobacco Company, et al., Circuit Court of Kanawha
County, West Virginia, filed January 31, 1997.
Muncy (formerly Ingle and formerly Woods), et al. v. Philip Morris Incorporated,
et al., Circuit Court, McDowell County, West Virginia, filed February 4, 1997.
Peterson, et al. v. The American Tobacco Company, et al., Circuit Court, First
Circuit, Hawaii, filed February 6, 1997.
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.
Geiger, et al. v. The American Tobacco Company, et al., Supreme Court, Queens
County, New York, filed April 30, 1997. In October 1999, plaintiffs appealed the
trial court's refusal to certify the class.
Cole, et al. v. The Tobacco Institute, Inc., et al., United States District
Court, Eastern District, Texas, Texarkana Division, filed May 5, 1997.
Cosentino, et al. v. Philip Morris Incorporated, et al., Superior Court,
Middlesex County, New Jersey, filed May 21, 1997. In July 1999, the New Jersey
Supreme Court denied plaintiffs' motion for leave to appeal the trial court's
decision denying class certification.
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 August 1999, the court granted plaintiffs' motion to voluntarily
dismiss the case.
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.
Kirstein (formerly Enright), et al. v. The American Tobacco Company, Inc., et
al., Superior Court, Middlesex County, New Jersey, filed May 28, 1997. In July
1999, the New Jersey Supreme Court denied plaintiffs' motion for leave to appeal
the trial court's decision denying class certification.
<PAGE>
Tepper, et al. v. Philip Morris Incorporated, et al., Superior Court, Middlesex
County, New Jersey, filed May 28, 1997. In July 1999, the New Jersey Supreme
Court denied plaintiffs' motion for leave to appeal the trial court's decision
denying class certification.
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. The American Tobacco Company, Inc., et al., Superior
Court, Middlesex County, New Jersey, filed June 13, 1997. In July 1999, the New
Jersey Supreme Court denied plaintiffs' motion for leave to appeal the trial
court's decision denying class certification.
Brammer, et al. v. R.J. Reynolds Tobacco Company, et al., United States District
Court, Southern District, Iowa, filed June 20, 1997.
Daley, et al. v. American Brands, Inc., et al., United States District Court,
Northern District, Illinois, filed July 7, 1997.
Piscitello, et al. v. Philip Morris Incorporated, et al., Superior Court,
Middlesex County, New Jersey, filed July 28, 1997. In July 1999, the New Jersey
Supreme Court denied plaintiffs' motion for leave to appeal the trial court's
decision denying class certification.
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. The 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. In September
1999, the court dismissed the complaint with prejudice for plaintiffs' failure
to prosecute.
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.
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.
Basik (formerly 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, San
Diego County, California, filed April 2, 1998.
Christensen, et al. v. Philip Morris Companies Inc., et al., United States
District Court, Nevada, filed April 3, 1998.
Avallone, et al. v. The American Tobacco Company, Inc., et al., New Jersey
Superior Court, Atlantic County Law Division, filed April 23, 1998.
<PAGE>
Cleary, et al. v. PM Inc., et al., Circuit Court, Cook County Illinois, County
Law Department, Law Division, filed June 3, 1998.
Creekmore, et al. v. Brown & Williamson, et al., Superior Court of Bucombe
County, North Carolina, filed July 31, 1998.
Jimenez, et al. v. Brown & Williamson Tobacco Corporation, et al., Second
Judicial District Court, County of Bernalillo, New Mexico, filed August 20,
1998.
Smokers for Fairness, LLC et al. v. The State of California, et al., Los
Angeles, Superior Court, California, filed September 25, 1998. In June 1999,
plaintiffs voluntarily dismissed this case without prejudice.
Sweeney, et al. v. The American Tobacco Company, et al., United States District
Court, Western District, Pennsylvania, filed October 15, 1998.
Brown, et al. v. Philip Morris, Inc., et al., United States District Court,
Eastern District of Pennsylvania, filed October 16, 1998. Plaintiffs allege that
tobacco companies' "discriminatory targeting of menthol tobacco product sales to
Black Americans" violates federal civil rights statutes. In September 1999, the
court granted defendants' motion to dismiss the case. In October 1999,
plaintiffs filed a notice of appeal to the United States Court of Appeals for
the Third Circuit.
Gatlin, et al. v. The American Tobacco Company, et al., United States District
Court, Eastern District of Missouri, filed December 21, 1998.
Jones, et al. v. The American Tobacco Company, et al., Circuit Court, Jackson
County, Missouri, filed December 22, 1998.
Tobacco Consumers' Group Number 3 v. R. J. Reynolds Tobacco Company, et al.,
United States District Court, Massachusetts, filed March 24, 1999.
Simon, et al. v. Philip Morris Incorporated, et al., United States District
Court, Eastern District of New York, filed April 9, 1999.
Julian, et al., v. Philip Morris Companies Inc., Circuit Court for Montgomery
County, Alabama, filed April 14, 1999.
Shortino, et al. v. Philip Morris Incorporated, et al., Superior Court of New
Jersey, Law Division, Middlesex County, filed August 30, 1999. This putative
class action is brought on behalf of New Jersey consumers who purchased and
smoked cigarettes manufactured by Philip Morris and are asymptomatic of
tobacco-related disease. The case was removed to the United States District
Court for the District of New Jersey on October 28, 1999.
Catherine Marrone, et al. v. Philip Morris Companies, Inc. and Philip Morris
Incorporated, Court of Common Pleas in Medina County, Ohio, filed November 8,
1999. This putative class action is brought on behalf of all residents of Ohio
who purchased and consumed Virginia Slims Lights cigarettes and who do not have
a claim for personal injury resulting from the purchase or consumption of
cigarettes.
International Cases
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.
DaSilva, et al. v. Nigerian Tobacco Company, et al., High Court of Lagos State,
Nigeria, filed September 8, 1997.
<PAGE>
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.
Fortin, et al. v. Imperial Tobacco Ltd., et al., Quebec Superior Court, Canada,
filed on or about September 11, 1998.
Conseil Quebecois sur le Tabac v. RJR-Macdonald Inc., et al., Quebec Superior
Court, Canada, filed November 20, 1998.
Associacao Cearense' de Defesa da Saude do Fumante e Ex-Fumante (ACEDESFE) v.
Philip Morris Brazil, S.A., et al., Third Civil Court of the State of Ceara,
Forteleza, Brazil, filed April 12, 1999.
Nixon v. Philip Morris (Australia) Limited, et al., Federal Court, New South
Wales Registry, filed April 16, 1999.
Yabin Galidi, et al. v. Dubek Ltd., et al., Tel Aviv-Yaffo Region Court, Israel,
filed (but not officially served) July 12, 1999.
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 November 1, 1999, and describes certain developments in these
cases since July 1, 1999. As discussed in Note 5, in 1998 PM Inc. and certain
other United States tobacco product manufacturers entered into a Master
Settlement Agreement (the "MSA") settling the health care cost recovery claims
of 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam,
the United States Virgin Islands, American Samoa and the Northern Marianas.
Settlement agreements settling similar claims had previously been entered into
with the states of Mississippi, Florida, Texas and Minnesota. Exhibit 99.2
hereto sets forth the status of judicial approval of the MSA in each of the
respective settling jurisdictions. The Company believes that the claims in the
city/county, taxpayer and certain of the other health care cost recovery actions
listed below are released in whole or in part by the MSA or that recovery in any
such actions should be subject to the offset provisions of the MSA.
City/County Cases
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.
People of the State of California v. Philip Morris Incorporated, et al.,
Superior Court, San Francisco County, California, filed September 5, 1996. In
June 1999, plaintiffs voluntarily dismissed their case with prejudice pursuant
to the MSA.
City of New York, et al. v. The Tobacco Institute, et al., Supreme Court, New
York County, New York, filed October 17, 1996. Pursuant to the MSA, plaintiffs,
New York City and the Health and Hospitals Corporation, have agreed to execute a
release against all defendants and others, including PM Inc., and to sign a
stipulation dismissing this action with prejudice.
County of Erie v. The Tobacco Institute, Inc., et al., Supreme Court, Erie
County, New York, filed January 14, 1997. Pursuant to the MSA, plaintiff, Erie
County, has agreed to execute a release against all defendants and others,
including PM Inc., and to sign a stipulation dismissing this action with
prejudice.
County of Cook v. Philip Morris, Incorporated, et al., Circuit Court, Cook
County, Illinois, filed April 18, 1997. In September 1999, the judge granted in
part and denied in part defendants' motion to dismiss the complaint. Dismissed
were plaintiff's claims for intentional/negligent breach of special and general
duty, performance of another's duty to the public, public nuisance and unjust
enrichment/restitution. The counts remaining are for various violations of the
Illinois Consumer Fraud Act, violations of the Illinois Antitrust Act,
negligence per se and conspiracy.
<PAGE>
City of Birmingham, Alabama and the Greene County Racing Commission v. The
American Tobacco Company, et al., United States District Court for the Northern
District of Alabama, filed May 28, 1997. In October 1999, plaintiffs dismissed
their appeal with prejudice.
City of St. Louis v. American Tobacco, et al., Circuit Court for the City of St.
Louis, filed November 23, 1998.
County of St. Louis v. American Tobacco, et al., United States District Court,
Eastern District of Missouri, filed December 3, 1998.
Craig J. Wedde v. Valley Warehousing, Inc., et al., Circuit Court Fond Du Lac
County, Wisconsin, filed April 7, 1999.
Department of Justice Case
The United States of America v. Philip Morris, Inc., et al., United States
District Court, Washington, DC, filed September 22, 1999. See Note 5 for a
discussion of this case.
International Cases
Republic of the Marshall Islands v. The American Tobacco Company, et al., High
Court, Republic of the Marshall Islands, filed October 20, 1997. In July 1999,
the court denied defendants' motion to dismiss. Trial of this case is scheduled
to begin in October 2000.
The Republic of Panama v. The American Tobacco Company, Inc., et al., District
Court of Orleans Parish, Louisiana, filed September 11, 1998.
Kupat Holim Clalit v. Philip Morris, Inc., et al., Jerusalem District Court,
Israel, filed September 28, 1998.
Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited,
et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed
November 12, 1998. This lawsuit relies heavily upon recently enacted legislation
in British Columbia which is being challenged. An agreement has been reached
with the government in British Columbia that these separate constitutional
challenges will be litigated prior to the health care cost recovery action.
These constitutional challenges were heard by the British Columbia court in
October 1999.
The Caisse Primaire d'Assurance Maladie of Saint-Nazaires v. SEITA, et al.,
Civil Court of Saint-Nazaires, France, filed June 1999.
The State of Rio de Janeiro of the Federal Republic of Brazil v. Philip Morris
Companies Inc., et al., District Court of Angelina County, Texas, filed July 12,
1999.
The State of Goias, Brazil v. Philip Morris Companies, Inc., et al., Circuit
Court of the Eleventh Judicial Circuit, Dade County, Florida, filed October 18,
1999.
In re Tobacco/Governmental Health Care Costs Litigation (MDL No. 1279), United
States District Court, District of Columbia, consolidated June 1999. The cases
previously filed by the Republics of Guatemala, Nicaragua, Bolivia and Venezuela
have been consolidated into this action.
Union Cases
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 August 1999, the court dismissed the action without
prejudice. Plaintiff has appealed the dismissal and several interlocutory orders
of the court to the United States Court of Appeals for the Ninth Circuit.
<PAGE>
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. In March 1999, a jury returned a verdict in favor of
defendants on all counts. Plaintiffs appealed the court's denial of their motion
for a new trial and, in October 1999, voluntarily withdrew the appeal.
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 July 1999, the court entered judgment for
defendants finding, inter alia, that "[p]roximate cause is missing as to all
claims." Plaintiffs have appealed the judgment of dismissal to the United States
Court of Appeals for the Ninth Circuit, and requested that the issues on appeal
be certified to the Washington Supreme Court.
Central Laborers Welfare Fund, et al. v. Philip Morris, Inc., et al., Circuit
Court for the Third Judicial Circuit, Madison County, 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. In August 1999,
the court granted defendants' motion to dismiss as to all counts except one,
ruling that plaintiffs can only proceed on that claim on the basis of
subrogation.
Hawaii Health and Welfare Trust Fund for Operating Engineers v. Philip Morris,
Inc., et al., United States District Court, Hawaii, filed June 13, 1997.
Plaintiff has appealed the court's dismissal of its action to the United States
Court of Appeals for the Ninth Circuit.
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/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. This case has been consolidated with the Laborers Local 17 and Benefit
Fund case referred to above. Earlier this year, the United States Court of
Appeals for the Second Circuit reversed the district court's order denying
defendants' motion to dismiss on remoteness grounds. The Court of Appeals
remanded the case to the district court with instructions to dismiss the
complaint. In August 1999, the Court of Appeals denied plaintiffs' request for
rehearing en banc. In November 1999, plaintiffs filed a petition for a writ of
certiorari to the United States Supreme Court.
Ark-La-Miss Laborers Welfare Fund, et al. v. Philip Morris, Inc. et al., United
States District Court for the Eastern District of Louisiana, filed June 20,
1997.
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. In October 1999, the
plaintiff voluntarily dismissed the case without prejudice.
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.
In July 1999, the United States Court of Appeals for the Ninth Circuit affirmed
the trial court's dismissal of this suit. Plaintiff has filed a petition for a
writ of certiorari to the United States Supreme Court.
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. Plaintiffs have appealed the court's decision to
grant defendants' motion to dismiss to the United States Court of Appeals for
the Ninth Circuit.
Rhode Island Laborers Health and Welfare Fund v. Philip Morris Incorporated, et
al., United States District Court, Rhode Island, filed July 20, 1997. In August
1999, the Magistrate issued a report and recommendation dismissing the entire
complaint, citing grounds of remoteness with respect to the injunctive claims
and lack of standing with respect to the RICO and antitrust claims.
Eastern States Health and Welfare Fund, et al. v. Philip Morris, Inc., et al.,
Supreme Court, State of New York, County of New York, filed July 28, 1997.
<PAGE>
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. The United States Court of Appeals for the Third Circuit affirmed the
trial court's dismissal of this suit and in September 1999 plaintiffs filed a
petition for a writ of certiorari to the United States Supreme Court.
Construction Laborers of Greater St. Louis Welfare Fund, et al. v. Philip
Morris, Inc., et al., Circuit Court for the City of St. Louis, 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. In September 1999, the court granted defendants' motion to dismiss,
ruling that plaintiff "is too far removed from the challenged harmful conduct to
succeed on any of the several claims." Plaintiffs have appealed to the United
States Court of Appeals for the Eighth Circuit.
West Virginia--Ohio Valley Area International Brotherhood of Electrical Workers
Welfare Fund v. The American Tobacco Company, et al., United States District
Court, Southern District, West Virginia, filed September 11, 1997. In August
1999, the court granted plaintiff's motion to dismiss the case without prejudice
subject to two terms: (1) plaintiff cannot oppose defendants' use of discovery
and research materials in any refiled action and (2) plaintiff cannot assert any
claim in a refiled action that is based on alleged injury to the Fund's
individual members.
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.
Operating Engineers Local 12 Health and Welfare Trust Fund, et al. v. American
Tobacco, Inc., et al., Superior Court of the State of California, County of San
Diego, filed September 17, 1997.
Puerto Rican ILGWU Health & Welfare Fund, et al. v. Philip Morris Inc., et al.,
Supreme Court, State of New York, County of New York, filed September 17, 1997.
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. The court granted defendants' motion to
dismiss in December 1998. Plaintiffs have appealed dismissal of only their
antitrust and state law consumer protection claims to the New Mexico Court of
Appeals.
Central States Joint Board v. Philip Morris, Inc., et al., United States
District Court, Northern District, Illinois, filed October 20, 1997. Plaintiffs
appealed the dismissal of the case to the United States Court of Appeals for the
Seventh Circuit.
International Brotherhood of Teamsters, Local 734 v. Philip Morris, Inc., et
al., United States District Court, Northern District, Illinois, filed October
20, 1997. Plaintiffs appealed the court's decision to grant defendants' motion
to dismiss to the United States Court of Appeals for the Seventh Circuit.
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. Plaintiffs have appealed the dismissal of the case to the
United States Court of Appeals for the Fifth Circuit.
United Food and Commercial Workers Unions and Employers Health and Welfare Fund
v. Philip Morris, Inc., et al., United States District Court, Northern District,
Alabama, filed November 13, 1997. In August 1999, the court granted defendants'
motion to dismiss. Plaintiff has appealed to the United States Court of Appeals
for the Eleventh Circuit.
<PAGE>
Screen Actors Guild, et al. v. Philip Morris, Inc., et al., Los Angeles Superior
Court, California, filed November 20, 1997. In August 1999, this case was
voluntarily dismissed without prejudice.
IBEW Local 25 Health and Benefit Fund v. Philip Morris, Inc., et al., Supreme
Court, State of New York, County of New York, filed November 25, 1997.
IBEW Local 363 Welfare Fund v. Philip Morris, Inc., et al., Supreme Court, State
of New York, County of New York, filed November 25, 1997.
Local 138, 138A and 138B International Union of Operating Engineers Welfare Fund
v. Philip Morris, Inc., et al., Supreme Court, State of New York, County of New
York, filed November 25, 1997.
Local 840, International Brotherhood of Teamsters Health and Insurance Fund v.
Philip Morris, Inc., et al., Supreme Court, State of New York, County of New
York, filed November 25, 1997.
Long Island Regional Council of Carpenters Welfare Fund v. Philip Morris, Inc.,
Supreme Court, State of New York, County of New York, filed November 25, 1997.
Day Care Council - Local 205 D.C. 1707 Welfare Fund v. Philip Morris, Inc., et
al., Supreme Court, State of New York, County of New York, filed December 8,
1997.
Local 1199 Home Care Industry Benefit Fund v. Philip Morris, Inc., et al.,
Supreme Court, State of New York, County of New York, filed December 8, 1997.
Local 1199 National Benefit Fund for Health and Human Services Employees v.
Philip Morris, Inc., et al., Supreme Court, New York County, New York, filed
December 8, 1997.
Operating Engineers Local 324 Health Care Fund, et al. v. Philip Morris, Inc.,
et al., Circuit Court, Wayne County, Michigan, filed December 30, 1997.
Plaintiffs appealed the court's February 1999 decision to grant defendants'
motion to dismiss to the Michigan Court of Appeals.
Carpenters & Joiners Welfare Fund, et al. v. Philip Morris Incorporated, et al.,
United States District Court, Minnesota, filed December 31, 1997. In April 1999,
the court granted defendants' motion to dismiss the case on the grounds that
plaintiffs' alleged injuries were "too derivative and remote" to be cognizable
under federal antitrust and RICO law. Plaintiffs have appealed to the United
States Court of Appeals for the Eighth Circuit.
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.
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. In July 1999, the District Court denied a motion to intervene
filed by another union health and welfare fund. In August 1999, the court denied
defendants' motion to dismiss the amended complaint. In October 1999, the United
States Court of Appeals for the Second Circuit denied defendants' appeal and
mandamus petition, which sought review of the District Court's denial of
defendants' motion to dismiss the amended complaint. Trial is scheduled for June
2000.
Milwaukee Carpenters, et al. v. Philip Morris Incorporated, et al., United
States District Court for the Eastern District of Wisconsin, filed March 4,
1998. In September 1999, the judge denied plaintiffs' motion to remand the case
to state court.
Service Employees International Union Health & Welfare Fund, et al. v. Philip
Morris, Inc., et al., United States District Court, District of Columbia, filed
March 19, 1998. In July 1999, the court denied without prejudice the motion of
two health and welfare trust funds to intervene in this lawsuit.
<PAGE>
Utah Laborers' Health and Welfare Trust Fund, et al. v. Philip Morris
Incorporated, et al., United States District Court, Utah, filed June 13, 1998.
In October 1999, the District Court certified its denial of the motion to
dismiss to the United States Court of Appeals for the Tenth Circuit.
S.E.I.U. Local 74 Welfare Fund, et al. v. Philip Morris, Inc., et al., United
States District Court, District of Columbia, filed June 22, 1998.
Michael H. Holland, et al. v. Philip Morris, Inc., et al., United States
District Court, District of Columbia, filed July 9, 1998.
Sheet Metal Workers Trust Fund, et al. v. Philip Morris, Inc., et al., United
States District Court, District of Columbia, filed August 31, 1999.
David B. Burgeon, et al. v. Philip Morris Incorporated, et al., United States
District Court, Eastern District of New York, filed September 29, 1999.
Native American Cases
The Muscogee (Creek Nation), et al. v. The American Tobacco Company, et al.,
District Court, Muscogee (Creek) Nation, Okmulgee District, filed June 20, 1997.
Crow Creek Sioux Tribe v. The American Tobacco Company, et al., Tribal Court,
Crow Creek Sioux Tribe, filed September 14, 1997.
Lower Brule Sioux Tribe v. American Tobacco Company, et al., Tribal Court of
the Lower Brule Sioux Tribe, Lower Brule, South Dakota, filed December 4, 1997.
Sisseton-Wahpeton Sioux Tribe v. Philip Morris Incorporated, et al., Tribal
Court of the Sisseton-Wahpeton Sioux Tribe, filed May 8, 1998.
Standing Rock Sioux Tribe v. Philip Morris Incorporated, et al., Tribal Court of
the Standing Rock Sioux Indian Reservation, filed May 8, 1998.
Yukon-Kushokwim Health Corporation v. Philip Morris Incorporated, et al.,
Superior Court for the State of Alaska, Fourth Judicial District of Bethel,
Alaska, filed April 5, 1999. In August 1999, the court granted plaintiff's
motion to voluntarily dismiss the case.
Acoma Pueblo, et al. v. American Tobacco Co., et al., New Mexico, First Judicial
District Court, Santa Fe County, New Mexico, filed June 16, 1999.
Navaho Nation v. Philip Morris Incorporated, et al., District Court, Window
Rock, Arizona, filed August 12, 1999.
Insurer and Self-Insurer Cases
Group Health Plan, et al. v. Philip Morris, Inc., et al., United States District
Court, Minnesota, filed March 11, 1998. In April 1999, the court dismissed all
claims except the state antitrust and conspiracy claims.
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. In August 1999, the court denied defendants' motion to reconsider its
earlier denial of defendants' motion to dismiss and granted certification of the
order for interlocutory appeal to the Seventh Circuit.
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. In August 1999, the court denied defendants'
<PAGE>
motion to dismiss the amended complaint. In October 1999, the United States
Court of Appeals for the Second Circuit denied defendants' appeals and mandamus
petition, which sought review of the District Court's denial of defendants'
motion to dismiss the amended complaint. In October 1999, five of the plaintiffs
agreed to dismiss their claims without prejudice.
Regence BlueShield, et al. v. Philip Morris, Inc., et al., United States
District Court, Western District, Washington, filed April 29, 1998. Plaintiffs
have appealed the trial court's dismissal of its action to the United States
Court of Appeals for the Ninth Circuit.
Taxpayer Cases
Coyne, et al. v. The American Tobacco Company, et al., Court of Common Pleas,
Cuyahoga County, Ohio, filed September 17, 1996. In July 1999, an appeals court
affirmed the trial court's ruling that granted defendants' motion to dismiss on
the grounds that plaintiffs lacked standing to sue as taxpayers. The case was
remanded to the State Court for additional proceedings.
State of Tennessee, et al., ex. rel. Beckom, et al. v. The American Tobacco
Company, et al., United States District Court for the Eastern District of
Tennessee, filed May 8, 1997. Plaintiffs have appealed the trial court's
dismissal of their action to the United States Court of Appeals for the Sixth
Circuit.
Woods, et al. v. The American Tobacco Company, et al., United States District
Court, Middle District, North Carolina, filed February 13, 1998.
Wynn v. Philip Morris Inc., et al., Circuit Court, Birmingham, Alabama, filed
May 27, 1998. In September 1999, the court dismissed the case with prejudice and
plaintiff has filed a motion for reconsideration.
Other Cases
Perry, et al. v. The American Tobacco Company, et al., Circuit Court, Coffee
County, Tennessee, filed September 30, 1996.
University of South Alabama v. The American Tobacco Company, et al., United
States District Court, Southern District, Alabama, filed May 19, 1997.
Mason, et al. v. The American Tobacco Company, et al., United States District
Court, Northern District, Texas, filed December 23, 1997. In May 1999, the
United States Justice Department advised the court that the Federal Government
does not plan to intervene in this suit.
In re TOBACCO CASES II, Superior Court for the State of California, Judicial
Council Coordination Proceeding No. 4042. The court in this case has
consolidated 30 previously filed cases, including 26 health care cost recovery
actions filed by unions (25 of which were recently voluntarily dismissed by
plaintiffs without prejudice) and one by native Americans, two Proposition 65
cases, and one smoking and health class action. In a July 1999 telephonic
ruling, the court in the native American case denied defendants' motion to
dismiss except with respect to claims for violation of the California Business
and Professional Code. The Proposition 65 cases have been set for trial in
February 2000, and the union cases (which are to proceed as a class action) have
been set for trial in June 2000.
Allegheny General Hospital, et al. v. Philip Morris, Inc., et al., United States
District Court, Western District, Pennsylvania, filed December 10, 1998. In
November 1999, the court granted defendants' motion to dismiss.
Association of Washington Public Hospital Districts, et al. v. Philip Morris
Incorporated, United States District Court, Western District of Washington,
filed March 17, 1999.
CERTAIN OTHER TOBACCO-RELATED ACTIONS
<PAGE>
The following lists certain other tobacco-related litigation pending against the
Company and/or various subsidiaries and others as of November 1, 1999, and
describes certain developments since July 1, 1999.
Asbestos Contribution Cases
Raymark Industries, Inc. v. R. J. Reynolds Tobacco Company, et al., Circuit
Court, Fourth Judicial Circuit, Duval County, Florida, filed September 15, 1997.
Raymark Industries, Inc. v. Brown & Williamson Tobacco Corporation, et al.,
United States District Court for the Northern District of Georgia, Atlanta
Division, filed September 15, 1997.
Fibreboard Corporation and Owens Corning v. The American Tobacco Company, et
al., Superior Court of Alameda County, California, filed December 11, 1997.
Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al., Supreme
Court of New York County, New York, filed December 19, 1997.
Robert A. Falise, et al. v. The American Tobacco Company, et al., United States
District Court for the Southern District of New York, filed December 31, 1997.
On November 2, 1999, the court granted defendant's motion to dismiss, finding no
subject matter jurisdiction.
H. K. Porter Company, Inc. v. The American Tobacco Company, et al., United
States District Court for the Eastern District of New York, filed December 31,
1997.
Raymark Industries, Inc. v. R. J. Reynolds Tobacco Company, et al., Circuit
Court, Fourth Judicial Circuit, Duval County, Florida, filed December 31, 1997.
Raymark Industries, Inc. v. The American Tobacco Company, et al., United States
District Court for the Eastern District of New York, filed January 30, 1998.
Ezell Thomas (As to all Defendants) and Owens Corning (As to all Tobacco
Defendants Only) v. R. J. Reynolds Tobacco Company, et al., Circuit Court of
Jefferson County, Mississippi, filed August 30, 1998.
The Seibels Bruce Group, Inc. v. R. J. Reynolds Tobacco Company, et al., United
States District Court for the Northern District of California, filed December
30, 1998. In September 1999, the court granted defendants' motion to dismiss and
entered final judgement in defendants' favor. The plaintiff is an insurer of
asbestos companies and paid to defend or indemnify those companies in their
litigation. In dismissing plaintiffs' negligent misrepresentation and fraud
claims, the court held that "plaintiff here is even more removed from the injury
than plaintiffs in the other actions brought throughout the country and which
were dismissed for lack of a direct injury. Rather than standing as the
insurance company of the smokers who were allegedly injured by defendants,
plaintiff here stands once removed as the insurance company of companies that
employ such smokers." The court also rejected plaintiffs' claims that the
defendants violated unfair business practices statutes as well as their claims
for subrogation and declaratory relief.
UNR Asbestos-Disease Claims Trust v. Brown & Williamson Tobacco Corporation, et
al., Supreme Court of New York County, New York, filed March 15, 1999.
Marlboro Light/Ultra Light Cases
Hogue, et al. v. Philip Morris Companies, Inc. and Philip Morris, Inc., United
States District Court for the Middle District of Florida, filed June 30, 1998.
Cummis, et al. v. Philip Morris Companies, Inc. and Philip Morris, Inc.,
Superior Court, Middlesex County, New Jersey, filed July 9, 1998.
<PAGE>
McNamara, et al. v. Philip Morris Companies, Inc. and Philip Morris, Inc.,
United States District Court for the Eastern District of Pennsylvania, filed
July 16, 1998.
Aspinall, et al. v. Philip Morris Companies, Inc. and Philip Morris
Incorporated, Superior Court of the Commonwealth of Massachusetts, Suffolk
County, filed November 24, 1998.
Russell, et al. v. Philip Morris Incorporated and Philip Morris Companies, Inc.,
United States District Court for the Eastern District of Tennessee, filed
November 24, 1998. In April 1999, plaintiffs voluntarily dismissed this case.
McClure, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated,
Circuit Court of Davidson County, Tennessee, filed February 19, 1999.
Cocca, et al. v. Philip Morris Incorporated, United States District Court,
District of Arizona, filed May 13, 1999.
Popa, et al. v. Philip Morris Companies Inc., et al., United States District
Court, Northern District of Ohio, filed June 30, 1999.
Engle, et al. v. Philip Morris Companies, Inc. and Philip Morris Inc., United
States District Court, District of Arizona, filed July 16, 1999.
Retail Leaders Case
R.J.Reynolds Tobacco Company, et al. v. Philip Morris Incorporated, United
States District Court, Middle District of North Carolina, filed March 12, 1999.
Vending Machine Case
Lewis d/b/a B&H Vendors v. Philip Morris Inc., United States District Court for
the Middle District of Tennessee, filed February 3, 1999.
Proposition 65 Cases
The Company believes that these cases are released in whole or in part by the
MSA or that recovery in any such action should be subject to the offset
provisions of the MSA.
The People of the State of California, et al. v. Philip Morris Incorporated, et
al., Superior Court of Los Angeles County, California, filed July 14, 1998. This
case has been coordinated with In Re Tobacco Cases II discussed above.
The People of the State of California, et al. v. Brown & Williamson Tobacco
Corporation, et al., Superior Court of San Francisco County, California, filed
July 28, 1998. This case has been coordinated with In Re Tobacco Cases II
discussed above.
MSA-Related Cases
Hise, et al. v. Philip Morris Incorporated, et al., United District Court for
the Northern District of Oklahoma, filed December 15, 1998. Plaintiffs have
appealed the trial court's dismissal of their action to the United States Court
of Appeals for the Tenth Circuit.
Forces Action Project, LLC, et al. v. The State of California, et. al., United
States District Court for the Northern District of California, filed January 23,
1999.
A.D. Bedell Wholesale Co. v. Philip Morris Incorporated, et al., United States
District Court, Western District of Pennsylvania, filed April 12, 1999. In
October 1999, plaintiff filed a separate lawsuit against Philip Morris, A.D.
Bedell Company, Inc. v. Philip Morris Incorporated, Supreme Court of the State
of New York
<PAGE>
(Cattaraugus County), filed October 18, 1999. This lawsuit alleges claims
arising out of Philip Morris' decision to suspend sales to plaintiff.
Turner Branch, et al. v. Philip Morris Incorporated, et al., United States
District Court, New Mexico, filed August 3, 1999.
PTI, Inc. et al. v. Philip Morris Incorporated, et al., United States District
Court, Central District of California, filed August 13, 1999.
State of New York, et al. v. Philip Morris Incorporated, et al., Supreme Court,
New York County, intervention motion filed August 19, 1999. The intervention
motion was denied, and is presently on appeal to the Appellate Division, First
Department.
Herek, et al. v. State of Wisconsin, et al., Circuit Court for the State of
Wisconsin, Dane County, filed November 5, 1999. This lawsuit alleges that
plaintiffs have a right to a portion of the proceeds Wisconsin receives pursuant
to the MSA.
CERTAIN OTHER ACTIONS
The following lists certain other actions pending against subsidiaries of the
Company and others as of November 1, 1999.
National Cheese Exchange Cases
Consolidated Action: (Servais, et al. v. Kraft Foods, Inc. and the National
Cheese Exchange, Inc., Circuit Court of Dane County, Wisconsin, filed May 5,
1997; Dodson, et al. v. Kraft Foods, Inc., et al., Circuit Court of Dane County,
Wisconsin, filed July 1, 1997; Noll, et al. v. Kraft Foods, Inc., et al.,
Circuit Court of Dane County, Wisconsin, filed July 11, 1997.) As discussed in
Note 5, in October 1999 the Court granted Kraft's motion for summary judgment.
Vincent, et al. v. Kraft Foods, Inc., Circuit Court of Cook County, Illinois,
filed October 27, 1997. Plaintiff has appealed the Court's dismissal of this
action, and oral arguments were heard in November 1999.
Knevelboard Dairies, et al. v. Kraft Foods, Inc., et al., United States District
Court for the Central District of California, filed April 14, 1998. Plaintiff
has appealed the court's dismissal of this action.
Environmental Matters
In June 1999 the Missouri Department of Natural Resources (the "DNR") issued a
notice of violation to Kraft alleging that it had violated state solid waste and
water laws by arranging for the reuse of spent hot dog casings at a farmsite. In
October 1999 the DNR proposed to settle the matter for a civil penalty of
$254,000 in lieu of a formal enforcement action. Kraft is currently evaluating
this matter.
-------------------
Exhibit 99.2
STATUS OF THE MASTER SETTLEMENT AGREEMENT
The Master Settlement Agreement ("MSA") is subject to final judicial approval
(i.e., trial court approval and the expiration of the time for review or appeal
with respect to such approval) in each of the settling jurisdictions. If a
settling jurisdiction does not obtain final judicial approval by December 31,
2001, the agreement will be terminated with respect to such state; the
agreement, however, will remain in effect as to each settling jurisdiction in
which final judicial approval is obtained. As noted in the chart below, the MSA
has been approved by trial courts in all of the 52 settling jurisdictions and
the Company believes that the time for review or appeal with respect to such
approvals has expired in 45 of those jurisdictions. Interventions and/or
challenges to the MSA (or appeals thereof) are pending in 8 jurisdictions. In
addition, as described in Note 5. Contingencies, above under the heading
"Litigation Settlements," there are a number of other suits pending related to
the MSA.
- --------------------------------------------------------------------------------
INTERVENTION
FINAL AND/OR
JUDICIAL CHALLENGE
JURISDICTION TRIAL COURT APPROVAL APPROVAL PENDING
- --------------------------------------------------------------------------------
American Samoa X X
- --------------------------------------------------------------------------------
Alabama X X
- --------------------------------------------------------------------------------
Alaska X X
- --------------------------------------------------------------------------------
Arizona X X
- --------------------------------------------------------------------------------
Arkansas X X
- --------------------------------------------------------------------------------
California X X
- --------------------------------------------------------------------------------
Colorado X X
- --------------------------------------------------------------------------------
Connecticut X X
- --------------------------------------------------------------------------------
District of Columbia X X
- --------------------------------------------------------------------------------
Delaware X X
- --------------------------------------------------------------------------------
Georgia X X
- --------------------------------------------------------------------------------
Guam X X
- --------------------------------------------------------------------------------
Hawaii X X
- --------------------------------------------------------------------------------
Idaho X X
- --------------------------------------------------------------------------------
Illinois X X
- --------------------------------------------------------------------------------
Indiana X X
- --------------------------------------------------------------------------------
Iowa X X
- --------------------------------------------------------------------------------
Kansas X X
- --------------------------------------------------------------------------------
Kentucky X X
- --------------------------------------------------------------------------------
Louisiana X X
- --------------------------------------------------------------------------------
Maine X X
- --------------------------------------------------------------------------------
Maryland X X
- --------------------------------------------------------------------------------
Massachusetts X X
- --------------------------------------------------------------------------------
Michigan X X
- --------------------------------------------------------------------------------
Missouri X X
- --------------------------------------------------------------------------------
Montana X X
- --------------------------------------------------------------------------------
Nebraska X X
- --------------------------------------------------------------------------------
Nevada X X
- --------------------------------------------------------------------------------
New Hampshire X X
- --------------------------------------------------------------------------------
New Jersey X X
- --------------------------------------------------------------------------------
New Mexico X X
- --------------------------------------------------------------------------------
New York X X X
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 99.2
- --------------------------------------------------------------------------------
INTERVENTION
FINAL AND/OR
JUDICIAL CHALLENGE
JURISDICTION TRIAL COURT APPROVAL APPROVAL PENDING
- --------------------------------------------------------------------------------
North Carolina X X
- --------------------------------------------------------------------------------
North Dakota X X
- --------------------------------------------------------------------------------
Northern Marianas X X
- --------------------------------------------------------------------------------
Ohio X X
- --------------------------------------------------------------------------------
Oklahoma X X
- --------------------------------------------------------------------------------
Oregon X X
- --------------------------------------------------------------------------------
Pennsylvania X X
- --------------------------------------------------------------------------------
Puerto Rico X X
- --------------------------------------------------------------------------------
Rhode Island X X
- --------------------------------------------------------------------------------
South Carolina X X
- --------------------------------------------------------------------------------
South Dakota X X
- --------------------------------------------------------------------------------
Tennessee X X
- --------------------------------------------------------------------------------
Utah X X
- --------------------------------------------------------------------------------
Vermont X X
- --------------------------------------------------------------------------------
Virgin Islands X X
- --------------------------------------------------------------------------------
Virginia X X
- --------------------------------------------------------------------------------
Washington X X
- --------------------------------------------------------------------------------
West Virginia X X
- --------------------------------------------------------------------------------
Wisconsin X X
- --------------------------------------------------------------------------------
Wyoming X X
- --------------------------------------------------------------------------------
Exhibit 99.3
TRIAL SCHEDULE FOR CERTAIN CASES
Set forth below is a list of smoking and health class actions, health care cost
recovery actions, Proposition 65 actions and asbestos contribution actions
currently scheduled for trial through 2000 against PM Inc. and, in some cases,
the Company. Trial dates, however, are subject to change.
<TABLE>
<CAPTION>
Case (Jurisdiction) Type of Action Trial Date
- ------------------- -------------- ----------
<S> <C> <C>
Engle, et al. v. R. J. Reynolds Smoking and Health Class Action November 1, 1999
Tobacco Co., et al. (Florida) (Phase Two)
Ezell Thomas and Owens Asbestos Contribution Action February 14, 2000
Corning v. R. J. Reynolds
Tobacco Company, et al.
(Mississippi)
The People of the State of Proposition 65 Case February 25, 2000
California, et al. v. Philip
Morris, Inc., et al. (California)
Blue Cross and Blue Shield of Health Care Cost Recovery Action April 10, 2000
New Jersey, Inc., et al. v. Philip (to be rescheduled)
Morris, Incorporated, et al.
(New York)
Thompson, et al. v. The Smoking and Health Class Action June 1, 2000
American Tobacco Company,
Inc., et al. (Minnesota)
National Asbestos Workers Health Care Cost Recovery Action June 5, 2000
Medical Fund, et al. v. Philip
Morris Incorporated, et al.
(New York)
In re TOBACCO II Health Care Cost Recovery Action June 19, 2000
(California) (5 consolidated union cases)
H.K. Porter v. The American Asbestos Contribution Action September 11, 2000
Tobacco Company, et al.
(New York)
Republic of the Marshall Health Care Cost Recovery Action October 1, 2000
Islands v. The American
Tobacco Company, et al.
(Marshall Islands)
Raymark Industries v. The Asbestos Contribution Action October 2, 2000
American Tobacco Company, et al.
(New York)
Group Health Plan, et al. v Health Care Cost Recovery Action December 1, 2000
Philip Morris, Inc., et al.
(Minnesota)
</TABLE>
<PAGE>
Exhibit 99.3
Below is a schedule setting forth by month the number of individual smoking and
health cases against PM Inc. and, in some cases, the Company that are currently
scheduled for trial through the end of the year 2000.
1999 2000
- ---- ----
December (1) January (3)
February (2)
March (2)
April (5)
May (3)
June (4)
July (1)
August (3)
September (3)
October (7)
November (2)
