<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 13-3260245
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Park Avenue, New York, New York 10017
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (917) 663-5000
----------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
At April 30, 1999, there were 2,412,749,687 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
March 31, 1999 and December 31, 1998 3 - 4
Condensed Consolidated Statements of Earnings for the
Three Months Ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 1998 and the
Three Months Ended March 31, 1999 6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 7 - 8
Notes to Condensed Consolidated Financial Statements 9 - 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 20 - 34
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 35
Item 4. Submission of Matters to a Vote of Security Holders. 35 - 36
Item 6. Exhibits and Reports on Form 8-K. 36
Signature 37
-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)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- -----------
<S> <C> <C>
ASSETS
Consumer products
Cash and cash equivalents $ 3,194 $ 4,081
Receivables, net 4,941 4,691
Inventories:
Leaf tobacco 4,521 4,729
Other raw materials 1,926 1,728
Finished product 3,163 2,988
------- -------
9,610 9,445
Other current assets 1,914 2,013
------- -------
Total current assets 19,659 20,230
Property, plant and equipment, at cost 21,108 21,234
Less accumulated depreciation 8,941 8,899
------- -------
12,167 12,335
Goodwill and other intangible assets
(less accumulated amortization of
$5,504 and $5,436) 17,040 17,566
Other assets 3,418 3,309
------- -------
Total consumer products assets 52,284 53,440
Financial services
Finance assets, net 6,354 6,324
Other assets 144 156
------- -------
Total financial services assets 6,498 6,480
------- -------
TOTAL ASSETS $58,782 $59,920
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
Continued
-3-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- -------------
<S> <C> <C>
LIABILITIES
Consumer products
Short-term borrowings $ 230 $ 225
Current portion of long-term debt 1,604 1,822
Accounts payable 2,493 3,359
Accrued marketing 2,541 2,637
Accrued taxes, except income taxes 1,669 1,408
Accrued settlement charges 1,741 1,135
Other accrued liabilities 3,148 3,576
Income taxes 1,747 1,144
Dividends payable 1,070 1,073
------- -------
Total current liabilities 16,243 16,379
Long-term debt 11,273 11,906
Deferred income taxes 963 929
Accrued postretirement health care costs 2,560 2,543
Other liabilities 6,990 7,019
------- -------
Total consumer products liabilities 38,029 38,776
Financial services
Long-term debt 687 709
Deferred income taxes 4,132 4,151
Other liabilities 93 87
------- -------
Total financial services liabilities 4,912 4,947
------- -------
Total liabilities 42,941 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 26,991 26,261
Accumulated other comprehensive earnings (including
currency translation of $1,556 and $1,081) (1,581) (1,106)
------- -------
26,345 26,090
Less cost of repurchased stock
(389,574,577 and 375,426,742 shares) 10,504 9,893
------- -------
Total stockholders' equity 15,841 16,197
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $58,782 $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)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1999 1998
----------- -------------
<C> <C>
<S>
Operating revenues $19,497 $18,383
Cost of sales 7,260 6,707
Excise taxes on products 4,363 4,227
------- -------
Gross profit 7,874 7,449
Marketing, administration and research costs 4,566 3,934
Settlement charges (Note 5) 806
Amortization of goodwill 147 146
------- -------
Operating income 3,161 2,563
Interest and other debt expense, net 206 244
------- -------
Earnings before income taxes 2,955 2,319
Provision for income taxes 1,168 937
------- -------
Net earnings $ 1,787 $ 1,382
======= =======
Per share data:
Basic earnings per share $ 0.74 $ 0.57
======= =======
Diluted earnings per share $ 0.73 $ 0.57
======= =======
Dividends declared $ 0.44 $ 0.40
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1998 and
the Three Months Ended March 31, 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 1,787 1,787
Other comprehensive earnings,
net of income taxes:
Currency translation adjustments (475) (475) (475)
------- -------- -------
Total other comprehensive earnings (475) (475) (475)
------- -------- -------
Total comprehensive earnings 1,312
Exercise of stock options and
issuance of other stock awards 10 38 48
Cash dividends
declared ($0.44 per share) (1,067) (1,067)
Stock repurchased (649) (649)
---- ------- ------- ----------- ------- -------- -------
Balances, March 31, 1999 $935 $26,991 $(1,556) $(25) $(1,581) $(10,504) $15,841
==== ======= ======= =========== ======= ======== =======
</TABLE>
Total comprehensive earnings was $1,201 million in the first quarter of 1998,
which represents net earnings, partially offset by currency translation
adjustments.
See notes to condensed consolidated financial statements.
-6-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------------------------
1999 1998
--------------------- -----------------
<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $1,756 $1,355
- Financial services 31 27
------ ------
Net earnings 1,787 1,382
Adjustments to reconcile net earnings to
operating cash flows:
Consumer products
Depreciation and amortization 403 415
Deferred income tax provision 79 89
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (407) (775)
Inventories (332) (631)
Accounts payable (803) (699)
Income taxes 607 493
Accrued liabilities and other current assets 432 (212)
Other 110 355
Financial services
Deferred income tax benefit (26) (22)
Other 103 76
------ ------
Net cash provided by operating activities 1,953 471
------ ------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures (323) (341)
Purchases of businesses, net of acquired cash (52)
Proceeds from sale of businesses 2
Other 37 (27)
Financial services
Investments in finance assets (99) (138)
Proceeds from finance assets 10 26
------ ------
Net cash used in investing activities (425) (480)
------ ------
</TABLE>
See notes to condensed consolidated financial statements.
Continued
-7-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-------------------------------
1999 1998
------- ------
<S> <C> <C>
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net issuance of short-term borrowings $ 31 $ 893
Long-term debt proceeds 15 814
Long-term debt repaid (776) (558)
Dividends paid (1,070) (970)
Issuance of common stock 38 71
Repurchase of common stock (613)
Other 12 (54)
------- ------
Net cash (used in) provided by financing activities (2,363) 196
------- ------
Effect of exchange rate changes on cash and
cash equivalents (52) (15)
------- ------
Cash and cash equivalents:
(Decrease) increase (887) 172
Balance at beginning of period 4,081 2,282
------- ------
Balance at end of period $ 3,194 $2,454
======= ======
</TABLE>
See notes to condensed consolidated financial statements.
-8-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies:
- -----------------------------
The interim condensed consolidated financial statements of Philip Morris
Companies Inc. (the "Company") are unaudited. It is the opinion of the
Company's management that all adjustments necessary for a fair statement of the
interim results presented have been reflected therein. All such adjustments
were of a normal recurring nature. 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 98-5 nor its
application for the quarter ended March 31, 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:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1999 1998
------------ ------------
(in millions)
<S> <C> <C>
Net earnings $1,787 $1,382
====== ======
Weighted average shares for
basic EPS 2,424 2,425
Plus incremental shares from conversions:
Restricted stock and stock rights 2 1
Stock options 13 18
------ ------
Weighted average shares for
diluted EPS 2,439 2,444
====== ======
</TABLE>
For the first quarter of 1999 and 1998, options on 32,080 and 15,508,600 shares
of common stock, respectively, were excluded from the calculation of weighted
average shares for diluted EPS because their effects were antidilutive.
-9-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 is principally attributable
to the North American food segment.
Reportable segment data were as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------------
1999 1998
----------- ---------------
<S> <C> <C>
Operating revenues: (in millions)
Domestic tobacco $ 4,460 $ 3,336
International tobacco 7,340 7,327
North American food 4,396 4,365
International food 2,242 2,310
Beer 986 980
Financial services 73 65
------- -------
Total operating revenues $19,497 $18,383
======= =======
Operating companies income:
Domestic tobacco $ 918 $ 230
International tobacco 1,431 1,418
North American food 685 802
International food 246 235
Beer 136 128
Financial services 50 42
------- -------
Total operating companies income 3,466 2,855
Amortization of goodwill (147) (146)
General corporate expenses (124) (115)
Minority interest (34) (31)
------- -------
Total operating income 3,161 2,563
Interest and other debt expense, net (206) (244)
------- -------
Total earnings before income taxes $ 2,955 $ 2,319
======= =======
</TABLE>
Operating companies income for the first quarter of 1999 includes pre-tax
charges of $130 million in the domestic tobacco segment related primarily to a
portion of the cost for separation programs covering
-10-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
approximately 1,400 employees at the Philip Morris Incorporated ("PM Inc.")
Louisville, Kentucky manufacturing plant. PM Inc. presently anticipates that the
total pre-tax charges related to this plan will approximate $200 million, the
balance of which is expected to be recorded in the second quarter of 1999. In
addition, operating companies income for the first quarter of 1999 includes pre-
tax charges of $157 million related primarily to voluntary workforce reductions
covering approximately 700 employees in the Company's North American food
segment. First quarter 1998 operating companies income for the domestic tobacco
segment included pre-tax tobacco litigation settlement charges of $806 million
and voluntary early retirement and separation program pre-tax charges of $95
million.
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.
Overview of Tobacco-Related Litigation
Types and Number of Cases
Pending claims related to tobacco products generally fall within three
categories: (i) smoking and health cases alleging personal injury brought on
behalf of individual plaintiffs, (ii) smoking and health cases alleging personal
injury and purporting to be brought on behalf of a class of individual
plaintiffs, and (iii) health care cost recovery cases brought by governmental
and non-governmental plaintiffs seeking reimbursement for health care
expenditures allegedly caused by cigarette smoking. Governmental plaintiffs
include 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. Damages claimed in some of the smoking and
health class actions and health care cost recovery cases range into the billions
of dollars. Plaintiffs' theories of recovery and the defenses raised in those
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 May 1, 1999, and discusses certain developments in such cases
since January 1, 1999.
In recent years, there has been a substantial increase in the number of tobacco-
related cases being filed.
As of May 1, 1999, there were approximately 485 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 410 such cases
on May 1, 1998, and approximately 190 such cases on May 1, 1997. Many of these
cases are pending in West Virginia, New York and Florida. Twenty of the
individual cases involve allegations of various personal injuries allegedly
related to exposure to environmental tobacco smoke ("ETS").
In addition, as of May 1, 1999, there were approximately 60 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 55 such cases
on May 1, 1998, and approximately 25 such cases on May 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.
-11-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
As of May 1, 1999, there were approximately 100 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 120
health care cost recovery cases pending on May 1, 1998, and 30 cases on May 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
35 smoking and health cases initiated by one or more individuals (Argentina
(25), Brazil (1), Canada (1), Ireland (1), Italy (1), Japan (1), the Philippines
(1), Scotland (1), Spain (1) and Turkey (2)), up from approximately 15 such
cases in May 1997. In addition, there are seven smoking and health putative
class actions pending outside the United States (Australia (1), Brazil (2),
Canada (3) and Nigeria (1)), up from two in May 1997. In addition, during the
past year and one-half, health care cost recovery actions have been brought in
Israel, the Marshall Islands and British Columbia, Canada, and, in the United
States, by Bolivia, Guatemala, Panama, Nicaragua, Thailand and Venezuela.
Industry Trial Results
There have been several jury verdicts in individual smoking and health cases and
in one union health care cost recovery action over the past three years. In May
1999, a Missouri jury returned a unanimous 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 unanimous 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 the defendants and apportioned fault as follows:
plaintiff - 50%, defendants - 50%. 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. Recently, the punitive damage awards in the Oregon and California
actions were reduced to $32 million and $25 million, respectively. PM Inc. is or
will be appealing the verdicts and the damage awards in both the California and
Oregon cases. In March 1999, a jury returned a verdict in favor of defendants on
all counts in a union health care cost recovery action brought on behalf of
approximately 114 employer-employee trust funds in Ohio. Plaintiffs' motion for
a new trial has been denied.
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 totalling 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. Plaintiff is seeking an appeal of
this ruling to the Florida Supreme Court. In Brazil, a court in 1997 awarded
plaintiffs in a smoking and health case the Brazilian 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.
Pending and Upcoming Trials
As of May 13, 1999, the trial in Florida of the Engle smoking and health class
action against PM Inc. (discussed below) was underway, as was the trial in
Mississippi of an individual ETS smoking and health case against PM Inc. and the
Company.
As set forth in Exhibit 99.2, additional cases against PM Inc. and, in one case,
the Company as well, are scheduled for trial during 1999, including one union
health care cost recovery action in Washington (September), one purported
smoking and health class action in Illinois (August), and one asbestos
contribution case (discussed below) in New York (November). Three individual
smoking
-12-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
and health cases against PM Inc. are currently scheduled for trial during 1999.
Cases against other tobacco companies are also scheduled for trial in 1999.
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 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 in principle with tobacco growers
discussed below), subject to adjustment for several factors, including
inflation, market share and industry volume: 1999, $4.2 billion; 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 community to address concerns about the potential adverse
economic impact of the MSA on that community. To that end, in January 1999, the
four major domestic tobacco product manufacturers, including PM Inc., agreed in
principle to participate in the establishment of a $5.15 billion trust fund to
be administered for the benefit of the tobacco-growing community. It is
currently contemplated that the trust will be funded by industry participants
over 12 years, beginning in 1999. PM Inc. has agreed to pay $300 million into
the trust in 1999, which amount has been charged to 1998 operating companies
income. Subsequent annual industry payments are to be adjusted for several
factors, including inflation and United States cigarette consumption, and are to
be allocated based on each manufacturer's relative market share.
-13-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 May 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 MSA. 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 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.
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."
Also in February 1999, a putative class action was filed on behalf of Wisconsin
Medicaid recipients against the State of Wisconsin and certain domestic tobacco
manufacturers, including PM Inc., challenging the State of Wisconsin's authority
to enter into the MSA and asking, among other things, that "any funds to be paid
the state by the tobacco defendants pursuant to the master settlement agreement
which exceed the amount of assistance granted to plaintiff and to similarly
situated Medicaid recipients during the applicable statute of limitations period
by the state prior to execution of the master settlement agreement must be paid
to plaintiff and similarly situated Medicaid recipients and their estates." In
May 1999, this case was voluntarily dismissed by plaintiff.
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 prices 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.
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
-14-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
practice laws and consumer protection statutes, and claims under the federal
Racketeer Influenced and Corrupt Organization Act ("RICO") and state RICO
statutes. In certain of these cases, plaintiffs claim that cigarette smoking
exacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the
smoking and health actions seek various forms of relief, including compensatory
and punitive damages, treble/multiple damages and other statutory damages and
penalties, creation of medical monitoring 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.
In May 1996, the Fifth Circuit Court of Appeals in the Castano case held that a
putative 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 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 May 1, 1999, smoking and health
class actions were pending in Alabama, Arkansas, California, the District of
Columbia, Florida, Hawaii, Illinois, Indiana, Iowa, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey,
New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Puerto Rico,
South Carolina, Tennessee, Texas, Utah, Virginia and West Virginia, as well as
in Australia, Brazil, Canada and Nigeria. Class certification has been denied or
reversed by courts in 15 smoking and health class actions involving PM Inc. in
Louisiana, the District of Columbia, 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. 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.
Engle Trial
Trial in this Florida class action case began in July 1998. The presentation of
the defense case began on March 1, 1999. Plaintiffs seek compensatory and
punitive damages ranging into the billions of dollars, as well as equitable
relief including, but not limited to, a medical fund for future health care
costs, attorneys' fees and court costs. The class consists of all Florida
residents and citizens, and their survivors, who claim to have suffered,
presently suffer or have died from diseases and medical conditions caused by
their addiction to cigarettes that contain nicotine.
The current trial plan calls for the case to be tried in three "Phases." The
court has stated, however, that the trial plan may be modified further. Phase
One, which is currently underway and expected to conclude within the next month,
involves evidence concerning certain "common" class issues relating to the
plaintiff class's causes of action. If defendants are found liable, entitlement
to punitive damages will be decided at the end of Phase One, but no amount is
expected to be set at that time.
If plaintiffs prevail in Phase One, the first matters to be resolved in Phase
Two will involve individual determination of specific causation, reliance and
other individual issues related to the elements of the claims of the class
representatives and entitlement to compensatory damages for the class
representatives. Phase Two will also involve an assessment of the amount of
punitive damages, if any, that individual class representatives will be awarded
and the setting of a percentage or ratio of punitive damages for absent class
members, assuming entitlement was found at the end of Phase One.
Phase Three of the trial will be held before separate juries to address absent
class members' claims, including issues of specific causation and other
individual issues regarding entitlement to compensatory damages.
-15-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Health Care Cost Recovery Litigation
In certain of the pending proceedings, domestic and foreign governmental
entities and non-governmental plaintiffs, including 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
others, 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
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 May 1, 1999, there were
approximately 100 health care cost recovery cases pending in the United States
against PM Inc. and, in some cases, the Company, of which approximately 75 were
filed by unions. Health care cost recovery actions have also been brought in
Israel, the Marshall Islands and British Columbia, Canada, and, in the United
States, by Bolivia, Guatemala, Panama, Nicaragua, Thailand and Venezuela. Other
foreign entities, including a local agency of the French social security health
insurance system, and others have stated that they are considering filing health
care cost recovery actions. In January 1999, President Clinton announced that
the United States Department of Justice is preparing a litigation plan to take
tobacco companies to court and to use recovered funds to strengthen Medicare.
Recently, two 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
-16-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
reversed another district court's order denying defendants' motion to
dismiss on remoteness grounds and instructed the district court to dismiss the
complaint. 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.
Certain Other Tobacco-Related Litigation
Asbestos Contribution Cases: A number of suits have 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.
Marlboro Light/Ultra Light Cases: There are five class actions pending against
- --------------------------------
PM Inc. and the Company, in Florida, New Jersey, Pennsylvania, Massachusetts 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. On May 13, 1999, the press reported that a
similar class action had been filed in Arizona.
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.
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 to retail
stores and to cigarette vending machine operators. The plaintiffs request actual
damages, treble damages, injunctive relief, attorneys' fees and costs, and other
unspecified relief.
Proposition 65 Cases: Since July 1998, two suits have been 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, restitution, disgorgement of profits
and other relief. The courts have denied defendants' motions to dismiss in both
of these cases.
Florida Settlement Cases: In February and April 1999, plaintiff (a Medicaid
- ------------------------
recipient) filed two putative class actions in Florida state courts seeking
unspecified amounts of compensatory damages and declaratory and injunctive
relief regarding his rights (and the rights of the members of the putative
classes of Florida Medicaid recipients) to a portion of the proceeds of the
health care cost recovery action settlement between the State of Florida and
certain tobacco manufacturers.
-17-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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. 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 unpaid taxes assessed to date is alleged to be the Italian
lira equivalent of $2.5 billion. In addition, the Italian lira equivalent of
$3.4 billion in interest and penalties has been assessed. The 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
125 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
cases have been decided unfavorably at the trial court level and are in the
process of being appealed, and it is possible that some future cases could be
decided unfavorably as well. 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.
-18-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6. Recently Issued Accounting Pronouncements:
- ---------------------------------------------------
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which must be adopted by the Company by
January 1, 2000. 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.
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
- ------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
Operating Revenues
--------------------------
(in millions)
1999 1998
-------- -------
<S> <C> <C>
Domestic tobacco $ 4,460 $ 3,336
International tobacco 7,340 7,327
North American food 4,396 4,365
International food 2,242 2,310
Beer 986 980
Financial services 73 65
------- -------
Operating revenues $19,497 $18,383
======= =======
Operating Income
--------------------------
(in millions)
1999 1998
------- -------
Domestic tobacco $ 918 $ 230
International tobacco 1,431 1,418
North American food 685 802
International food 246 235
Beer 136 128
Financial services 50 42
------- -------
Operating companies income 3,466 2,855
Amortization of goodwill (147) (146)
General corporate expenses (124) (115)
Minority interest (34) (31)
------- -------
Operating income $ 3,161 $ 2,563
======= =======
</TABLE>
Amortization of goodwill is primarily attributable to the North American food
segment.
Results of Operations
Operating revenues for the first quarter of 1999 increased $1,114 million (6.1%)
over the first quarter of 1998, due primarily to an increase in revenues from
domestic tobacco operations. Excluding the revenues of several international
food businesses divested in 1998, underlying operating revenues for the first
quarter of 1999 increased $1,128 million (6.1%) over the first quarter of 1998.
Operating income for the first quarter of 1999 increased $598 million (23.3%)
over the comparable 1998 period. The first quarter 1999 operating income
includes pre-tax charges of $130 million, principally for a portion of the cost
of separation programs covering approximately 1,400 employees at the Philip
Morris Incorporated ("PM Inc.") Louisville, Kentucky manufacturing plant, and
$157 million related to previously announced voluntary workforce reduction
programs at the Company's North American food segment. Operating income for the
first quarter of 1998 includes pre-tax charges of $806 million related to
settling health care cost recovery litigation in Minnesota and $95 million
related 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 decreased $15 million
(0.4%) from the first
-20-
<PAGE>
quarter of 1998, due primarily to lower operating income from domestic tobacco
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 $611 million (21.4%) from the comparable
1998 period due primarily to a lower level of pre-tax charges, principally for
tobacco litigation settlements, in the domestic tobacco segment during the first
quarter of 1999. Excluding the previously mentioned pre-tax charges, operating
companies income decreased 0.1% on lower earnings from domestic tobacco
operations, partially offset by higher earnings from all other segments.
Currency movements, primarily reflecting weakness of the U.S. dollar against the
euro early in the first quarter of 1999, resulted in slight increases in
operating revenues ($169 million) and operating income ($34 million). However,
as the dollar continued to strengthen in relation to first quarter 1998 rates,
currency movements during 1999 grew increasingly unfavorable to the Company's
results of operations. Although the Company cannot predict future movements in
currency rates, strengthening of the dollar, primarily against the euro, if
sustained during the remainder of 1999, could have an unfavorable impact on
operating revenues and operating companies income comparisons with 1998. In
addition, the Company's businesses in certain Asian markets and, since the
second half of 1998, in Eastern Europe and Latin America, 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
during 1999.
Interest and other debt expense, net, decreased $38 million (15.6%) in the first
quarter of 1999 from the comparable 1998 period. This decrease was due
primarily to higher interest income and lower average debt outstanding during
the first quarter of 1999.
Diluted and basic EPS, which were $0.73 and $0.74, respectively, for the first
quarter of 1999, increased by 28.1% and 29.8%, respectively, over the first
quarter of 1998. These results reflect the charges for the previously discussed
1999 and 1998 separation programs and the 1998 tobacco-related litigation
settlement. Excluding the after-tax impact of these items, net earnings
increased 1.4% to $2.0 billion, diluted EPS increased 1.3% to $0.80 and basic
EPS increased 1.3% to $0.81.
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") issue 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.
The Company and each of its operating subsidiaries are well along in
implementing a CDC readiness program with the objective of having all of their
significant Business Systems, including those that affect facilities and
manufacturing activities, functioning properly with respect to the CDC issue
before January 1, 2000, and 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. The Company and its operating
subsidiaries are using both internal and external resources to complete this
process. As of March 31, 1999, this effort, as well as the testing and
certification of
-21-
<PAGE>
individual systems for CDC readiness, was 90% complete; the remaining internal
Business Systems are expected to be fully remediated, tested and certified by
September 1999. Integration testing and certification (i.e., the testing and
certification of the interfaces between individual Business Systems previously
certified as Year 2000 ready as well as the testing and certification of the
external linkages between the Company's systems with those of third parties) is
underway and is expected to be substantially completed by September 1999.
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. The initial evaluation is complete. With the exception of
certain utilities and governmental entities (particularly outside the United
States), the Company currently believes that the vast majority of its 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. The CDC readiness of Key Business Partners continues to be
monitored and contingency plans continue to be developed, as appropriate, to
address those considered to have a significant risk of CDC failure.
Because of the vast number of Business Systems used by the Company and its
operating subsidiaries, the significant number of Key Business Partners, the
extent of the Company's foreign operations, including operations within
countries that are not actively promoting resolution of the CDC issue, the
Company presently believes that its operating subsidiaries may 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 to the businesses of its operating subsidiaries
exist in certain international markets and with respect to the CDC readiness of
certain of its Key Business Partners. Each of the Company's operating
subsidiaries is developing 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.
Concurrently with implementing the CDC readiness measures described above, the
Company and its operating subsidiaries are developing contingency plans intended
to mitigate the possible disruption in business operations that may result from
the CDC issue. Contingency plans fall into two categories: "event-triggered" and
"preemptive." Event-triggered plans are those that will be implemented in
response to actual Year 2000 events or disruptions as they arise, whereas
preemptive strategies are those that will be implemented in advance of 2000 in
order to avoid or minimize the impact of anticipated or potential Year 2000
problems. The Company's contingency plans may 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, manual
workarounds, procuring back-up power generators and heat supply for key plants,
hiring additional staff, and other appropriate measures. The Company's objective
is to substantially complete its initial contingency plans by June 1999, but the
Company will continue to evaluate and modify these plans as additional
information becomes available. While the Company cannot reasonably estimate at
this time the aggregate cost of
-22-
<PAGE>
implementing contingency plans (since such costs will depend on the nature and
extent of future Year 2000 events and related event-triggered costs), it
currently does not believe that such 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.
It is currently estimated that the aggregate cost of the Company's CDC
compliance/remediation efforts will be approximately $550 million, of which
approximately $400 million has been spent. The remaining costs relate to
remediation efforts, the final testing and certification of Business Systems,
preemptive contingency plans and other CDC-related efforts, including
incremental costs associated with transition management that will be incurred in
the Year 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 any costs associated with the implementation of event-triggered
contingency plans. The costs associated with the replacement of computerized
systems, hardware or equipment (currently estimated to be approximately $150
million), substantially all of which would be 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.
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 remediate and test all date-sensitive
lines of computer code and embedded chips; 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 (for example, the availability of
additional warehouse space); and the occurrence of broad-based or systemic
economic or infrastructure 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 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.
-23-
<PAGE>
Operating Results by Business Segment
- -------------------------------------
Tobacco
- -------
Business Environment
The tobacco industry, both in the United States and abroad, has faced, and
continues to face, a number of issues that may adversely affect the business,
volume, results of operations, cash flows and financial position of PM 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.; 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 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, as well as the testing and reporting of the yields of "tar,"
nicotine and other constituents found in cigarette smoke; 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 including two European Union directives that, unless
successfully challenged or reversed, will (i) ban virtually all forms of tobacco
advertising and sponsorship in the European Union other than at the retail point
of sale (currently being challenged by the Federal Republic of Germany and
others), and (ii) abolish duty-free sales generally among member states of the
European Union (efforts to reverse this legislation are underway); proposed
legislation to eliminate the U.S. tax 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 countries.
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 in the year 2000 and
then to $0.39 per pack in 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
-24-
<PAGE>
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. 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 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
- ---------------------------------------------
alleged harmful physical effects 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, and 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
U.S. 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
-25-
<PAGE>
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.
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.
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 or have been
asked to testify in connection with certain of these matters. The investigations
include four grand jury investigations being conducted by: the United States
Department of Justice in Washington, D.C., relating to issues raised in
testimony provided by tobacco industry executives before Congress and other
related matters; 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.
Tobacco-Related Litigation and Threatened Federal Action: There is substantial
- --------------------------------------------------------
litigation pending related to tobacco products in the United States and certain
foreign jurisdictions. (See Note 5. Contingencies, above for a discussion of
such litigation.) In addition, in January 1999 President Clinton announced that
the United States Department of Justice is preparing a litigation plan to take
tobacco companies to court and to use the recovered funds to strengthen
Medicare.
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
-26-
<PAGE>
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.
<TABLE>
<CAPTION>
Operating Results
For the Three Months Ended March 31,
-------------------------------------
Operating
Operating Revenues Companies Income
------------------ -----------------
(in millions)
1999 1998 1999 1998
--------- ------- ------ ------
<S> <C> <C> <C> <C>
Domestic tobacco $ 4,460 $ 3,336 $ 918 $ 230
International tobacco 7,340 7,327 1,431 1,418
------- ------- ------ ------
Total tobacco $11,800 $10,663 $2,349 $1,648
======= ======= ====== ======
</TABLE>
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 quarter of 1999, PM Inc.'s operating
revenues increased $1.1 billion (33.7%) over the comparable 1998 period, due
primarily to pricing ($1.4 billion), partially offset by lower volume ($318
million).
During February 1999, PM Inc. announced plans to phase out cigarette production
at its Louisville, Kentucky manufacturing plant. As a result, PM Inc. recorded
a pre-tax charge of $130 million, principally for a portion of the cost of
separation programs covering approximately 1,400 employees, during the first
quarter of 1999. PM Inc. presently anticipates that the total pre-tax charges
related to this plan will approximate $200 million, the balance of which is
expected to be recorded in the second quarter of 1999. In addition, during the
first quarter of 1998, PM Inc. recorded pre-tax charges of $95 million related
to separation programs and $806 million related to settling health care cost
recovery litigation in Minnesota.
Operating companies income for the first quarter of 1999 increased $688 million
from the comparable 1998 period, due primarily to 1998 tobacco litigation
settlement charges ($806 million) and price increases, net of cost increases
($434 million), partially offset by higher charges for separation programs ($35
million), higher marketing, administration and research costs ($328 million,
primarily marketing) and lower volume ($216 million). Excluding the impact of
the 1998 tobacco litigation settlement charges and the separation programs in
each year, PM Inc.'s operating companies income of $1,048 million for the first
quarter of 1999 decreased 7.3% from $1,131 million during the comparable 1998
period.
Domestic tobacco industry shipment volume during the first quarter of 1999
declined 9.7% from the first quarter of 1998 primarily as a result of
settlement-related price increases and wholesalers' decisions to lower their
inventories. PM Inc.'s shipment volume for the first quarter of 1999 was 49.3
billion units, a decrease of 9.6% from the comparable 1998 period. However, PM
Inc. estimates that, excluding the effects of wholesalers' decisions to lower
their inventories during the first quarter of 1999, its volume would have
decreased by approximately 7.0%. For the first quarter of 1999, PM Inc.'s
shipment market share was 50.4%, an increase of 0.1 share points over the
comparable period of 1998. Marlboro shipment volume declined 1.8 billion units
(4.6%) from the first quarter of 1998 to 37.0 billion units for a 37.9% share of
the total industry, an increase of 2.0 share points over the comparable period
of 1998.
-27-
<PAGE>
Based on shipments, the premium segment accounted for approximately 73.9% of the
domestic cigarette industry volume in the first quarter of 1999, an increase of
1.3 share points over the comparable period of 1998. In the premium segment, PM
Inc.'s volume decreased 6.3% during the first quarter of 1999, compared with an
8.1% decrease for the industry, resulting in a premium segment share of 60.5%,
an increase of 1.1 share points over the first quarter of 1998.
In the discount segment, PM Inc.'s shipments decreased 28.9% to 5.5 billion
units in the first quarter of 1999, compared with an industry decline of 14.0%,
resulting in a discount segment share of 21.8%, a decrease of 4.6 share points
from the comparable period of 1998. Basic shipment volume for the first quarter
of 1999 was down 25.0% at 4.5 billion units, for a 17.7% share of the discount
segment, a decrease of 2.6 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 November 1998, PM Inc. announced a price increase of $22.50 per thousand
cigarettes on its domestic premium and discount brands. This followed similar
price increases of $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.
Including the $150 million paid in December, the total acquisition price for
these trademarks is expected to be approximately $300 million.
International tobacco. During the first quarter of 1999, international tobacco
operating revenues increased $13 million (0.2%) over the first quarter of 1998,
including excise taxes. Excluding excise taxes, operating revenues decreased
$187 million (4.8%), due primarily to unfavorable volume/mix ($272 million),
partially offset by price increases ($77 million) and favorable currency
movements ($73 million). Operating companies income for the first quarter of
1999 increased $13 million (0.9%) over the comparable 1998 period, due primarily
to price increases ($77 million), favorable currency movements ($31 million),
and lower marketing, administration and research costs, partially offset by
unfavorable volume/mix ($102 million).
PMI's volume decreased 22.3 billion units (11.2%) from the first quarter of 1998
to 177.2 billion units. PMI's volume decline was due primarily to weaker
business conditions in Eastern Europe and parts of Asia and Latin America,
partially offset by volume increases in Western Europe and Japan. Volume
advanced in a number of important markets, including France, Spain, the Benelux
and Scandinavian countries, Greece, Austria, Slovak Republic, Romania, Saudi
Arabia, Egypt, Turkey, Japan, Mexico and Argentina. PMI recorded market share
gains in virtually all major markets. In Germany, however, declines in PMI's
share and the premium segment as a whole reflected competitive disadvantages,
especially in the vending-machine segment, following a second-quarter 1998
industry price increase. Volume for Marlboro declined 1.8% on a reported basis
as weakness in Eastern Europe and worldwide duty-free more than offset volume
and share gains in many of PMI's major markets. However, on an equal trading
day basis volume for Marlboro increased by 0.9%, while volume for PMI declined
by 8.7%.
Although business conditions remained difficult in Eastern Europe during the
first quarter of 1999, PMI recorded higher volume in the Asian markets of Korea,
Singapore, Malaysia and Thailand. During the quarter, PMI accelerated its
investment program to expand local manufacturing capacity in Eastern Europe to
-28-
<PAGE>
address the consumer affordability of its international brand portfolio, and
plans to have additional capacity in place by the third quarter of 1999.
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. 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. However, dairy commodity costs began to moderate early in the first
quarter of 1999 and stabilized by the end of the first quarter of 1999. Coffee
bean prices gradually declined during 1998 and the first quarter of 1999 after
reaching a twenty-year high in May 1997. Declining coffee bean prices have led
to price reductions by Kraft, KFI and their competitors.
During the first quarter of 1999, Kraft recorded a pre-tax charge of
approximately $157 million, primarily for voluntary workforce reductions
covering approximately 700 employees.
During 1998, KFI sold four 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 operating results for the first quarter of 1999.
<TABLE>
<CAPTION>
Operating Results
For the Three Months Ended March 31,
--------------------------------------
Operating
Operating Revenues Companies Income
------------------ ------------------
(in millions)
1999 1998 1999 1998
-------- -------- ------ ------
<S> <C> <C> <C> <C>
North American food $4,396 $4,365 $ 685 $ 802
International food 2,242 2,310 246 235
------ ------ ----- ------
Total food $6,638 $6,675 $ 931 $1,037
====== ====== ===== ======
</TABLE>
North American food. During the first quarter of 1999, operating revenues
increased $31 million (0.7%) from the first quarter of 1998, due primarily to
favorable pricing ($52 million, largely a result of commodity driven price
increases in cheese, partially offset by commodity driven price decreases in
coffee), partially offset by unfavorable currency movements. Operating
companies income for the first quarter of 1999 decreased $117 million (14.6%)
from the first quarter of 1998, due primarily to a charge for voluntary
workforce reductions ($157 million), higher marketing, administration and
research costs ($46 million, the
-29-
<PAGE>
majority of which related to higher marketing expense), unfavorable product mix
($8 million) and unfavorable currency movements ($2 million), partially offset
by cost decreases (aggregating $97 million, driven by lower manufacturing and
commodity-related costs). Excluding the impact of the charge for voluntary
workforce reductions in the first quarter of 1999, operating companies income of
$842 million in 1999 increased 5.0% over $802 million in the first quarter of
1998.
Volume for the first quarter increased slightly over the comparable 1998 period.
Volume gains were achieved by frozen pizza, resulting from the continued success
of rising crust pizza; processed meats, with increases across most product
categories; beverages, from the strength of ready-to-drink beverages and new
product introductions; cheese, across most product lines; meals, primarily as a
result of new product introductions during the second half of 1998; enhancers,
due to higher shipments of pourable dressings and barbecue sauce; and desserts
and snacks, due primarily to the impact of Easter marketing programs.
Offsetting the aforementioned volume gains were volume declines in coffee, with
declines across most product categories following an exceptionally strong fourth
quarter, and in cereals, due to aggressive competitive activity and a decline in
the ready-to-eat cereal category. In Canada, volume declined due to retailers'
decisions to lower their inventories, as well as aggressive competitive activity
in cereals.
International food. Operating revenues for the first quarter of 1999 decreased
$68 million (2.9%) from the first quarter of 1998, due to unfavorable volume/mix
($23 million), unfavorable pricing ($60 million) and the impact of divestitures
($14 million), partially offset by favorable currency movements ($29 million).
Operating companies income for the first quarter of 1999 increased $11 million
(4.7%) from the first quarter of 1998, due primarily to favorable net pricing
(aggregating to $50 million, primarily related to lower coffee costs), favorable
currency movements ($5 million) and favorable volume/mix ($3 million), partially
offset by higher marketing, administration and research costs ($45 million).
Excluding the operating results of the international food businesses divested in
1998, operating revenues of $2,242 million in the first quarter of 1999
decreased 2.4% from $2,296 million in 1998, and operating companies income of
$246 million in 1999 increased 5.1% from $234 million in the first quarter of
1998.
KFI's coffee volume decreased from the comparable period of 1998, as lower
commodity costs intensified price competition in Germany and led to trade
inventory reductions in Sweden. Despite an overall decrease in coffee volume,
KFI experienced share gains in roast and ground coffees in France, Sweden,
Denmark and Austria, while soluble coffee brands gained share in the United
Kingdom and Korea. Confectionery volume was down due to the continued weak
business conditions in Russia; however volume outside Eastern Europe grew as a
result of new products and line extensions. Volume also grew in KFI's cheese and
grocery business, driven by volume and share advances in cream cheese products
in Germany, Italy, Sweden and Australia; snack and lunch combinations in the
United Kingdom and Germany; and powdered soft drink volume in Romania, the
Middle East, Africa, China and the Philippines. In Latin America, volume
declined from the comparable period of 1998 due primarily to lower confectionery
sales in Brazil and lower powdered soft drink sales in Argentina, partially
offset by higher powdered soft drink sales in Brazil and Mexico.
Beer
- ----
Miller's operating revenues for the first quarter of 1999 increased $6 million
(0.6%) over the first quarter of 1998, due primarily to contract manufacturing
fees. Operating companies income for the first quarter of 1999 increased $8
million (6.3%) over the first quarter of 1998, due primarily to contract
manufacturing income and favorable price/mix ($11 million), partially offset by
higher marketing, administration and research costs ($8 million).
Miller's domestic shipment volume of 9.9 million barrels for the first quarter
of 1999 increased 0.5% from the comparable 1998 period, reflecting an increase
in shipments of near-premium brands. Domestic shipments of premium brands were
below the comparable 1998 period, due primarily to lower domestic shipments of
Molson, Miller beer and Miller Genuine Draft, partially offset by double-digit
increases for Icehouse and
-30-
<PAGE>
Foster's. Domestic shipments of Miller Lite increased slightly from the first
quarter of 1998. Domestic shipments of near-premium brand products increased on
higher shipments of Miller High Life and Southpaw Light, while budget brand
products decreased on lower shipments across all brands. Wholesalers' sales to
retailers in the first quarter of 1999 decreased 1.0% from the comparable 1998
period, reflecting lower sales of Miller Lite, Miller Genuine Draft and Miller
beer, partially offset by double-digit increases for Icehouse and Foster's.
Export volume declined 21.6%, as volume shifted to sales under international
licensing agreements.
During April 1999, 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 expects to begin
brewing and shipping the newly acquired brands and to increase its contract
manufacturing during the second quarter of 1999. This expanded agreement is
expected to have a positive impact on Miller's revenue and operating companies
income for the remainder of 1999.
Financial Services
- ------------------
Philip Morris Capital Corporation's ("PMCC") financial services operating
revenues and operating companies income increased in the first quarter of 1999
from the comparable 1998 period. These increases were due primarily to
increased leasing and structured finance investments and the continued
profitability of PMCC's existing portfolio of finance assets.
Financial Review
- ----------------
Net Cash Provided by Operating Activities
- -----------------------------------------
During the first quarter of 1999, net cash provided by operating activities was
$2.0 billion compared with $471 million 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.
Net Cash Used in Investing Activities
- -------------------------------------
During the first quarter of 1999, net cash used in investing activities was $425
million, down from $480 million in 1998. The decrease primarily reflects the
lower level of cash invested in capital expenditures and finance assets during
the first quarter of 1999.
Net Cash Used in Financing Activities
- -------------------------------------
During the first quarter of 1999, net cash of $2.4 billion was used in financing
activities, as compared with $196 million provided by financing activities
during the comparable 1998 period. This difference was primarily due to 1999
net debt repayments of $730 million compared with 1998 net debt issuances of
$1.1 billion and to higher stock repurchases and dividends paid during the first
quarter of 1999. In April 1999, subsequent to the end of the first quarter, the
Company issued debt of $1.1 billion.
Debt and Liquidity
- ------------------
The Company's total debt (consumer products and financial services) was $13.8
billion and $14.7 billion at March 31, 1999 and December 31, 1998, respectively.
Total consumer products debt was $13.1 billion and $14.0 billion at March 31,
1999 and December 31, 1998, respectively. At March 31, 1999 and December 31,
1998, the Company's ratio of consumer products debt to total equity was 0.83 and
0.86, respectively. The ratio of total debt to total equity was 0.87 and 0.91
at March 31, 1999 and December 31, 1998, respectively.
-31-
<PAGE>
Subsequent to March 31, 1999, the Company completed a debt issuance of euro 1.0
billion (approximately U.S. $1.1 billion).
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 $2.0 billion expires in October 1999, and an
agreement for $8.0 billion expires in 2002, enabling the Company to refinance
short-term debt on a long-term basis. The Company expects to refinance long-term
and short-term debt from time to time. The nature and amount of the Company's
long-term and short-term debt and the proportionate amount of each can be
expected to vary as a result of future business requirements, market conditions
and other factors.
The Company's credit ratings by Moody's at March 31, 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 ("S&P") at March
31, 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; 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. The domestic tobacco industry has also
agreed in principle to contribute $5.15 billion over a period of twelve years
into a fund to compensate the domestic tobacco growing community for the
potential adverse economic impact of the foregoing tobacco settlements. 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 quarter of 1999, the Company repurchased 15.6 million shares of
its common stock at a cost of $649 million. The repurchases were made under an
existing $8 billion authority that expires in November 2001. At March 31, 1999,
cumulative repurchases under the $8 billion authority totaled 23.4 million
shares at an aggregate cost of $1.1 billion. The Company did not repurchase
any of its stock during the first quarter of 1998.
Dividends paid in the first quarter of 1999 and 1998 were $1.1 billion and $1.0
billion, respectively. During 1998, the Company's Board of Directors approved a
10% increase in the current quarterly dividend rate to $0.44 per share. As a
result, the present annualized dividend rate is $1.76 per share.
-32-
<PAGE>
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents were $3.2 billion at March 31, 1999 and $4.1 billion
at December 31, 1998, the decrease being largely attributable to the resumption
of the Company's share repurchase program and a lower level of outstanding
borrowings.
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 contracts to hedge
certain anticipated foreign currency revenues and raw materials purchases. The
Company also enters into short-term currency forward contracts, primarily to
hedge intercompany transactions denominated in foreign currencies and to hedge
the purchase of commodities. At March 31, 1999, the Company had long and short
forward exchange/option contracts with U.S. dollar equivalent values of $3.8
billion and $4.0 billion, respectively. At December 31, 1998, the Company had
long and short forward exchange/option contracts with U.S. dollar equivalent
values of $3.6 billion and $4.5 billion, respectively.
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 March 31, 1999 and December
31, 1998, the notional amounts of currency swap agreements aggregated $2.0
billion and $2.5 billion, respectively. Subsequent to March 31, 1999, the
Company executed a euro to Swiss franc currency swap with a notional principal
of $800 million.
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 March 31, 1999 and December
31, 1998, the Company had net long commodity positions of $332 million and $158
million, respectively. Unrealized gains/losses on net commodity positions were
immaterial at March 31, 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 March 31, 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 March 31, 1999 and
December 31, 1998, or the Company's results of operations for the three months
ended March 31, 1999 or the year ended December 31, 1998.
-33-
<PAGE>
New Accounting Standards
- ------------------------
During 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which must be
adopted by the Company by January 1, 2000. 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 contingencies.
Forward-Looking and Cautionary Statements
- -----------------------------------------
The Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company; any such statement is qualified by reference to the following
cautionary statements.
The tobacco industry continues to be subject to health concerns relating to the
use of tobacco products and exposure to ETS, legislation, including tax
increases, governmental regulation, privately imposed smoking restrictions,
governmental and grand jury investigations, litigation, and the effects of price
increases related to concluded tobacco litigation settlements. Each of the
Company's operating subsidiaries is subject to intense competition, changes in
consumer preferences, the effects of changing prices for its raw materials,
local economic conditions and the potential impact of the CDC issue. In
addition, PMI, KFI and Kraft are subject to the effects of foreign economies,
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.
-34-
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders was held in Richmond, Virginia on April
29, 1999. 1,950,651,864 shares of Common Stock, 80.4% of outstanding shares,
were represented in person or by proxy.
The following fifteen directors were elected to a one-year term expiring in
2000:
<TABLE>
<CAPTION>
Number of Shares
-----------------------------
For Withheld
------------- ----------
<S> <C> <C>
Elizabeth E. Bailey 1,940,081,142 10,570,722
Geoffrey C. Bible 1,940,358,905 10,292,959
Murray H. Bring 1,940,469,914 10,181,950
Harold Brown 1,939,835,896 10,815,968
William H. Donaldson 1,940,558,525 10,093,339
Jane Evans 1,940,142,315 10,509,549
J. Dudley Fishburn 1,938,863,799 11,788,065
Robert E. R. Huntley 1,940,052,843 10,599,021
Rupert Murdoch 1,939,022,371 11,629,493
John D. Nichols 1,940,542,430 10,109,434
Lucio A. Noto 1,940,922,708 9,729,156
Richard D. Parsons 1,940,402,334 10,249,530
John S. Reed 1,940,466,691 10,185,173
Carlos Slim Helu 1,940,164,760 10,487,104
Stephen M. Wolf 1,939,839,229 10,812,635
</TABLE>
The selection of PricewaterhouseCoopers LLP as independent accountants was
approved: 1,908,745,027 shares voted in favor; 3,885,276 shares voted against
and 38,021,561 shares abstained (including broker non-votes).
The four stockholder proposals were defeated:
Stockholder Proposal 1 - Protecting Youth from Smoking in Developing Countries:
112,400,072 shares voted in favor; 1,445,990,400 shares voted against and
392,261,392 shares abstained (including broker non-votes).
Stockholder Proposal 2 - Establish a Review Committee to Investigate and
Recommend Actions Related to Smuggled Cigarettes of the Company: 79,477,854
shares voted in favor; 1,460,587,457 shares voted against and 410,586,553 shares
abstained (including broker non-votes).
Stockholder Proposal 3 - Tobacco Executives' Compensation and Reduction of Teen
Tobacco: 64,480,689 shares voted in favor; 1,496,468,018 shares voted against
and 389,703,157 shares abstained (including broker non-votes).
-35-
<PAGE>
Stockholder Proposal 4 - Ensuring That Tobacco Ads Are Not Youth-Friendly:
83,252,543 shares voted in favor; 1,449,215,801 shares voted against and
418,183,520 shares abstained (including broker non-votes).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
3.2 By-Laws, as amended, of the Company. (Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.)
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.
</TABLE>
(b) Reports on Form 8-K. The Registrant filed a Current Report on Form 8-K,
dated January 29, 1999, containing the Registrant's consolidated
financial statements for the year ended December 31, 1998.
-36-
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
/s/ LOUIS C. CAMILLERI
Louis C. Camilleri, Senior Vice President and
Chief Financial Officer
May 14, 1999
-37-
<PAGE>
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
___________________
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
-------------------
<S> <C>
Earnings before income taxes $2,955
Add (Deduct):
Equity in net earnings of less than 50% owned
affiliates (40)
Dividends from less than 50% owned
affiliates 13
Fixed charges 319
Interest capitalized, net of amortization (1)
------
Earnings available for fixed charges $3,246
======
Fixed charges:
Interest incurred:
Consumer products $ 263
Financial services 20
------
283
Portion of rent expense deemed to represent
interest factor 36
------
Fixed charges $ 319
======
Ratio of earnings to fixed charges 10.2
======
</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>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Pages 3-5 of the
Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,194
<SECURITIES> 0
<RECEIVABLES> 5,114
<ALLOWANCES> 173
<INVENTORY> 9,610
<CURRENT-ASSETS> 19,659
<PP&E> 21,108
<DEPRECIATION> 8,941
<TOTAL-ASSETS> 58,782
<CURRENT-LIABILITIES> 16,243
<BONDS> 11,960
0
0
<COMMON> 935
<OTHER-SE> 14,906
<TOTAL-LIABILITY-AND-EQUITY> 58,782
<SALES> 19,497
<TOTAL-REVENUES> 19,497
<CGS> 7,260
<TOTAL-COSTS> 11,623
<OTHER-EXPENSES> 4,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206
<INCOME-PRETAX> 2,955
<INCOME-TAX> 1,168
<INCOME-CONTINUING> 1,787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,787
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.73
</TABLE>
<PAGE>
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 three
categories: (i) smoking and health cases alleging personal injury brought on
behalf of individual plaintiffs, (ii) smoking and health cases alleging personal
injury and purporting to be brought on behalf of a class of individual
plaintiffs, and (iii) health care cost recovery cases brought by governmental
and non-governmental plaintiffs seeking reimbursement for health care
expenditures allegedly caused by cigarette smoking. Governmental plaintiffs
include 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 two of these
categories and certain other pending claims. Certain developments in these
cases since January 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 May 1, 1999, and describes certain developments since
January 1, 1999.
Domestic Cases
- --------------
Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Dade County,
Florida, filed May 5, 1994. The trial is currently underway.
Granier, et al. v. The American Tobacco Company, et al., United States District
Court, Eastern District, Louisiana, filed September 26, 1994.
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 February 1999, the Louisiana Supreme
Court declined to hear defendants' appeal of the lower court's class
certification rulings.
Frosina, et al. v. Philip Morris Incorporated, et al., Supreme Court, New York
County, New York, filed June 19, 1996.
Reed, et al. v. Philip Morris Incorporated, et al., Superior Court, District of
Columbia, filed June 21, 1996.
Barnes (formerly Arch), et al. v. The American Tobacco Company, et al., United
States District Court, Eastern District, Pennsylvania, filed August 8, 1996.
<PAGE>
Lyons, et al. v. The American Tobacco Company, et al., United States District
Court, Southern District, Alabama, filed August 8, 1996.
Blaylock (formerly Holmes and formerly Crozier) v. The American Tobacco Company,
et al., Circuit Court, Montgomery County, Alabama, filed August 8, 1996. In
March 1999, the court dismissed this case without prejudice.
Chamberlain, et al. v. The American Tobacco Company, et al., United States
District Court, Northern District, Ohio, filed August 14, 1996. In April 1999,
the court denied plaintiffs' motion for class certification on behalf of Ohio
smokers ruling that plaintiffs had not satisfied the commonality, typicality and
adequacy of representation requirements of the federal rules of civil procedure.
The judge also held that plaintiffs could not satisfy the predominance and
superiority requirements.
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.
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.
Emig (formerly Green), et al. v. The American Tobacco Company, et al., United
States District Court, Kansas, filed February 6, 1997. In March 1999, plaintiffs
voluntarily dismissed this case without prejudice.
Peterson, et al. v. The American Tobacco Company, et al., United States District
Court, 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.
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.
2
<PAGE>
Clay, et al. v. The American Tobacco Company, Inc., et al., United States
District Court, Southern District, Illinois, Benton Division, filed May 22,
1997.
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.
Tepper, et al. v. Philip Morris Incorporated, et al., Superior Court, Middlesex
County, New Jersey, filed May 28, 1997.
Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San
Diego County, California, filed June 10, 1997. This case has been coordinated
with In re TOBACCO CASES II, discussed below.
Lippincott, et al. v. The American Tobacco Company, Inc., et al., Superior
Court, Middlesex County, New Jersey, filed June 13, 1997.
Brammer, et al. v. R.J. Reynolds Tobacco Company, et al., United States District
Court, Southern District, Iowa, filed June 20, 1997.
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.
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. In May 1999, the
court denied defendants' motion to dismiss.
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.
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.
3
<PAGE>
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. In April
1999, the court denied plaintiffs' motion for class certification on behalf of
New Jersey casino workers who were occupationally exposed to environmental
tobacco smoke ruling that the motion failed on the questions of predominance and
superiority. The court also dismissed several of plaintiffs' claims with
prejudice.
Collier, et al. v. Philip Morris Incorporated, United States District Court,
Southern District of Mississippi, filed May 26, 1998. In March 1999, the court
granted plaintiffs' motion to dismiss this case without prejudice.
Cleary, et al. v. PM Inc., et al., Circuit Court, Cook County Illinois, County
Law Department, Law Division, filed June 3, 1998.
Vaughan, et al. v. Philip Morris Inc., et al., United States District Court,
Western District of Virginia, filed July 30, 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. This purported
class action is brought on behalf of all California smokers. It purports to
allege eight causes of action: two against the State of California and other
California public entities, and six against PM Inc. and other tobacco company
defendants. Against the state and the other public entities, the first cause of
action seeks to prohibit the public entities from concluding any settlements
with the tobacco company defendants; the second cause of action seeks a refund
of all tobacco taxes the purported class has paid. Against PM Inc. and the
other tobacco company defendants, plaintiffs allege causes of action for fraud,
violations of the California Consumers Legal Remedies Act, breach of express and
implied warranties, strict liability, and violations of the California Unfair
Competition Law and False Advertising Law. Plaintiffs seek from the tobacco
companies unspecified general damages, special damages, restitution, a permanent
and preliminary injunction restraining defendants from committing the acts and
offenses alleged in the complaint, and attorneys' fees and costs.
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. In this case,
plaintiffs allege that tobacco companies' "discriminatory targeting of menthol
tobacco product sales to Black Americans" violates federal civil rights
statutes.
4
<PAGE>
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.
Sturgeon, 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.
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.
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.
Nixon v. Philip Morris (Australia) Limited, et al., Federal Court, New South
Wales Registry, filed April 16, 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 May 1, 1999, and describes certain developments since January
1, 1999. Exhibit 99.2 hereto sets forth the status of the Master Settlement
Agreement ("MSA")in each of the respective settling jurisdictions.
The Company believes that the city/county, taxpayer and claims in 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.
5
<PAGE>
People of the State of California v. Philip Morris Incorporated, et al.,
Superior Court, San Francisco County, California, filed September 5, 1996.
City of New York, et al. v. The Tobacco Institute, et al., Supreme Court, New
York County, New York, filed October 17, 1996. In January 1999, the court ruled
that the pending motions in this case, including motions to dismiss, were "moot"
as this case has been settled as part of the MSA.
County of Erie v. The Tobacco Institute, Inc., et al., Supreme Court, Erie
County, New York, filed January 14, 1997. In February 1999, the court stayed
this action until decision of Erie County's appeal of the New York trial court's
approval of the MSA or until further order of the court.
County of Cook v. Philip Morris, Incorporated, et al., Circuit Court, Cook
County, Illinois, filed April 18, 1997.
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.
City of St. Louis v. American Tobacco, et al., United States District Court,
Eastern District of Missouri, 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.
County of Allegheny v. American Tobacco Company, et al., United States District
Court, Pennsylvania, filed March 5, 1999. In April 1999, plaintiff voluntarily
dismissed 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.
The Republic of Guatemala v. The Tobacco Institute, Inc., et al., United States
District Court, District of Columbia, filed May 11, 1998.
The Republic of Panama v. The American Tobacco Company, Inc., et al., United
States District Court, Eastern District, 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 separately challenged by Canadian tobacco
companies. 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 are scheduled
to be heard by the Canadian courts in October 1999.
The Republic of Nicaragua v. Liggett Group, Inc., et al., United States District
Court, Puerto Rico, filed December 10, 1998.
The Republic of Bolivia v. Philip Morris Companies Inc., et al., United States
District Court, District of Columbia, filed January 20, 1999. In March 1999, the
United States District Court for the Southern District of Texas transferred this
case to the United States District Court for the District of Columbia.
6
<PAGE>
The Republic of Venezuela v. Philip Morris Companies Inc., et al., Circuit Court
of the Eleventh Judicial Circuit, Miami-Dade County, Florida, filed January 27,
1999.
The Kingdom of Thailand v. Tobacco Institute, et al., United States District
Court, Southern District, Texas, filed January 29, 1999.
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 May 1999, the court granted defendants' motion to dismiss
claims for disgorgement of profits and restitution under California's unfair
competition statute, but denied the motion with respect to claims for fraud and
misrepresentation, negligent breach of special duty, and claims for injunctive
relief under the statute.
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, the jury returned a verdict in favor of
defendants on all counts. In May 1999, plaintiffs' motion for a new trial was
denied.
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.
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.
Hawaii Health and Welfare Trust Fund for Operating Engineers v. Philip Morris,
Inc., et al., United States District Court, Hawaii, filed June 13, 1997. In
January 1999, the court granted defendants' motion to dismiss based on the
remoteness doctrine and thereafter denied plaintiffs' motion to amend the
judgment to permit the filing of an amended complaint.
Laborers Local 17 Health and Benefit Fund, et al. v. Philip Morris, Inc., et
al., United States District Court, Southern District, New York, filed June 19,
1997. In April 1999, 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.
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.
Oregon Laborers -- Employers Health and Welfare Trust Fund, et al. v. Philip
Morris, Inc., et al., United States District Court, Oregon, filed June 20, 1997.
United Federation of Teachers Welfare Fund, et al. v. Philip Morris, Inc., et
al., United States District Court, Southern District, New York, filed June 25,
1997.
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. In February 1999, the court granted
defendants' motion to dismiss for failure to state a claim.
7
<PAGE>
International Union of Operating Engineers, Local 132, Health and Welfare Fund
v. Philip Morris, Inc., et al., United States District Court, Southern District,
West Virginia, Huntington Division, filed July 10, 1997. In January 1999, the
court granted plaintiffs' motion to drop its class allegations.
Rhode Island Laborers Health and Welfare Fund v. Philip Morris Incorporated, et
al., United States District Court, Rhode Island, filed July 20, 1997.
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.
Asbestos Workers Local 53 Health and Welfare Fund, et al. v. Philip Morris,
Inc., et al., United States District Court, Eastern District, Louisiana, filed
August 15, 1997.
Steamfitters Local Union No. 420 Welfare Fund, et al. v. Philip Morris, Inc., et
al., United States District Court, Eastern District, Pennsylvania, filed August
21, 1997. In March 1999, the Third Circuit Court of Appeals affirmed the
district court's dismissal of plaintiffs' complaint 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.
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.
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.
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.
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 Jersey Carpenters' Health Fund, et al. v. Philip Morris, Inc., et al.,
United States District Court, New Jersey, filed September 25, 1997. In May 1999,
the court dismissed this case with prejudice in light of the ruling by Third
Circuit Court of Appeals in the Steamfitters case discussed above.
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.
Central States Joint Board v. Philip Morris, Inc., et al., United States
District Court, Northern District, Illinois, filed October 20, 1997.
International Brotherhood of Teamsters, Local 734 v. Philip Morris, Inc., et
al., United States District Court, Northern District, Illinois, filed October
20, 1997.
Texas Carpenters Health Benefit Fund, et al. v. Philip Morris, Inc., et al.,
United States District Court, Eastern District, Texas, Beaumont Division, filed
October 31, 1997.
8
<PAGE>
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.
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. In
February 1999, the court granted defendants' motion to dismiss for failure to
state a claim.
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 ruling that plaintiffs' alleged
injuries were "too derivative and remote" to be cognizable under federal
antitrust and RICO law.
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. In January 1999, the court granted defendants' motion to
dismiss as to plaintiffs' antitrust claim, but otherwise denied the motion.
National Asbestos Workers Medical Fund, et al. v. Philip Morris Incorporated, et
al., United States District Court for the Eastern District of New York, filed
February 27, 1998.
Milwaukee Carpenters, et al. v. Philip Morris Incorporated, et al., Circuit
Court, Milwaukee County, Wisconsin, filed March 4, 1998.
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.
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 March 1999, the court denied defendants' motion to dismiss based on failure
to state a claim.
9
<PAGE>
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.
Contractors, Laborers, Teamsters & Engineers Health & Welfare Plan v. Philip
Morris, Inc., et al., United States District Court, Nebraska, filed August 11,
1998. In February 1999, the court granted defendants' motion to dismiss for
failure to state a claim.
Native American Cases
- ---------------------
The Lower Brule Sioux Tribe v. The American Tobacco Company, et al., Tribal
Court, Lower Brule Sioux Tribe, filed June 4, 1997.
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.
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. In March 1999,
the court denied defendants' motion to dismiss.
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.
Conwed Corporation and Leucadia, Inc. v. RJ Reynolds Tobacco Company, et al.,
United States District Court, Minnesota, filed April 9, 1998. In April 1999, the
court dismissed the complaint without prejudice, ruling that ERISA preempts all
of the plaintiff's non-workers' compensation claims and that the workers'
compensation claims were inadequately plead as to the essential elements of each
subrogor-employee's underlying 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 April 1999, the court denied defendants' motion to dismiss. In so
ruling, the judge agreed that plaintiffs stated a claim for relief and
recommended that plaintiffs proceed under federal RICO.
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 February 1999, the court denied certain defendants'
motions to dismiss for failure to state a claim and failure to join necessary
parties and ordered that the federal RICO claims only proceed to trial while the
federal antitrust and state-law claims, although not dismissed, not proceed.
Regence BlueShield, et al. v. Philip Morris, Inc., et al., United States
District Court, Western District, Washington, filed April 29, 1998. In January
1999, the court granted certain defendants' motion to dismiss for failure to
state a claim, holding that plaintiffs do not have standing to bring the action
because the alleged injuries are not distinct and separate from the alleged
injuries to the health care plan members and are, therefore, too remote.
10
<PAGE>
Taxpayer Cases
- --------------
Coyne, et al. v. The American Tobacco Company, et al., United States District
Court for the Northern District of Ohio, filed September 17, 1996.
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.
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.
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 23, 1997. In
February 1999, the Court of Appeals reversed the trial court's dismissal of this
case.
Mason, et al. v. The American Tobacco Company, et al., United States District
Court, Northern District, Texas, filed December 23, 1997. In January 1999, the
court denied defendants' motion to dismiss for failure to state a claim.
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 and one by native Americans, two Proposition 65 cases,
and one smoking and health class action. In March 1999, the court granted
defendants' motion to dismiss claims for negligent misrepresentation in certain
of the union cases but denied the motion with respect to certain statutory
claims and claims for fraud and unjust enrichment.
Allegheny General Hospital, et al. v. Philip Morris, Inc., et al., United States
District Court, Western District, Pennsylvania, filed December 10, 1998.
Association of Washington Public Hospital Districts, et al. v. Philip Morris
Incorporated, United States District Court for the Western District of
Washington, filed March 17, 1999.
CERTAIN OTHER TOBACCO-RELATED ACTIONS
The following lists certain other tobacco-related litigation pending against the
Company and/or various subsidiaries and others as of May 1, 1999, and describes
certain developments since January 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.
11
<PAGE>
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.
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.
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.
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 January 19, 1999.
12
<PAGE>
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. In
April 1999, the court coordinated this case 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. In March 1999, the court coordinated this case 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. In April 1999, the
court granted defendants' motions for summary judgment.
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.
Floyd v. State of Wisconsin, et al., Circuit Court of Milwaukee County,
Wisconsin, filed February 10, 1999. In May 1999, this case was voluntarily
dismissed by plaintiff.
A.D. Bedell Wholesale Co. v. Philip Morris et al., United States District Court,
Western District of Pennsylvania, filed April 9, 1999.
Florida Settlement-Related Cases
- --------------------------------
Oliva, et al. v. State of Florida, et al., Circuit Court of the Eleventh
Judicial Circuit, Dade County, Florida, filed February 23, 1999.
Oliva, et al, v. State of Florida, et al., Circuit Court of the Second
Judicial Circuit, Leon County, Florida filed April 22, 1999.
CERTAIN OTHER ACTIONS
The following lists certain other actions pending against subsidiaries of the
Company and others as of May 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.)
Vincent, et al. v. Kraft Foods, Inc., Circuit Court of Cook County, Illinois,
filed October 27, 1997.
Knevelboard Dairies, et al. v. Kraft Foods, Inc., et al., United States District
Court for the Central District of California, filed April 14, 1998.
------------------------------
In May 1999, the press reported that the provincial governments of Columbia
intend to sue PM Inc. and others for allegedly abetting the smuggling of
cigarettes into Columbia.
13
<PAGE>
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 42 of those jurisdictions. Interventions and/or
challenges to the MSA (or appeals thereof) are pending in 10 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.
<TABLE>
<CAPTION>
===================================================================
INTERVENTION
FINAL AND/OR
JUDICIAL CHALLENGE
JURISDICTION TRIAL COURT APPROVAL APPROVAL PENDING
====================================================================
<S> <C> <C> <C>
- --------------------------------------------------------------------
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
- --------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
===================================================================
INTERVENTION
FINAL AND/OR
JUDICIAL CHALLENGE
JURISDICTION TRIAL COURT APPROVAL APPROVAL PENDING
====================================================================
<S> <C> <C> <C>
- --------------------------------------------------------------------
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
- --------------------------------------------------------------------
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
- --------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
===================================================================
INTERVENTION
FINAL AND/OR
JUDICIAL CHALLENGE
JURISDICTION TRIAL COURT APPROVAL APPROVAL PENDING
====================================================================
<S> <C> <C> <C>
- --------------------------------------------------------------------
West Virginia X X
- --------------------------------------------------------------------
Wisconsin X X
- --------------------------------------------------------------------
Wyoming X X
- --------------------------------------------------------------------
</TABLE>
<PAGE>
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 Type of Action Trial Date
---- -------------- ----------
<S> <C> <C>
Engle, et al. v. R.J. Reynolds Smoking and Health Class Action In Progress
Tobacco Co., et al.
Clay, et al. v. The American Smoking and Health Class Action August 1999
Tobacco Company, Inc., et al. Specific Date to be Set
Northwest Laborers-Employers Health Care Cost Recovery Action September 7, 1999
Health and Security Trust Fund,
et al. v. Philip Morris, Inc.,
et al.
Robert A. Falise, et al. v. The Asbestos Contribution Action November 18, 1999
American Tobacco Company, et al.
Blue Cross and Blue Shield of New Health Care Cost Recovery Action January 10, 2000
Jersey, Inc., et al. v. Philip
Morris, Incorporated, et al.
Richardson, et al. v. Philip Smoking and Health Class Action February 4, 2000
Morris Incorporated, et al.
Thomas and Owens Corning v. R.J. Asbestos Contribution Action February 14, 2000
Reynolds Tobacco Company, et al.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Case Type of Action Trial Date
---- -------------- ----------
<S> <C> <C>
Group Health Plan, et al. v. Health Care Cost Recovery Action March 1, 2000
Philip Morris, Inc., et al.
Thompson, et al. v. American Smoking and Health Class Action March 1, 2000
Tobacco Company, Inc., et al.
West Virginia--Ohio Valley Area Health Care Cost Recovery March 7, 2000
International Brotherhood of Action
Electrical Workers Welfare Fund
v. The American Tobacco Company,
et al.
National Asbestos Workers Medical Health Care Cost Recovery Action April 5, 2000
Fund, et al. v. Philip Morris
Incorporated, et al.
International Union of Operating Health Care Cost Recovery June 6, 2000
Engineers Local 132 v. Philip Action
Morris, Inc., et al.
In re TOBACCO II Health Care Cost Recovery June 19, 2000
Action (26 consolidated
union cases)
</TABLE>
Below is a schedule setting forth by month the number of individual smoking and
health cases against PM Inc. that are currently scheduled for trial through the
end of the year 2000.
<TABLE>
<CAPTION>
1999 2000
- ---- ----
<S> <C>
May (1, in progress) January (1)
September (1) April (1)
October (2) May (1)
July (1)
September (1)
November (1)
</TABLE>
