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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 1-8940
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PHILIP MORRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
VIRGINIA 13-3260245
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 PARK AVENUE,
NEW YORK, N.Y. 10017
(Address of principal executive offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 917-663-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $0.33 1/3 par value New York Stock Exchange
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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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
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The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant, computed by reference to the closing price of
such stock on February 26, 1999, was approximately $95 billion. At such date,
there were 2,425,864,366 shares of the registrant's Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to stockholders for the year
ended December 31, 1998, are incorporated in Part I, Part II and Part IV hereof
and made a part hereof. The registrant's definitive proxy statement for use in
connection with its annual meeting of stockholders to be held on April 29, 1999,
is incorporated in Part III hereof and made a part hereof.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS
GENERAL
Philip Morris Companies Inc. is a holding company whose principal
wholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris
International Inc., Kraft Foods, Inc., and Miller Brewing Company, are engaged
in the manufacture and sale of various consumer products. A wholly-owned
subsidiary of the Company, Philip Morris Capital Corporation, engages in various
financing and investment activities. As used herein, unless the context
indicates otherwise, the term "Company" means Philip Morris Companies Inc. and
its subsidiaries. The Company is the largest consumer packaged goods company in
the world.*
Philip Morris Incorporated ("PM Inc."), which conducts business under the
trade name "Philip Morris U.S.A.," and its subsidiaries and affiliates are
engaged in the manufacture and sale of cigarettes. PM Inc. is the largest
cigarette company in the United States. Philip Morris International Inc.
("Philip Morris International" or "PMI") is a holding company whose subsidiaries
and affiliates and their licensees are engaged primarily in the manufacture and
sale of tobacco products (mainly cigarettes) internationally. A subsidiary of
Philip Morris International is the leading United States exporter of cigarettes.
MARLBORO, the principal cigarette brand of these companies, has been the world's
largest-selling cigarette brand since 1972. Certain subsidiaries and affiliates
of Philip Morris International manufacture and sell a wide variety of food
products in Latin America.
Kraft Foods, Inc. ("Kraft"), is the largest processor and marketer of retail
packaged foods in the United States. A wide variety of cheese, processed meat
products, coffee and grocery products are manufactured and marketed in the
United States and Canada by Kraft. Subsidiaries and affiliates of Kraft Foods
International, Inc. ("Kraft Foods International"), a subsidiary of Kraft,
manufacture and market coffee, confectionery, cheese, grocery and processed meat
products primarily in Europe and the Asia/ Pacific region.
Miller Brewing Company ("Miller") is the second-largest brewing company in
the United States.
SOURCE OF FUNDS--DIVIDENDS
Because the Company is a holding company, its principal source of funds is
dividends from its subsidiaries. The Company's principal wholly-owned
subsidiaries currently are not limited by long-term debt or other agreements in
their ability to pay cash dividends or make other distributions with respect to
their common stock.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
In 1998, the Company's significant industry segments were domestic tobacco,
international tobacco, North American food, international food, beer and
financial services. Operating revenues and operating companies income (together
with a reconciliation to operating income) attributable to each such segment for
each of the last three years (along with total assets for each of tobacco, food,
beer and financial services at December 31, 1998, 1997 and 1996) are set forth
in Note 12 to the Company's consolidated financial statements and are
incorporated herein by reference to the Company's annual report to stockholders
for the year ended December 31, 1998 (the "1998 Annual Report").
In 1998, operating companies income for domestic tobacco was approximately
13.1% of consolidated operating companies income, down from 25.7% in 1997 and
32.7% in 1996. Both the decrease from 1996 to 1997 and the decrease from 1997 to
1998 were due primarily to charges recorded in 1998 and 1997 in
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* References to the Company's competitive ranking in its various businesses
are based on sales data or, in the case of cigarettes and beer, shipments,
unless otherwise indicated.
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connection with tobacco litigation settlements discussed below in Item 3. LEGAL
PROCEEDINGS. International tobacco contributed 44.4% of consolidated operating
companies income in 1998, compared with 35.7% and 31.7%, respectively, in 1997
and 1996. North American food and international food contributed 27.0% and 9.9%,
respectively, to consolidated operating companies income in 1998, compared with
22.4% and 10.3%, respectively, in 1997 and 20.5% and 10.1%, respectively, in
1996. Beer and financial services contributed 4.0% and 1.6%, respectively, to
consolidated operating companies income in 1998, compared with 3.6% and 2.3%,
respectively, in 1997, and 3.4% and 1.6%, respectively, in 1996. The higher
contribution attributable to financial services in 1997 reflects a $103 million
pre-tax gain on the sale of its real estate operations.
(C) NARRATIVE DESCRIPTION OF BUSINESS
TOBACCO PRODUCTS
PM Inc. manufactures, markets and sells cigarettes in the United States.
Subsidiaries and affiliates of Philip Morris International and their licensees
manufacture, market and sell tobacco products outside the United States and
export tobacco products from the United States.
DOMESTIC TOBACCO PRODUCTS
PM Inc. is the largest tobacco company in the United States, with total
cigarette shipments in the United States of 227.6 billion units in 1998, a
decrease of 3.2% from 1997. PM Inc. accounted for 49.4% of the cigarette
industry's total shipments in the United States in 1998 (an increase of 0.7
share points from 1997). The industry's cigarette shipments in the United States
decreased by 4.6% in 1998. The following table(+) sets forth the industry's
cigarette shipments in the United States, PM Inc.'s shipments and its share of
United States industry shipments:
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YEARS ENDED PM INC.
DECEMBER 31 INDUSTRY* PM INC. SHARE OF INDUSTRY
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(IN BILLIONS OF UNITS) (%)
1998...................................................... 460.8 227.6 49.4
1997...................................................... 482.9 235.2 48.7
1996...................................................... 483.2 230.8 47.8
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PM Inc.'s major premium brands are MARLBORO, VIRGINIA SLIMS, BENSON &
HEDGES, MERIT and PARLIAMENT. Its principal discount brands are BASIC and
CAMBRIDGE. All of its brands are marketed to take into account differing
preferences of adult smokers. MARLBORO is the largest-selling cigarette brand in
the United States, with shipments of 162.5 billion units in 1998 (down 0.9% from
1997), equating to 35.3% of the United States market (up from 34.0% in 1997).
In December 1998, PM Inc. paid $150 million for options to purchase the
United States rights to manufacture and market three cigarette trademarks, L&M,
Lark and Chesterfield, the international rights to which are already owned by
Philip Morris International. The exercise of the options is subject to certain
conditions. Including the $150 million paid in December, the total acquisition
price for these trademarks will be $300 million. L&M, Lark and Chesterfield
accounted for less than 0.2% of domestic cigarette industry volume in 1998. In
February 1999, PM Inc. announced that it plans to phase out cigarette production
at its Louisville, Kentucky manufacturing plant by December 2000.
In 1998, the premium and discount segments accounted for approximately 73%
and 27%, respectively, of domestic cigarette industry volume, versus 72.3% and
27.7%, respectively, in 1997. PM Inc.'s share of the premium segment was 58.4%
in 1998, an increase of 0.8 share points over 1997. Shipments of premium
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+ Data presented in this table differ in some cases from data discussed above
due to rounding differences.
* Source: Management Science Associates.
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cigarettes accounted for 86.4% of PM Inc.'s 1998 volume, up from 85.7% in 1997.
In 1998, United States industry shipments within the discount segment declined
6.9% from 1997 levels; PM Inc.'s 1998 shipments within this category declined
8.1%, resulting in a share of 25.0% of the discount segment (down 0.3 share
points from 1997).
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 the tobacco litigation settlements and, if enacted, by
increased excise taxes or other tobacco legislation discussed below.
INTERNATIONAL TOBACCO PRODUCTS
Philip Morris International's total cigarette shipments grew 1.0% in 1998,
to 716.9 billion units. Philip Morris International estimates that its share of
the international cigarette market (excluding the United States) was 13.9% in
1998, up from 13.6% in 1997. Philip Morris International estimates that
international cigarette industry shipments (excluding the United States) were
approximately 5.2 trillion units in 1998, down slightly from 1997, due to the
impact of regional economic crises. Philip Morris International unit shipments
(including brands acquired through acquisitions) have grown at a compounded
annual growth rate of 9.3% over the last five years, versus compounded annual
industry growth of approximately 1.3% over the same period. Philip Morris
International's leading international brands--MARLBORO, L&M, PHILIP MORRIS, BOND
STREET, CHESTERFIELD, PARLIAMENT, LARK, MERIT and VIRGINIA SLIMS--collectively
accounted for approximately 10.8% of the international cigarette market
(excluding the United States) in 1998, up from 10.7% in 1997. Unit sales of
Philip Morris International's principal brand, MARLBORO, increased 3.8% in 1998,
to 330 billion units, representing more than 6% of the international cigarette
market (excluding the United States).
Philip Morris International has a cigarette market share of at least 15%,
and in a number of instances substantially more than 15%, in more than 40
markets, including Argentina, Australia, Belgium, the Czech Republic, Finland,
France, Germany, Hong Kong, Hungary, Italy, Japan, Mexico, the Netherlands,
Poland, Portugal, Saudi Arabia, Singapore, Spain, Switzerland and Turkey.
In 1998, Philip Morris International took a number of measures to invest in
and expand its international manufacturing base. Philip Morris International
acquired the assets of its former licensee in Indonesia, produced L&M and BOND
STREET at a new manufacturing facility in Romania, and began construction of new
manufacturing plants in St. Petersburg, Russia and in Almaty, Kazakhstan.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
PM Inc. sells its tobacco products principally to wholesalers (including
distributors), large retail organizations, including chain stores, and the armed
services. Subsidiaries and affiliates of Philip Morris International and their
licensees market cigarettes and other tobacco products worldwide, directly or
through export sales organizations and other entities with which they have
contractual arrangements.
The market for tobacco products is highly competitive, characterized by
brand recognition and loyalty, with product quality, price, marketing and
packaging constituting the significant methods of competition. Promotional
activities include, in certain instances and where permitted by law, allowances,
the distribution of incentive items, price reductions and other discounts. The
tobacco products of the Company's subsidiaries, affiliates and their licensees
are advertised and promoted through various media, although television and radio
advertising of cigarettes is prohibited in the United States and is prohibited
or restricted in many other countries. In addition, as discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") on pages 21-35 of the Company's 1998 Annual Report, incorporated herein
by reference, PM Inc. and other domestic tobacco manufacturers have agreed to
other marketing restrictions in the United States as part of the settlements of
state health care cost recovery actions.
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PM Inc. and Philip Morris International's subsidiaries and affiliates and
their licensees purchase domestic burley and flue-cured leaf tobaccos of various
grades and types each year, primarily at domestic auction. In addition, oriental
tobacco and certain other tobaccos are purchased outside the United States. The
tobacco is then graded, cleaned, stemmed and redried prior to its storage for
aging up to three years. Large quantities of leaf tobacco inventory are
maintained to support cigarette manufacturing requirements. Tobacco is an
agricultural commodity subject to United States government controls, including
the tobacco price support (subject to Congressional review) and production
adjustment programs administered by the United States Department of Agriculture
(the "USDA"), either of which can substantially affect market prices. PM Inc.
and Philip Morris International believe there is an adequate supply of tobacco
in the world markets to satisfy their current production requirements.
TAXES, LEGISLATION, REGULATION AND OTHER MATTERS REGARDING TOBACCO AND SMOKING
The tobacco industry, both in the United States and abroad, has faced, and
continues to face, a number of issues that may adversely affect the business,
volume, results of operations, cash flows and financial position of PM Inc.,
Philip Morris International 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 purported adverse health effects associated
with both smoking and exposure to environmental tobacco smoke ("ETS"); increased
smoking and health litigation; price increases in the United States related to
the settlement of certain tobacco litigation; actual and proposed excise tax
increases; 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 on
tobacco manufacturing, marketing, advertising and sales (including two European
Union directives that, if implemented, will (i) ban virtually all forms of
tobacco advertising and sponsorship in the European Union other than at the
retail point of sale, and (ii) abolish duty-free tobacco sales among member
states of the European Union); 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 Philip Morris International, 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 Philip Morris
International, 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
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established by a 1970 voluntary agreement among domestic cigarette
manufacturers. In February 1998, PM Inc. and three other domestic cigarette
manufacturers filed comments on the proposed revisions. In November 1998, the
FTC wrote to the Department of Health and Human Services requesting its
assistance in developing specific recommendations on the future of the FTC's
program for testing the "tar," nicotine and carbon monoxide content of
cigarettes.
FDA REGULATIONS--The FDA has promulgated regulations asserting jurisdiction
over cigarettes as "drugs" or "medical devices" under the provisions of the
Food, Drug and Cosmetic Act. These regulations include severe restrictions on
the distribution, marketing and advertising of cigarettes, and would require the
industry to comply with a wide range of labeling, reporting, recordkeeping,
manufacturing and other requirements. The FDA's exercise of jurisdiction, if not
reversed by judicial or legislative action, could lead to more expansive
FDA-imposed restrictions on cigarette operations than those set forth in the
regulations, and could materially adversely affect the business, volume, results
of operations, cash flows and financial position of PM Inc. and the Company. In
August 1998, the Fourth Circuit Court of Appeals ruled that the FDA does not
have the authority to regulate tobacco products, and declared the FDA's
regulations invalid and, in November 1998, that court denied the FDA's petition
for rehearing. The FDA is now petitioning the U.S. Supreme Court to review the
judgment of the Fourth Circuit Court of Appeals in this case. 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 to be 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 alleged 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 alleged health effects of ETS. The report included a
risk assessment relating to the alleged 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
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the EPA may have reached different conclusions had it complied with certain
relevant statutory requirements. The federal government has appealed the court's
ruling. The ultimate outcome of this litigation cannot be predicted.
In October 1997, at the request of the United States Senate Judiciary
Committee, the Company provided the Committee with a document setting forth the
Company's position on a number of issues. On the issues of the role played by
cigarette smoking in the development of lung cancer and other diseases in
smokers, and whether nicotine, as found in cigarette smoke, is "addictive," the
Company stated that despite the differences that may exist between its views and
those of the public health community, it would, in order to ensure that there
will be a single, consistent public health message on these issues, refrain from
debating the issues other than as necessary to defend itself and its opinions in
the courts and other forums in which it is required to do so. The Company also
stated that in relation to these issues, and the alleged health effects of
exposure to ETS, the Company is prepared to defer to the judgment of public
health authorities as to what health warning messages will best serve the public
interest.
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, provide
that the Federal Cigarette Labeling and Advertising Act and the Smoking
Education Act could not be used as a defense against liability under state
statutory or common law, allow state and local governments to restrict the sale
and distribution of cigarettes, and further restrict certain advertising of
cigarettes and eliminate or reduce the tax deductibility of tobacco advertising.
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., Philip Morris International 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
Attorney for the Eastern District of New York relating to The Council for
Tobacco Research-U.S.A., Inc., a research organization of which PM Inc. was a
sponsor; 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; and the United States Attorney for the Northern District of New
York relating to alleged contraband transactions primarily in Canadian-brand
tobacco products. Philip Morris International and its subsidiary, Philip Morris
Duty Free Inc., have also received subpoenas in the last referenced
investigation. While the outcomes of these investigations cannot be predicted,
PM Inc., Philip Morris International and Philip Morris Duty Free Inc. believe
they have acted lawfully.
TOBACCO-RELATED LITIGATION AND SETTLEMENTS--See Item 3. LEGAL PROCEEDINGS.
below for a discussion of the tobacco-related litigation pending against PM
Inc., Philip Morris International and, in some cases, the Company and its other
subsidiaries and related entities. As noted in the MD&A on pages 21-35 of the
Company's 1998 Annual Report, PM Inc. and other major domestic tobacco product
manufacturers have entered into agreements with states and various U.S.
jurisdictions settling asserted and unasserted health care cost recovery and
other claims. These settlement agreements, among other things, provide for
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substantial annual payments, restrict advertising and marketing of tobacco
products, require public disclosure of certain industry documents, impose
requirements applicable to lobbying activities, and limit the industry's ability
to challenge certain tobacco control and underage use laws.
FOOD PRODUCTS
Kraft and Kraft Foods International have taken a number of actions to
improve their business portfolios and operating efficiencies. During 1998, Kraft
Foods International sold four international food businesses. During 1997, Philip
Morris International sold its Brazilian ice cream businesses, Kraft sold North
American maple-flavored syrup businesses and Kraft Foods International sold a
Scandinavian sugar confectionery business. During 1996, Kraft sold its bagel
business, and Kraft Foods International sold margarine businesses in the U.K.
and Italy. The sales of these and other smaller businesses have not had a
material effect on the Company's results of operations. In the fourth quarter of
1997, the international food businesses recorded pre-tax realignment charges of
$630 million, related primarily to the downsizing or closure of manufacturing
and other facilities, as well as the discontinuance of certain low-margin
product lines. Included in the charges were provisions for incremental
postemployment benefits, primarily related to severance. During 1998, certain
actions contemplated by the charges were undertaken, including the divestiture
or closure of four businesses, the commencement of two manufacturing facilities
closures and consolidation of certain sales force and headquarters functions,
and began to make periodic postemployment payments to severed employees, the
duration of such payments being dictated by the severed employees' salary
grades, years of service and the customs of the respective countries in which
actions were taken. Kraft Foods International anticipates that the majority of
the remaining postemployment payments will be made by the end of the year 2000.
NORTH AMERICA
Kraft is the largest retail packaged food company in North America. Kraft's
principal products include cheese and cheese products, processed meat and
poultry products, coffee, ready-to-eat cereals, salad and other dressings,
powdered and ready-to-drink beverages, frozen pizza, packaged and ready-to-eat
desserts and snacks, packaged pasta dinners, lunch combinations, barbecue
sauces, frozen toppings, confections and other cultured dairy and grocery
products. Its principal brands include KRAFT, VELVEETA, CRACKER BARREL and
POLLY-O cheese and cheese products; PHILADELPHIA cream cheese; CHEEZ WHIZ cheese
sauce; OSCAR MAYER luncheon meats, hot dogs, bacon, ham and other meat products;
LOUIS RICH luncheon meats, poultry franks, turkey bacon and other poultry
products; LUNCHABLES lunch combinations; CLAUSSEN pickles; MAXWELL HOUSE, YUBAN,
GEVALIA and NABOB coffees; GENERAL FOODS INTERNATIONAL COFFEES flavored coffees;
POST ready-to-eat cereals; MIRACLE WHIP salad dressing; KRAFT spoonable and
pourable salad dressings; KOOL-AID, TANG, CAPRI SUN, CRYSTAL LIGHT and COUNTRY
TIME powdered and ready-to-drink beverages; TOMBSTONE and JACK'S frozen pizzas
and DI GIORNO pastas, sauces, cheeses and frozen pizzas; JELL-O desserts;
HANDI-SNACKS snack combinations and desserts; ALTOIDS confections; KRAFT
Macaroni & Cheese dinners; KRAFT and BULL'S-EYE barbecue sauces; COOL WHIP
whipped toppings; STOVE TOP stuffing mix; MINUTE rice; SHAKE 'N BAKE coatings;
LIGHT N' LIVELY, BREYERS, KNUDSEN and BREAKSTONE'S cultured dairy products; and
TACO BELL grocery products (acquired in 1996). During 1998, Kraft entered into a
licensing agreement to manufacture, market and sell CALIFORNIA PIZZA KITCHEN
frozen pizzas and a licensing agreement to market, sell and distribute STARBUCKS
coffees to grocery customers.
INTERNATIONAL
Subsidiaries and affiliates of Kraft Foods International manufacture and
market a wide variety of coffee, confectionery, cheese, grocery and processed
meat products in Europe, with distribution to the Middle East and Africa. In the
Asia/Pacific region, select grocery products are produced locally, and other
Company branded products are sourced from Europe and the United States. In Latin
America, subsidiaries and affiliates of Philip Morris International manufacture
and market a wide variety of food products, including confectionery products,
various powdered soft drinks, and other grocery products sold by Kraft. In 1998,
approximately 83% of operating revenues for the international food businesses
were derived from
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sales made in Europe. International brands include JACOBS, GEVALIA, CARTE NOIRE,
JACQUES VABRE, KAFFEE HAG, GRAND' MERE, KENCO, SAIMAZA and SPLENDID coffees;
MILKA, SUCHARD, COTE D'OR, MARABOU, TOBLERONE, FREIA, TERRY'S, DAIM and CALLARD
& BOWSER confectionery products; HOLLYWOOD chewing gum; DAIRYLEA, EL CASERIO and
INVERNIZZI cheeses; MIRACOLI pasta dinners and sauces; VEGEMITE spread; ESTRELLA
and MAARUD snacks; and SIMMENTHAL meats, as well as a variety of products sold
by Kraft in the United States, including PHILADELPHIA cream cheese. In 1996,
Philip Morris International acquired nearly all of the remaining voting shares
of Industrias de Chocolate Lacta S.A., a Brazilian confectionery company.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
Kraft's products in North America are generally sold to supermarket chains,
wholesalers, club stores, mass merchandisers, distributors, convenience stores,
individual stores and other retail food outlets. In general, the retail trade
for food products is consolidating. Food products are distributed through
distribution centers, satellite warehouses, company-operated and public
cold-storage facilities, depots and other facilities. Selling efforts are
supported by national and regional advertising on television and radio and in
magazines and newspapers, as well as by sales promotions, product displays,
trade incentives, informative material offered to customers and other
promotional activities. Subsidiaries and affiliates of Kraft Foods International
and Philip Morris International sell their food products primarily in the same
manner and also engage the services of independent sales offices and agents.
Advertising is tailored by product and country to reach targeted audiences.
Kraft is subject to highly competitive conditions in all aspects of its
business. Competitors include large national and international companies and
numerous local and regional companies. Its food products also compete with
generic products and private-label products of food retailers, wholesalers and
cooperatives. Kraft competes primarily on the basis of product quality, service,
marketing, advertising and price.
Kraft is a major purchaser of milk, cheese, green coffee beans, cocoa, corn,
wheat, poultry, pork, beef, vegetable oil, and sugar and other sweeteners. Kraft
continuously monitors worldwide supply and cost trends of these commodities to
enable it to take appropriate action to obtain ingredients needed for
production.
Kraft purchases all of its milk requirements and a substantial portion of
its cheese requirements from independent sources, principally from cooperatives
and individual producers. The prices for milk and other dairy product purchases
are substantially influenced by government programs, as well as market supply
and demand. During 1998, the cost of certain United States dairy commodities
reached record high levels. These costs began to moderate early in 1999.
The most significant cost item in coffee products is green coffee beans,
which are purchased on world markets. Green coffee bean prices are affected by
the quality and availability of supply, trade agreements among producing and
consuming nations, the unilateral policies of the producing nations, changes in
the value of the United States dollar in relation to certain other currencies
and consumer demand for coffee products. Coffee bean prices declined during the
last three quarters of 1998 after reaching a 20-year high in May 1997.
A significant cost item in confectionery products is cocoa, which is
purchased on world markets, and the price of which is affected by the quality
and availability of supply and changes in the value of the British pound
sterling relative to certain other currencies.
The purchase price of poultry and meat cuts is the major factor in the cost
of Kraft's processed meat products. Poultry and meat prices are cyclical and are
affected by market supply and demand.
Kraft is also a major user of packaging materials purchased from many
suppliers.
The prices paid for raw materials used in food products generally reflect
external factors such as weather conditions, commodity market activities,
currency fluctuations, and the effects of governmental agricultural programs.
Although the prices of the principal raw materials can be expected to fluctuate
as a result of government actions and/or market forces (which would directly
affect the cost of products and
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value of inventories), Kraft and Philip Morris International believe such raw
materials to be in adequate supply and generally available from numerous
sources.
REGULATION
Almost all of Kraft's United States food products (and packaging materials
therefor) are subject to regulations administered by the FDA or, with respect to
products containing meat and poultry, the USDA. Among other things, these
agencies enforce statutory prohibitions against misbranded and adulterated
foods, establish ingredients and/or manufacturing procedures for certain
standard foods, establish standards of identity for food, determine the safety
of food substances, and establish labeling standards and nutrition labeling
requirements for food products.
In addition, various states regulate the business of Kraft's United States
operating units by licensing dairy plants, enforcing federal and state standards
of identity for food, grading food products, inspecting plants, regulating
certain trade practices in connection with the sale of dairy products and
imposing their own labeling requirements on food products.
Many of the food commodities on which Kraft's United States businesses rely
are subject to governmental agricultural programs. These programs have
substantial effects on prices and supplies and are subject to Congressional
review.
Almost all of the activities of the Company's food operations outside of the
United States are subject to local and national regulations similar to those
applicable to Kraft's United States businesses and, in some cases, international
regulatory provisions (such as those of the European Union) relating to
labeling, packaging, food content, pricing, marketing and advertising, and
related areas.
BEER
PRODUCTS
Miller's brands include MILLER LITE, MILLER LITE ICE, MILLER GENUINE DRAFT,
MILLER GENUINE DRAFT LIGHT, MILLER BEER and ICEHOUSE in the premium segment; the
MILLER HIGH LIFE family, including MILLER HIGH LIFE, MILLER HIGH LIFE LIGHT and
MILLER HIGH LIFE ICE, and RED DOG in the near-premium segment; LOWENBRAU, in the
above-premium segment, which is brewed and sold in the United States pursuant to
a license agreement that is scheduled to expire on September 30, 1999; MEISTER
BRAU, MILWAUKEE'S BEST and MAGNUM MALT LIQUOR in the below-premium segment; and
SHARP'S non-alcohol brew. Miller's brands in the specialty segment are
LEINENKUGEL, CELIS and SHIPYARD. Miller also owns a majority interest in Molson
USA, LLC, one of the largest beer importers in the United States, whose brands
include MOLSON and FOSTER'S. Other brands in the import segment include
PRESIDENTE and SHANGHAI (available February 1999).
Miller's total shipment volume (which excludes international shipments of
Miller products by other brewers under license and contract brewing
arrangements) of 42.7 million barrels for 1998 decreased 2.3% from 1997. Export
shipments decreased 18.6%, with a planned, corresponding increase in licensee
volume. Domestic shipments of 41.7 million barrels decreased 1.8% from 1997.
Miller's estimated market share of the U.S. malt beverage industry (based on
shipments) was 21% in 1998, down from 21.7% in 1997. Wholesalers' sales of
Miller's products to retailers in 1998 decreased 1.3% from 1997. Domestic
shipments of premium-priced brands in 1998 increased slightly to 81.6% of total
domestic shipments.
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The following table sets forth, based on shipments (including imports and
exports), the U.S. industry's sales of beer and brewed non-alcohol beverages, as
estimated by Miller; Miller's unit sales; and Miller's estimated share of
industry sales:
<TABLE>
<CAPTION>
YEARS ENDED MILLER'S
DECEMBER 31 INDUSTRY MILLER SHARE OF INDUSTRY
- ----------------------------------------------------------- --------- --------- -------------------
<S> <C> <C> <C>
(IN THOUSANDS OF
BARRELS) (%)
1998....................................................... 203,646 42,674 21.0
1997....................................................... 201,246 43,675 21.7
1996....................................................... 200,627 43,799 21.8
</TABLE>
During 1997, Miller sold its 20% interest in Molson Breweries of Canada, and
a minority ownership interest in Molson USA, LLC. During 1996, Miller initiated
a number of actions intended to restore growth, streamline its organization and
reduce costs, including a workforce reduction.
In February 1999, Miller announced an agreement to acquire four trademarks
from the Pabst Brewing Company and the Stroh Brewery Company, subject to
regulatory review. Miller also agreed to increase its contract manufacturing of
Pabst products, including brands that Pabst has agreed to acquire from Stroh in
a separate agreement. Miller estimates that the acquisition and increased
contract manufacturing could result in incremental 1999 operating companies
income, depending upon the timing of regulatory review and the subsequent
beginning of production.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
Beer is distributed primarily through independent wholesalers. During 1998,
the agreement by which Miller and its independent wholesalers conduct business
was changed to better define wholesalers' responsibilities and to promote
increased focus on Miller's brands.
The United States malt beverage industry is highly competitive, with the
principal methods of competition being product quality, price, distribution,
marketing and advertising. Miller engages in a wide variety of advertising and
sales promotion activities. Barley malt, hops, corn grits and water represent
the principal ingredients used in manufacturing Miller's products, and are
generally available in the market. The production process, which includes
fermentation and aging periods, is conducted throughout the year. Containers
(bottles, cans and kegs) for beer are purchased from various suppliers.
REGULATION
The malt beverage industry is highly regulated at both the state and federal
levels. The Alcoholic Beverage Labeling Act of 1988 requires all alcoholic
beverages manufactured for sale in the United States to include the following
statement on containers: "GOVERNMENT WARNING: (1) According to the Surgeon
General, women should not drink alcoholic beverages during pregnancy because of
the risk of birth defects. (2) Consumption of alcoholic beverages impairs your
ability to drive a car or operate machinery, and may cause health problems." The
statute empowers the Bureau of Alcohol, Tobacco and Firearms to regulate the
size and format of the warning.
The federal excise tax is 32 cents per package of six 12-ounce containers.
Excise taxes, sales taxes and other taxes affecting beer are also levied by
various states, counties and municipalities. In the opinion of Miller, increases
in excise taxes have had, and could continue to have, an adverse effect on
shipments.
Advertising of alcoholic beverages, including beer, has come under increased
scrutiny by governmental agencies and others. Pursuant to a Congressional
request in 1998, the FTC ordered Miller, along with seven other alcohol beverage
manufacturers, to file a Special Report regarding the industry's self-regulating
efforts related to alcohol advertising and underage consumption. Miller expects
the FTC to report its findings to Congress during the first quarter of 1999.
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In 1997, key changes were made to the Beer Institute's Advertising and
Marketing Code, including the following: a revised introduction clarifying that
the Code applies to advertising and marketing in cyberspace, including the
Internet; an undertaking that the Beer Institute will make a list of brewer web
sites available to all major Internet service providers so that the sites can be
included in parental control software; and an obligation for brewers to include
additional notices on their web sites reminding users of the legal purchase age.
Consistent with the brewers' commitment to marketing their products only to
persons of legal purchase age, the revised Code requires that television survey
data purchased by brewers reflect the proportion of viewers in the sample survey
who are over legal purchase age. The revised code also obligates brewers to
review their advertising placements at least every six months to ensure that the
majority of viewers of brewer-sponsored television programs are above the legal
purchase age.
FINANCIAL SERVICES
Philip Morris Capital Corporation ("PMCC") invests in leveraged and direct
finance leases, other tax-oriented financing transactions and third-party
financial instruments. During 1997, PMCC sold its wholly-owned subsidiary,
Mission Viejo Company, which was engaged in land planning, development and sales
activities in Southern California and in the Denver, Colorado area. Total assets
of PMCC were $6.5 billion at December 31, 1998, up from $5.9 billion at December
31, 1997, reflecting an increase in net finance assets.
OTHER MATTERS
CUSTOMERS
None of the Company's business segments is dependent upon a single customer
or a few customers, the loss of which would have a material adverse effect on
the Company's results of operations.
EMPLOYEES
At December 31, 1998, the Company employed approximately 144,000 people
worldwide.
In February 1998, the Company announced voluntary early retirement and
separation programs for salaried and hourly employees, primarily at PM Inc.'s
manufacturing facilities in Richmond, Virginia and Louisville, Kentucky.
Approximately 2,100 employees were affected by the programs, which were
completed during 1998 at a cost of $337 million, of which $319 million was
charged against domestic tobacco operating results and $18 million, reflecting
actions concerning corporate headquarters' employees, was charged to general
corporate expense. During January 1999, Kraft announced that it will take a
pre-tax charge of approximately $150 million during 1999, primarily for
voluntary retirement and separation programs for employees in the United States.
As previously discussed, in February 1999, PM Inc. announced that it plans to
phase out cigarette production at its Louisville, Kentucky manufacturing plant
by December 2000. PM Inc. estimates that this will result in a pre-tax charge of
approximately $200 million, principally for severance, in the first half of
1999, and will affect approximately 1,400 employees.
TRADEMARKS
Trademarks are of material importance to all three of the Company's consumer
products businesses and are protected by registration or otherwise in the United
States and most other markets where the related products are sold.
ENVIRONMENTAL REGULATION
The Company and its subsidiaries are subject to various federal, state and
local laws and regulations concerning the discharge of materials into the
environment, or otherwise related to environmental protection, including the
Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery
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Act and the Comprehensive Environmental Response, Compensation and Liability
Act, which imposes joint and several liability on each responsible party
(commonly known as "Superfund"). In 1998, subsidiaries (or former subsidiaries)
of the Company were involved in approximately 160 matters subjecting them to
potential remediation costs under Superfund or otherwise. The Company and its
subsidiaries expect to continue to make capital and other expenditures in
connection with environmental laws and regulations. Although it is not possible
to predict precise levels of environmental-related expenditures, compliance with
such laws and regulations, including the payment of any remediation costs and
the making of such expenditures, has not had, and is not expected to have, a
material adverse effect on the Company's results of operations, capital
expenditures, financial position, earnings and competitive position.
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 century date change
(or "Year 2000") issue. In addition, Philip Morris International, Kraft Foods
International 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 elsewhere in Part I hereof and in the MD&A
on pages 21-35 of the Company's 1998 Annual Report, each of which is
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.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The amounts of operating revenues and long-lived assets attributable to each
of the Company's geographic segments and the amount of export sales from the
United States for each of the last three fiscal years are set forth in Note 12
to the Company's consolidated financial statements, incorporated herein by
reference to the Company's 1998 Annual Report.
Subsidiaries of the Company export tobacco and tobacco-related products,
coffee products, grocery products, cheese, processed meats and beer. In 1998,
the value of all exports from the United States by these subsidiaries amounted
to approximately $6 billion.
ITEM 2. DESCRIPTION OF PROPERTY.
TOBACCO PRODUCTS
PM Inc. owns seven tobacco manufacturing and processing facilities--four in
the Richmond, Virginia area, two in Louisville, Kentucky and one in Cabarrus
County, North Carolina. As noted above, cigarette production at one of PM Inc.'s
Louisville, Kentucky plants is scheduled to be phased out. Subsidiaries and
affiliates of Philip Morris International own, lease or have an interest in 55
cigarette or component
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manufacturing facilities in 30 countries outside the United States, including
cigarette manufacturing facilities in Bergen Op Zoom, the Netherlands and in
Berlin, Germany.
FOOD PRODUCTS
The Company's subsidiaries have 54 manufacturing and processing facilities
and 261 distribution centers and depots throughout the United States, as well as
92 foreign manufacturing and processing facilities in 34 countries, and various
distribution and other facilities outside the United States. All significant
plants and properties used for production of food products are owned, although
the majority of the domestic distribution centers and depots are leased.
BEER
Miller owns and operates eight breweries, located in Milwaukee, Wisconsin
(two); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia; Irwindale,
California; Trenton, Ohio; and Chippewa Falls, Wisconsin. Miller owns a majority
interest in the Celis Brewery in Austin, Texas and the Shipyard Brewery in
Portland, Maine. Miller also owns a hops-processing facility in Wisconsin and
owns or leases warehouses in several locations. As part of the Pabst/Stroh
transaction described above, Miller agreed to purchase a brewery in Tumwater,
Washington.
GENERAL
The plants and properties owned and operated by the Company's subsidiaries
are maintained in good condition and are believed to be suitable and adequate
for present needs.
During 1997, the Company's international food businesses recorded a pre-tax
charge of $342 million, related primarily to the downsizing or closure of
manufacturing and other facilities, as well as the discontinuance of certain
low-margin product lines. Facility write-downs included in the charge totaled
$209 million.
ITEM 3. LEGAL PROCEEDINGS.
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. and Philip Morris International,
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 have
included local, state and certain foreign governmental entities.
Non-governmental plaintiffs in these cases include union health and welfare
trust funds ("unions"), Blue Cross/Blue Shield groups, health maintenance
organizations ("HMOs"), hospitals, native American tribes, 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.
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<PAGE>
In recent years, there has been a substantial increase in the number of
tobacco-related cases being filed.
As of March 1, 1999, there were approximately 500 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 375 such
cases on December 31, 1997, and approximately 185 such cases on December 31,
1996. Many of these cases are pending in Florida, West Virginia and New York.
Eighteen of the individual cases involve allegations of various personal
injuries allegedly related to exposure to ETS.
In addition, as of March 1, 1999, there were approximately 65 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 50
such cases on December 31, 1997, and approximately 20 such cases on December 31,
1996. Most of these actions purport to constitute statewide class actions and
were filed after May 1996 when the Fifth Circuit Court of Appeals, in the
CASTANO case, reversed a federal district court's certification of a purported
nationwide class action on behalf of persons who were allegedly "addicted" to
tobacco products.
During 1997 and 1998, PM Inc. and certain other United States tobacco
product manufacturers entered into agreements settling the asserted and
unasserted health care cost recovery and other claims of all 50 states and
several commonwealths and territories of the United States. The settlements are
in the process of being approved by the courts, and some of the settlements are
being challenged by various third parties. As of March 1, 1999, there were
approximately 95 health care cost recovery actions pending in the United States
(excluding the cases covered by the settlements), compared with approximately
105 health care cost recovery cases pending on December 31, 1997, and 25 such
cases on December 31, 1996.
There are also a number of tobacco-related actions pending outside the
United States against Philip Morris International and its affiliates and
subsidiaries, including approximately 31 smoking and health cases initiated by
one or more individuals (Argentina (21), Brazil (1), Canada (1), Ireland (1),
Italy (1), Japan (1), the Philippines (1), Scotland (1), Spain (1) and Turkey
(2)), and six smoking and health putative class actions (Brazil (2), Canada (3)
and Nigeria (1)). In addition, 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.
VERDICTS IN INDIVIDUAL CASES
There have been a number of jury verdicts in individual smoking and health
cases over the past three years. In February 1999, a California jury awarded
$1.5 million in compensatory damages and $50.0 million in punitive damages
against PM Inc. PM Inc. is appealing the verdict and the damage award. Prior to
that, 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 $1.0 million jury award 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. Neither the Company nor its affiliates were parties to that
action.
PENDING AND UPCOMING TRIALS
As of March 1, 1999, trials against PM Inc. and, in one case, the Company
were underway in the ENGLE smoking and health class action in Florida (discussed
below), in a union health care cost recovery action in Ohio (discussed below)
and in individual smoking and health cases in Oregon and Tennessee.
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Additional cases are scheduled for trial during 1999, including one union
health care cost recovery action in Washington (September), one smoking and
health class action in Illinois (August), a "Proposition 65" case (discussed
below) in California (June), and an "asbestos contribution" case (discussed
below) in New York (November). Also, six individual smoking and health cases
against PM Inc. and, in one case, the Company, are currently scheduled for trial
during 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 a 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.
PM Inc. recorded pre-tax charges of $3.1 billion and $1.5 billion during
1998 and 1997, respectively, to accrue for its share of all fixed and
determinable portions of its obligations under the tobacco settlements, as well
as $300 million during 1998 for its unconditional obligation under an agreement
in principle to contribute to a tobacco growers trust fund, discussed below. As
of December 31, 1998, PM Inc. had accrued costs of its obligations under the
settlements and to tobacco growers aggregating $1.4 billion, payable principally
before the end of the year 2000. 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 (of which $2.7 billion related to the MSA and has already been paid
by the industry); 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 made.
The State Settlement Agreements also include provisions, more fully
discussed in the MD&A, 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,
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 growers 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 by the tobacco-growing states. 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
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to be adjusted for several factors, including inflation and United States
cigarette consumption, and are to be allocated based on each manufacturer's
market share.
The Company believes that the State Settlement Agreements may materially
adversely affect the business, volume, results of operations, cash flows or
financial position of PM Inc. and the Company in future years. 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 March 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 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."
A description of the smoking and health litigation, health care cost
recovery litigation and certain other proceedings pending against the Company
and/or its subsidiaries and affiliates follows.
SMOKING AND HEALTH LITIGATION
Plaintiffs' allegations of liability in smoking and health cases are based
on various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, breach of special duty, conspiracy, concert of
action, violations of deceptive trade practice laws and consumer protection
statutes, and claims under the federal Racketeer Influenced and Corrupt
Organization Act ("RICO") and state RICO statutes. In certain of these cases,
plaintiffs claim that cigarette smoking exacerbated the injuries caused by their
exposure to asbestos. Plaintiffs in the smoking and health actions seek various
forms of relief, including compensatory and punitive damages, treble/multiple
damages and other statutory damages and penalties, creation of medical
monitoring and smoking cessation funds, disgorgement of profits, and injunctive
and equitable relief. Defenses raised in these cases include lack of proximate
cause, assumption of the risk, comparative fault and/or contributory negligence,
statutes of limitations and preemption by the Federal Cigarette Labeling and
Advertising Act.
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In May 1996, the Fifth Circuit Court of Appeals 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 (CASTANO, ET AL. V.
THE AMERICAN TOBACCO COMPANY, ET AL.). Since this class decertification, lawyers
for plaintiffs have filed numerous smoking and health class action suits in
various state and federal courts. In general, these cases purport to be brought
on behalf of residents of a particular state or states and raise "addiction"
claims similar to those raised in the CASTANO case and, in many cases, claims of
physical injury as well. As of March 1, 1999, smoking and health class actions
were pending in Alabama, Arkansas, California, the District of Columbia,
Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, 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, West Virginia and Wisconsin,
as well as in Canada, Brazil and Nigeria. Class certification has been denied or
reversed by courts in 13 smoking and health class actions involving PM Inc. in
Louisiana, the District of Columbia, New York (2), Pennsylvania, Puerto Rico,
New Jersey (5), 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, involves evidence concerning certain "common"
class issues relating to the plaintiff class's causes of action. Entitlement to
punitive damages will be decided at the end of Phase One, but no amount will be
set at that time.
If plaintiffs prevail in Phase One, the first two stages of Phase Two will
involve individual determination of specific causation and other individual
issues regarding entitlement to compensatory damages for the class
representatives. Stage three of Phase Two will involve an assessment of the
amount of punitive damages, if any, that individual class representatives will
be awarded. Stage four of Phase Two will involve 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.
17
<PAGE>
HEALTH CARE COST RECOVERY LITIGATION
In certain of the pending proceedings, domestic and foreign governmental
entities and non-governmental plaintiffs, including unions, Blue Cross/Blue
Shield groups, HMOs, hospitals, native American tribes, 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 State Settlement Agreements described
above, as of March 1, 1999, there were approximately 95 health care cost
recovery cases pending 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.
Courts have ruled on preliminary motions to dismiss various claims in
approximately 50 health care cost recovery actions. Although many of the rulings
in cases not settled by the State Settlement Agreements have been favorable to
the industry, a number have been adverse, including rulings in the union cases
scheduled for trial in 1999. In late January and in February of 1999, the Third
and Second Circuit Courts of Appeal heard oral argument on appeals from lower
court rulings on motions to dismiss various claims in health care cost recovery
actions filed by unions. The Company cannot predict the ultimate outcome of such
appeals.
18
<PAGE>
OHIO IRON WORKERS
Trial in this union health care cost recovery action began in February 1999,
and on March 16 the case went to the jury for a verdict on "Phase I" of the
trial (see discussion of trial Phases below). This case is being brought on
behalf of a class consisting of approximately 114 employer-employee trust funds
in Ohio. Plaintiffs seek compensatory damages in excess of $600 million,
statutory treble damages under RICO, and declaratory and injunctive relief
(including disgorgement of profits) as well as equitable relief, attorneys' fees
and court costs. Most of plaintiffs' original causes of action have either been
dismissed or voluntarily withdrawn. At present, plaintiffs have two remaining
claims, one under the Ohio RICO law and the other under general conspiracy law.
The current trial plan calls for the case to be tried in three Phases. Phase
I will determine liability for the named plaintiffs and all other class members.
Phase II will determine damages for the six class representatives. Phase III
will set damages for all absent class members.
CERTAIN OTHER TOBACCO-RELATED LITIGATION
ASBESTOS CONTRIBUTION CASES--Since September 1997, 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 trial of an asbestos contribution case in the Southern
District of New York is scheduled to begin in November 1999.
MARLBORO LIGHT/ULTRA LIGHT CASES--Since June 1998, six class actions have
been filed against PM Inc. and the Company, in Florida, New Jersey,
Pennsylvania, Massachusetts and Tennessee (2), 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,
unjust enrichment, and seek injunctive and equitable relief.
RETAIL LEADERS CASE--In March 1999, R.J. Reynolds Tobacco Company 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 incentive program is exclusionary and creates unreasonable restraint of
trade and unlawful monopolization. In addition to an injunction, plaintiff seeks
unspecified treble damages, attorneys' fees, costs, and interest.
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. One of these cases is scheduled to begin trial in June 1999.
------------------------
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 $2.6 billion. In addition, the Italian lira equivalent of
$3.5 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
105 of the assessments. The
19
<PAGE>
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,
and it is possible that some of these actions could be decided unfavorably. An
unfavorable outcome or settlement of a pending smoking and health or health care
cost recovery case could encourage the commencement of additional similar
litigation. There have also been a number of adverse legislative, regulatory,
political and other developments concerning cigarette smoking and the tobacco
industry that have received widespread media attention. These developments may
negatively affect the perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending litigation, and
may prompt the commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of pending litigation. The
present legislative and litigation environment is substantially uncertain, and
it is possible that the Company's business, 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.
Reference is made to Note 16, incorporated herein by reference to the
Company's 1998 Annual Report, for a description of certain pending legal
proceedings. Reference is also made to Exhibit 99.1 to this Form 10-K for a list
of pending smoking and health class actions, health care cost recovery actions,
and certain other actions, and for a description of certain developments in such
proceedings; Exhibit 99.2 for the status of the MSA in each of the settling
jurisdictions; and Exhibit 99.3 for a schedule of smoking and health class
actions, health care cost recovery and certain other actions that are currently
scheduled for trial through 2000. Copies of Note 16 and Exhibits 99.1, 99.2 and
99.3 are available upon written request to the Corporate Secretary, Philip
Morris Companies Inc., 120 Park Avenue, New York, NY 10017.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
20
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following are the executive officers of the Company as of March 1, 1999:
<TABLE>
<CAPTION>
NAME OFFICE AGE
- ----------------------------------------------------- ----------------------------------------------------- ---
<S> <C> <C>
Geoffrey C. Bible.................................... Chairman of the Board and Chief Executive Officer 61
John D. Bowlin....................................... President and Chief Executive Officer of Kraft Foods 48
International, Inc.
Murray H. Bring...................................... Vice Chairman, External Affairs, and General Counsel 64
Bruce S. Brown....................................... Vice President, Taxes 59
Louis C. Camilleri................................... Senior Vice President and Chief Financial Officer 44
Siw de Gysser........................................ Vice President, Corporate Planning 55
Nancy J. De Lisi..................................... Vice President and Treasurer 48
Robert A. Eckert..................................... President and Chief Executive Officer of Kraft Foods, 44
Inc.
Paul W. Hendrys...................................... President and Chief Executive Officer of Philip 51
Morris International Inc.
G. Penn Holsenbeck................................... Vice President, Associate General Counsel and 52
Corporate Secretary
John N. MacDonough................................... Chairman and Chief Executive Officer of Miller 55
Brewing Company
Steven C. Parrish.................................... Senior Vice President, Corporate Affairs 48
Timothy A. Sompolski................................. Senior Vice President, Human Resources and 46
Administration
Michael E. Szymanczyk................................ President and Chief Executive Officer of Philip 50
Morris Incorporated
Frank T. Toscano..................................... Vice President and Controller 47
William H. Webb...................................... Chief Operating Officer 59
</TABLE>
All of the above-mentioned officers, with the exception of Mr. Holsenbeck,
have been employed by the Company in various capacities during the past five
years. Mr. Holsenbeck was elected to his current position with the Company in
January 1995. Previously, Mr. Holsenbeck held various positions with Bethlehem
Steel Corporation, including Secretary and Deputy General Counsel from 1992 to
January 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information called for by this Item is hereby incorporated by reference
to the paragraph captioned "Quarterly Financial Data (Unaudited)" on page 59 of
the Company's 1998 Annual Report and made a part hereof.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this Item is hereby incorporated by reference
to the information with respect to 1994-1998 appearing under the caption
"Selected Financial Data" on pages 36 and 37 of the Company's 1998 Annual Report
and made a part hereof.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this Item is hereby incorporated by reference
to the paragraphs captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 21 to 35 of the Company's 1998
Annual Report and made a part hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information called for by this Item is hereby incorporated by reference
to the paragraphs in the MD&A captioned "Market Risk" and "Value at Risk" on
pages 33 to 35 of the Company's 1998 Annual Report and made a part hereof.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is hereby incorporated by reference
to the Company's 1998 Annual Report as set forth under the caption "Quarterly
Financial Data (Unaudited)" on page 59 and in the Index to Consolidated
Financial Statements and Schedules (see Item 14) and made a part hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Except for the information relating to the executive officers of the Company
set forth in Part I of this Report, the information called for by Items 10-13 is
hereby incorporated by reference to the Company's definitive proxy statement for
use in connection with its annual meeting of stockholders to be held on April
29, 1999, and made a part hereof.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Index to Consolidated Financial Statements and Schedules
<TABLE>
<CAPTION>
REFERENCE
----------------------------
<S> <C> <C>
FORM 10-K 1998
ANNUAL REPORT ANNUAL REPORT
PAGE PAGE
------------- -------------
Data incorporated by reference to the Company's 1998 Annual Report:
Consolidated Balance Sheets at December 31, 1998 and 1997 -- 38 - 39
Consolidated Statements of Earnings for the years ended December 31,
1998, 1997 and 1996................................................ -- 40
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996................................... -- 42
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996............................................ -- 40 - 41
Notes to Consolidated Financial Statements........................... -- 43 - 59
Report of Independent Accountants.................................... -- 60
Data submitted herewith:
Report of Independent Accountants.................................... S-1 --
Financial Statement Schedule--Valuation and Qualifying Accounts...... S-2 --
</TABLE>
Schedules other than those listed above have been omitted either because
such schedules are not required or are not applicable.
(b) Reports on Form 8-K: During the last quarter of the period for which
this Report is filed, the Company filed a Current Report on Form 8-K
dated November 25, 1998, and a Form 8-K/A dated December 24, 1998,
relating to the MSA. Subsequent to the last quarter of the period for
which this Report is filed, the Company filed a Current Report on Form
8-K dated January 27, 1999, relating to its 1998 financial statements.
23
<PAGE>
(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.1-10.15 are management contracts, compensatory plans or arrangements):
<TABLE>
<S> <C>
3.1. Restated Articles of Incorporation of the Company. (1)
3.2. By-Laws, as amended, of the Company.
4.1. Indenture dated as of August 1, 1990, between the Company and The Chase Manhattan
Bank (formerly known as Chemical Bank), Trustee. (2)
4.2. First Supplemental Indenture dated as of February 1, 1991, to Indenture dated as of
August 1, 1990, between the Company and The Chase Manhattan Bank (formerly known as
Chemical Bank), Trustee. (3)
4.3. Second Supplemental Indenture dated as of January 21, 1992, to Indenture dated as of
August 1, 1990, between the Company and The Chase Manhattan Bank (formerly known as
Chemical Bank), Trustee. (4)
4.4. Indenture dated as of December 2, 1996, between the Company and The Chase Manhattan
Bank, Trustee. (5)
4.5. 5-Year Revolving Credit Agreement dated as of October 14, 1997, among the Company,
and the Initial Lenders named therein and Citibank, N.A., and The Chase Manhattan
Bank, as Administrative Agents, and Credit Suisse First Boston, as Syndication
Agent, and Deutsche Bank AG, New York Branch, as Documentation Agent. (6)
10.1. Financial Counseling Program. (7)
10.2. Philip Morris Benefit Equalization Plan, as amended. (8)
10.3. Form of Employee Grantor Trust Enrollment Agreement. (9)
10.4. Automobile Policy. (7)
10.5. Form of Employment Agreement between the Company and its executive officers. (10)
10.6. Supplemental Management Employees' Retirement Plan of the Company, as amended. (7)
10.7. The Philip Morris 1992 Incentive Compensation and Stock Option Plan. (7)
10.8. 1992 Compensation Plan for Non-Employee Directors, as amended. (11)
10.9. Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996. (9)
10.10. The Philip Morris 1987 Long Term Incentive Plan. (7)
10.11. Form of Executive Master Trust between the Company, The Chase Manhattan Bank
(formerly known as Chemical Bank) and Handy Associates. (10)
10.12. 1997 Performance Incentive Plan. (12)
10.13. Philip Morris Long-Term Disability Benefit Equalization Plan, as amended. (7)
10.14. Philip Morris Survivor Income Benefit Equalization Plan, as amended. (7)
10.15. Amended and Restated Employment Agreement between the Company and Murray H. Bring.
10.16. Comprehensive Settlement Agreement and Release dated October 17, 1997, related to
settlement of Mississippi health care cost recovery action. (7)
10.17. Settlement Agreement dated August 25, 1997, related to settlement of Florida health
care cost recovery action. (13)
</TABLE>
24
<PAGE>
<TABLE>
<S> <C>
10.18. Comprehensive Settlement Agreement and Release dated January 16, 1998, related to
settlement of Texas health care cost recovery action. (14)
10.19. Settlement Agreement and Stipulation for Entry of Judgment, dated May 8, 1998,
regarding the claims of the State of Minnesota. (15)
10.20. Settlement Agreement and Release, dated May 8, 1998, regarding the claims of Blue
Cross and Blue Shield of Minnesota. (15)
10.21. Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order,
dated July 2, 1998, regarding the settlement of the Mississippi health care cost
recovery action. (16)
10.22. Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree,
dated July 24, 1998, regarding the settlement of the Texas health care cost recovery
action. (16)
10.23. Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree,
dated September 11, 1998, regarding the settlement of the Florida health care cost
recovery action. (17)
10.24. Master Settlement Agreement relating to state health care cost recovery and other
claims. (18)
12. Statements re computation of ratios. (19)
13. Pages 21-60 of the Company's 1998 Annual Report, but only to the extent set forth in
Items 1-3, 5-7, 7A, 8 and 14 hereof. With the exception of the aforementioned
information incorporated by reference in this Annual Report on Form 10-K, the
Company's 1998 Annual Report is not to be deemed "filed" as part of this Report.
21. Subsidiaries of the Company.
23. Consent of independent accountants.
24. Powers of attorney.
99.1. Certain Pending Litigation Matters and Recent Developments.
99.2. Status of the Master Settlement Agreement.
99.3. Trial Schedule.
</TABLE>
- ------------------------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended March 31, 1997.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-36450) dated August 22, 1990.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-39059) dated February 21, 1991.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-45210) dated January 22, 1992.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-3/A (No. 333-35143) dated January 29, 1998.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1997.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
25
<PAGE>
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997.
(12) Incorporated by reference to the Company's proxy statement dated March 10,
1997.
(13) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 25, 1997.
(14) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 16, 1998.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1998.
(18) Incorporated by reference to the Company's Current Report on Form 8-K dated
November 25, 1998, as amended by Form 8/K-A dated December 24, 1998.
(19) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 27, 1999.
26
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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.
<TABLE>
<S> <C> <C>
PHILIP MORRIS COMPANIES INC.
By: /s/ GEOFFREY C. BIBLE
-----------------------------------------
(Geoffrey C. Bible,
Chairman of the Board and
Chief Executive Officer)
Date: March 17, 1999
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
SIGNATURE TITLE DATE
- ------------------------------------- -------------------------- --------------
/s/ GEOFFREY C. BIBLE Director, Chairman of the
- ------------------------------------- Board and Chief March 17, 1999
(Geoffrey C. Bible) Executive Officer
/s/ LOUIS C. CAMILLERI
- ------------------------------------- Senior Vice President and March 17, 1999
(Louis C. Camilleri) Chief Financial Officer
/s/ FRANK T. TOSCANO
- ------------------------------------- Vice President and March 17, 1999
(Frank T. Toscano) Controller
* ELIZABETH E. BAILEY, MURRAY H.
BRING, HAROLD BROWN,
WILLIAM H. DONALDSON, JANE
EVANS, ROBERT E. R. HUNTLEY,
RUPERT MURDOCH, JOHN D.
NICHOLS, LUCIO A. NOTO,
RICHARD D. PARSONS,
JOHN S. REED, CARLOS SLIM HELU,
STEPHEN M. WOLF Directors
*BY: /S/ LOUIS C. CAMILLERI
- -------------------------------------
(Louis C. Camilleri March 17, 1999
Attorney-in-fact)
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on our audits of the consolidated financial statements of Philip
Morris Companies Inc. has been incorporated by reference in this Form 10-K from
page 60 of the 1998 annual report to stockholders of Philip Morris Companies
Inc. In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in the index in Item
14(a) on page 23 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 25, 1999
S-1
<PAGE>
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------- ----------- -------------------------- ----------- -----------
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------------------------------------- ----------- ----------- ------------- ----------- -----------
(a) (b)
<S> <C> <C> <C> <C> <C>
1998:
CONSUMER PRODUCTS:
Allowance for discounts................ $ 8 $ 607 $ -- $ 606 $ 9
Allowance for doubtful accounts........ 157 36 27 28 192
Allowance for returned goods........... 6 79 -- 64 21
----- ----- --- ----- -----
$ 171 $ 722 $ 27 $ 698 $ 222
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES:
Allowance for losses................... $ 101 $ 15 $ -- $ -- $ 116
----- ----- --- ----- -----
----- ----- --- ----- -----
1997:
CONSUMER PRODUCTS:
Allowance for discounts................ $ 5 $ 534 $ -- $ 531 $ 8
Allowance for doubtful accounts........ 167 35 (13) 32 157
Allowance for returned goods........... 5 66 -- 65 6
----- ----- --- ----- -----
$ 177 $ 635 $ (13) $ 628 $ 171
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES:
Allowance for losses................... $ 101 $ -- $ -- $ -- $ 101
----- ----- --- ----- -----
----- ----- --- ----- -----
1996:
CONSUMER PRODUCTS:
Allowance for discounts................ $ 12 $ 492 $ -- $ 499 $ 5
Allowance for doubtful accounts........ 163 27 16 39 167
Allowance for returned goods........... 3 64 -- 62 5
----- ----- --- ----- -----
$ 178 $ 583 $ 16 $ 600 $ 177
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES:
Allowance for losses................... $ 101 $ -- $ -- $ -- $ 101
----- ----- --- ----- -----
----- ----- --- ----- -----
</TABLE>
- ------------------------
Notes:
(a) Related to divestitures, acquisitions, the consolidation of previously
unconsolidated subsidiaries and currency translation.
(b) Represents charges for which allowances were created.
S-2
<PAGE>
Exhibit 3.2
BY-LAWS
OF
PHILIP MORRIS COMPANIES INC.
ARTICLE I
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meetings. - The annual meeting of the stockholders
for the election of directors and for the transaction of such other business as
may properly come before the meeting, and any postponement or adjournment
thereof, shall be held on such date and at such time as the Board of Directors
may in its discretion determine.
Section 2. Special Meetings. - Unless otherwise provided by law,
special meetings of the stockholders may be called by the chairman of the Board
of Directors, or in the chairman's absence, the deputy chairman of the Board of
Directors (if any), the vice chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) or, in the
absence of all of the foregoing, an executive vice president or by order of the
Board of Directors, whenever deemed necessary.
Section 3. Place of Meetings. - All meetings of the stockholders
shall be held at such place in the Commonwealth of Virginia as from time to time
may be fixed by the Board of Directors.
Section 4. Notice of Meetings. - Notice, stating the place, day and
hour and, in the case of a special meeting, the purpose or purposes for which
the meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting (except as a different time is specified herein
or by law), to each stockholder of record having voting power in respect of the
business to be transacted thereat.
Notice of a stockholders' meeting to act on an amendment of the
Articles of Incorporation, a plan of merger or share exchange, a proposed sale
of all, or substantially all of the Corporation's assets, otherwise than in the
usual and regular course of business, or the dissolution of the Corporation
shall be given not less than twenty-five nor more than sixty days before the
date of the meeting and shall be accompanied, as appropriate, by a copy of the
proposed amendment, plan of merger or share exchange or sale agreement.
February 1, 1999
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<PAGE>
Notwithstanding the foregoing, a written waiver of notice signed by
the person or persons entitled to such notice, either before or after the time
stated therein, shall be equivalent to the giving of such notice. A stockholder
who attends a meeting shall be deemed to have (i) waived objection to lack of
notice or defective notice of the meeting, unless at the beginning of the
meeting he or she objects to holding the meeting or transacting business at the
meeting, and (ii) waived objection to consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the meeting
notice, unless he or she objects to considering the matter when it is presented.
Section 5. Quorum. - At all meetings of the stockholders, unless a
greater number or voting by classes is required by law, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, action on a matter is approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless the vote
of a greater number or voting by classes is required by law or the Articles of
Incorporation, and except that in elections of directors those receiving the
greatest number of votes shall be deemed elected even though not receiving a
majority. Less than a quorum may adjourn.
Section 6. Organization and Order of Business. - At all meetings of
the stockholders, the chairman of the Board of Directors or, in the chairman's
absence, the deputy chairman of the Board of Directors (if any), the vice
chairman of the Board of Directors (if any), the president (if one shall have
been elected by the Board of Directors) or, in the absence of all of the
foregoing, the most senior executive vice president, shall act as chairman. In
the absence of all of the foregoing officers or, if present, with their consent,
a majority of the shares entitled to vote at such meeting, may appoint any
person to act as chairman. The secretary of the Corporation or, in the
secretary's absence, an assistant secretary, shall act as secretary at all
meetings of the stockholders. In the event that neither the secretary nor any
assistant secretary is present, the chairman may appoint any person to act as
secretary of the meeting.
The chairman shall have the right and authority to prescribe such
rules, regulations and procedures and to do all such acts and things as are
necessary or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the dismissal of business not
properly presented, the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof and the opening and closing of the voting polls.
At each annual meeting of stockholders, only such business shall be
conducted as shall have been properly brought before the meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of the
Corporation who shall be entitled to
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<PAGE>
vote at such meeting and who complies with the notice procedures set forth in
this Section 6. In addition to any other applicable requirements, for business
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the secretary of
the Corporation. To be timely, a stockholder's notice must be given, either by
personal delivery or by United States certified mail, postage prepaid, and
received at the principal executive offices of the Corporation (i) not less than
120 days nor more than 150 days before the first anniversary of the date of the
Corporation's proxy statement in connection with the last annual meeting of
stockholders or (ii) if no annual meeting was held in the previous year or the
date of the applicable annual meeting has been changed by more than 30 days from
the date contemplated at the time of the previous year's proxy statement, not
less than 60 days before the date of the applicable annual meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting, including the
complete text of any resolutions to be presented at the annual meeting, and the
reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's stock transfer books, of such
stockholder proposing such business, (c) a representation that such stockholder
is a stockholder of record and intends to appear in person or by proxy at such
meeting to bring the business before the meeting specified in the notice, (d)
the class and number of shares of stock of the Corporation beneficially owned by
the stockholder and (e) any material interest of the stockholder in such
business. Notwithstanding anything in the By-Laws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 6. The chairman of an annual meeting shall, if the
facts warrant, determine that the business was not brought before the meeting in
accordance with the procedures prescribed by this Section 6. If the chairman
should so determine,he or she shall so declare to the meeting and the business
not properly brought before the meeting shall not be transacted. Notwithstanding
the foregoing provisions of this Section 6, a stockholder seeking to have a
proposal included in the Corporation's proxy statement shall comply with the
requirements of Regulation 14A under the Securities Exchange Act of 1934, as
amended (including, but not limited to, Rule 14a-8 or its successor provision).
The secretary of the Corporation shall deliver each such stockholder's notice
that has been timely received to the Board of Directors or a committee
designated by the Board of Directors for review.
Section 7. Voting. - A stockholder may vote his or her shares in
person or by proxy. Any proxy shall be delivered to the secretary of the meeting
at or prior to the time designated by the chairman or in the order of business
for so delivering such proxies. No proxy shall be valid after eleven months from
its date, unless otherwise provided in the proxy. Each holder of record of stock
of any class shall, as to all matters in respect of which stock of such class
has voting power, be entitled to such vote as is provided in the Articles of
Incorporation for each share of stock of such class standing
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<PAGE>
in the holders's name on the books of the Corporation. Unless required by
statute or determined by the chairman to be advisable, the vote on any question
need not be by ballot. On a vote by ballot, each ballot shall be signed by the
stockholder voting or by such stockholder's proxy, if there be such proxy.
Section 8. Written Authorization. - A stockholder or a stockholder's
duly authorized attorney-in-fact may execute a writing authorizing another
person or persons to act for him or her as proxy. Execution may be accomplished
by the stockholder or such stockholder's duly authorized attorney-in-fact or
authorized officer, director, employee or agent signing such writing or causing
such stockholder's signature to be affixed to such writing by any reasonable
means including, but not limited to, by facsimile signature.
Section 9. Electronic Authorization. - The secretary or any vice
president may approve procedures to enable a stockholder or a stockholder's duly
authorized attorney-in-fact to authorize another person or persons to act for
him or her as proxy by transmitting or authorizing the transmission of a
telegram, cablegram, internet transmission, telephone transmission or other
means of electronic transmission to the person who will be the holder of the
proxy or to a proxy solicitation firm, proxy support service organization or
like agent duly authorized by the person who will be the holder of the proxy to
receive such transmission, provided that any such transmission must either set
forth or be submitted with information from which the inspectors of election can
determine that the transmission was authorized by the stockholder or the
stockholder's duly authorized attorney-in-fact. If it is determined that such
transmissions are valid, the inspectors shall specify the information upon which
they relied. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section 9
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used, provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original writing or transmission.
Section 10. Inspectors. - At every meeting of the stockholders for
election of directors, the proxies shall be received and taken in charge, all
ballots shall be received and counted and all questions concerning the
qualifications of voters, the validity of proxies, and the acceptance or
rejection of votes shall be decided, by two or more inspectors. Such inspectors
shall be appointed by the chairman of the meeting. They shall be sworn
faithfully to perform their duties and shall in writing certify to the returns.
No candidate for election as director shall be appointed or act as inspector.
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<PAGE>
ARTICLE II
Board of Directors
Section 1. General Powers. - The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors.
Section 2. Number. - The number of directors shall be fifteen (15).
Section 3. Term of Office and Qualification. - Each director shall
serve for the term for which he or she shall have been elected and until a
successor shall have been duly elected.
Section 4. Nomination and Election of Directors. - At each annual
meeting of stockholders, the stockholders entitled to vote shall elect the
directors. No person shall be eligible for election as a director unless
nominated in accordance with the procedures set forth in this Section 4.
Nominations of persons for election to the Board of Directors may be made by the
Board of Directors or any committee designated by the Board of Directors or by
any stockholder entitled to vote for the election of directors at the applicable
meeting of stockholders who complies with the notice procedures set forth in
this Section4. Such nominations, other than those made by the Board of Directors
or any committee designated by the Board of Directors, may be made only if
written notice of a stockholder's intent to nominate one or more persons for
election as directors at the applicable meeting of stockholders has been
given,either by personal delivery or by United States certified mail, postage
prepaid, to the secretary of the Corporation and received (i) not less than 120
days nor more than 150 days before the first anniversary of the date of the
Corporation's proxy statement in connection with the last annual meeting of
stockholders, or (ii) if no annual meeting was held in the previous year or the
date of the applicable annual meeting has been changed by more than 30 days from
the date contemplated at the time of the previous year's proxy statement, not
less than 60 days before the date of the applicable annual meeting, or (iii)
with respect to any special meeting of stockholders called for the election of
directors, not later than the close of business on the seventh day following the
date on which notice of such meeting is first given to stockholders. Each such
stockholder's notice shall set forth (a) as to the stockholder giving the
notice, (i) the name and address, as they appear on the Corporation's stock
transfer books, of such stockholder, (ii) a representation that such stockholder
is a stockholder of record and intends to appear in person or by proxy at such
meeting to nominate the person or persons specified in the notice, (iii) the
class and number of shares of stock of the Corporation beneficially owned by
such stockholder, and (iv) a description of all arrangements or understandings
between such stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made by such stockholder; and (b) as to each person whom the
stockholder proposes to nominate for
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<PAGE>
election as a director, (i) the name, age, business address and, if known,
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of stock of the Corporation
which are beneficially owned by such person, (iv) any other information relating
to such person that is required to be disclosed in solicitations of proxies for
election of directors or is otherwise required by the rules and regulations of
the Securities and Exchange Commission promulgated under the Securities Exchange
Act of 1934, as amended, and (v) the written consent of such person to be named
in the proxy statement as a nominee and to serve as a director if elected. The
secretary of the Corporation shall deliver each such stockholder's notice that
has been timely received to the Board of Directors or a committee designated by
the Board of Directors for review. Any person nominated for election as director
by the Board of Directors or any committee designated by the Board of Directors
shall, upon the request of the Board of Directors or such committee, furnish to
the secretary of the Corporation all such information pertaining to such person
that is required to be set forth in a stockholder's notice of nomination. The
chairman of the meeting of stockholders shall, if the facts warrant, determine
that a nomination was not made in accordance with the procedures prescribed by
this Section 4. If the chairman should so determine, he or she shall so declare
to the meeting and the defective nomination shall be disregarded.
Section 5. Organization. - At all meetings of the Board of
Directors, the chairman of the Board of Directors or, in the chairman's absence,
the deputy chairman of the Board of Directors (if any), the vice chairman of the
Board of Directors (if any), the president (if one shall have been elected by
the Board of Directors) or, in the absence of all of the foregoing, the senior
most executive vice president, shall act as chairman of the meeting. The
secretary of the Corporation or, in the secretary's absence, an assistant
secretary, shall act as secretary of meetings of the Board of Directors. In the
event that neither the secretary nor any assistant secretary shall be present at
such meeting, the chairman of the meeting shall appoint any person to act as
secretary of the meeting.
Section 6. Vacancies. - Any vacancy occurring in the Board of
Directors, including a vacancy resulting from amending these By-Laws to increase
the number of directors by thirty percent or less, may be filled by the
affirmative vote of a majority of the remaining directors though less than a
quorum of the Board of Directors.
Section 7. Place of Meeting. - Meetings of the Board of Directors,
regular or special, may be held either within or without the Commonwealth of
Virginia.
Section 8. Organizational Meeting. - The annual organizational
meeting of the Board of Directors shall be held immediately following
adjournment of the annual meeting of stockholders and at the same place, without
the requirement of any notice other than this provision of the By-Laws.
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<PAGE>
Section 9. Regular Meetings: Notice. - Regular meetings of the Board
of Directors shall be held at such times and places as it may from time to time
determine. Notice of such meetings need not be given if the time and place have
been fixed at a previous meeting.
Section 10. Special Meetings. - Special meetings of the Board of
Directors shall be held whenever called by order of the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the vice
chairman of the Board of Directors (if any), the president (if any) or two of
the directors. Notice of each such meeting, which need not specify the business
to be transacted thereat, shall be mailed to each director, addressed to his or
her residence or usual place of business, at least two days before the day on
which the meeting is to be held, or shall be sent to such place by telegraph,
telex or telecopy or be delivered personally or by telephone, not later than the
day before the day on which the meeting is to be held.
Section 11. Waiver of Notice. - Whenever any notice is required to
be given to a director of any meeting for any purpose under the provisions of
law, the Articles of Incorporation or these By-Laws, a waiver thereof in writing
signed by the person or persons entitled to such notice, either before or after
the time stated therein, shall be equivalent to the giving of such notice. A
director's attendance at or participation in a meeting waives any required
notice to him or her of the meeting unless at the beginning of the meeting or
promptly upon the director's arrival, he or she objects to holding the meeting
or transacting business at the meeting and does not thereafter vote for or
assent to action taken at the meeting.
Section 12. Quorum and Manner of Acting. - Except where otherwise
provided by law, a majority of the directors fixed by these By-Laws at the time
of any regular or special meeting shall constitute a quorum for the transaction
of business at such meeting, and the act of a majority of the directors present
at any such meeting at which a quorum is present shall be the act of the Board
of Directors. In the absence of a quorum, a majority of those present may
adjourn the meeting from time to time until a quorum be had. Notice of any such
adjourned meeting need not be given.
Section 13. Order of Business. - At all meetings of the Board of
Directors business may be transacted in such order as from time to time the
Board of Directors may determine.
Section 14. Committees. - In addition to the executive committee
authorized by Article III of these By-Laws, other committees, consisting of two
or more directors, may be designated by the Board of Directors by a resolution
adopted by the greater number of (i) a majority of all directors in office at
the time the action is being taken or (ii) the number of directors required to
take action under Article II, Section 12 hereof.
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<PAGE>
Any such committee, to the extent provided in the resolution of the Board of
Directors designating the committee, shall have and may exercise the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, except as limited by law.
ARTICLE III
Executive Committee
Section 1. How Constituted and Powers. - The Board of Directors, by
resolution adopted pursuant to Article II, Section 14 hereof, may designate, in
addition to the chairman of the Board of Directors, one or more directors to
constitute an executive committee, who shall serve during the pleasure of the
Board of Directors. The executive committee, to the extent provided in such
resolution and permitted by law, shall have and may exercise all of the
authority of the Board of Directors.
Section 2. Organization, Etc. - The executive committee may choose a
chairman and secretary. The executive committee shall keep a record of its acts
and proceedings and report the same from time to time to the Board of Directors.
Section 3. Meetings. - Meetings of the executive committee may be
called by any member of the committee. Notice of each such meeting, which need
not specify the business to be transacted thereat, shall be mailed to each
member of the committee, addressed to his or her residence or usual place of
business, at least two days before the day on which the meeting is to be held or
shall be sent to such place by telegraph, telex or telecopy or be delivered
personally or by telephone, not later than the day before the day on which the
meeting is to be held.
Section 4. Quorum and Manner of Acting. - A majority of the
executive committee shall constitute a quorum for transaction of business, and
the act of a majority of those present at a meeting at which a quorum is present
shall be the act of the executive committee. The members of the executive
committee shall act only as a committee, and the individual members shall have
no powers as such.
Section 5. Removal. - Any member of the executive committee may be
removed, with or without cause, at any time, by the Board of Directors.
Section 6. Vacancies. - Any vacancy in the executive committee shall
be filled by the Board of Directors.
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<PAGE>
ARTICLE IV
Officers
Section 1. Number. - The officers of the Corporation shall be a
chairman of the Board of Directors, a deputy chairman of the Board of Directors
(if elected by the Board of Directors), a president (if elected by the Board of
Directors), one or more vice chairmen of the Board of Directors (if elected by
the Board of Directors), a chief operating officer (if elected by the Board of
Directors), one or more vice presidents (one or more of whom may be designated
executive vice president or senior vice president), a treasurer, a controller, a
secretary, one or more assistant treasurers, assistant controllers and assistant
secretaries and such other officers as may from time to time be chosen by the
Board of Directors. Any two or more offices may be held by the same person.
Section 2. Election, Term of Office and Qualifications. - All
officers of the Corporation shall be chosen annually by the Board of Directors,
and each officer shall hold office until a successor shall have been duly chosen
and qualified or until the officer resigns or is removed in the manner
hereinafter provided. The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any) and the vice
chairmen of the Board of Directors (if any) shall be chosen from among the
directors.
Section 3. Vacancies. - If any vacancy shall occur among the
officers of the Corporation, such vacancy shall be filled by the Board of
Directors.
Section 4. Other Officers, Agents and Employees - Their Powers and
Duties. - The Board of Directors may from time to time appoint such other
officers as the Board of Directors may deem necessary, to hold office for such
time as may be designated by it or during its pleasure, and the Board of
Directors or the chairman of the Board of Directors may appoint, from time to
time, such agents and employees of the Corporation as may be deemed proper, and
may authorize any officers to appoint and remove agents and employees. The Board
of Directors or the chairman of the Board of Directors may from time to time
prescribe the powers and duties of such other officers, agents and employees of
the Corporation.
Section 5. Removal. - Any officer, agent or employee of the
Corporation may be removed, either with or without cause, by a vote of a
majority of the Board of Directors or, in the case of any agent or employee not
appointed by the Board of Directors, by a superior officer upon whom such power
of removal may be conferred by the Board of Directors or the chairman of the
Board of Directors.
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<PAGE>
Section 6. Chairman of the Board of Directors and Chief Executive
Officer. - The chairman of the Board of Directors shall preside at meetings of
the stockholders and of the Board of Directors and shall be a member of the
executive committee. The chairman shall be the Chief Executive Officer of the
Corporation and shall be responsible to the Board of Directors. He or she shall
be responsible for the general management and control of the business and
affairs of the Corporation and shall see to it that all orders and resolutions
of the Board of Directors are implemented. The chairman shall from, time to
time, report to the Board of Directors on matters within his or her knowledge
which the interests of the Corporation may require be brought to its notice. The
chairman shall do and perform such other duties as from time to time the Board
of Directors may prescribe.
Section 7. Deputy Chairman of the Board of Directors. - In the
absence of the chairman of the Board of Directors, the deputy chairman of the
Board of Directors (if elected by the Board of Directors) shall preside at
meetings of the stockholders and of the Board of Directors. The deputy chairman
shall be responsible to the chairman of the Board of Directors and shall perform
such duties as shall be assigned to him or her by the chairman of the Board of
Directors. The deputy chairman shall from time to time report to the chairman of
the Board of Directors on matters within the deputy chairman's knowledge which
the interests of the Corporation may require be brought to the chairman's
notice.
Section 8. President. - In the absence of the chairman of the Board
of Directors and the deputy chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) shall
preside at meetings of the stockholders and of the Board of Directors. The
president shall be responsible to the chairman of the Board of Directors.
Subject to the authority of the chairman of the Board of Directors, the
president shall be devoted to the Corporation's business and affairs under the
basic policies set by the Board of Directors and the chairman of the Board of
Directors. He or she shall from, time to time, report to the chairman of the
Board of Directors on matters within the president's knowledge which the
interests of the Corporation may require be brought to the chairman's notice. In
the absence of the chairman of the Board of Directors and the deputy chairman of
the Board of Directors (if any), the president (if any) shall, except as
otherwise directed by the Board of Directors, have all of the powers and the
duties of the chairman of the Board of Directors. The president (if any) shall
do and perform such other duties as from time to time the Board of Directors or
the chairman of the Board of Directors may prescribe.
Section 9. Vice Chairmen of the Board of Directors. - In the absence
of the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), the vice chairman of the Board of
Directors designated for such purpose by the chairman of the Board of Directors
(if any) shall preside at meetings of the stockholders and of the Board of
Directors. Each vice chairman of the
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<PAGE>
Board of Directors shall be responsible to the chairman of the Board of
Directors. Each vice chairman of the Board of Directors shall from time to time
report to the chairman of the Board of Directors on matters within the vice
chairman's knowledge which the interests of the Corporation may require be
brought to the chairman's notice. In the absence or inability to act of the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), such vice chairman of the Board
of Directors as the chairman of the Board of Directors may designate for the
purpose shall have the powers and discharge the duties of the chairman of the
Board of Directors. In the event of the failure or inability of the chairman of
the Board of Directors to so designate a vice chairman of the Board of
Directors, the Board of Directors may designate a vice chairman of the Board of
Directors who shall have the powers and discharge the duties of the chairman of
the Board of Directors.
Section 10. Chief Operating Officer. - The chief operating officer
(if any) shall be responsible to the Chairman of the Board of Directors for the
principal operating businesses of the Corporation and shall perform those duties
which may from time to time be assigned.
Section 11. Vice Presidents. - The vice presidents of the
Corporation shall assist the chairman of the Board of Directors, the deputy
chairman of the Board of Directors, the president (if any) and the vice chairmen
(if any) of the Board of Directors in carrying out their respective duties and
shall perform those duties which may from time to time be assigned to them. The
chief financial officer shall be a vice president of the Corporation (or more
senior) and shall be responsible for the management and supervision of the
financial affairs of the Corporation.
Section 12. Treasurer. - The treasurer shall have charge of the
funds, securities, receipts and disbursements of the Corporation. He or she
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such banks or trust companies or with such bankers
or other depositaries as the Board of Directors may from time to time designate.
The treasurer shall render to the Board of Directors, the chairman of the Board
of Directors, the deputy chairman of the Board of Directors (if any), the
president (if any), the vice chairmen of the Board of Directors (if any), and
the chief financial officer, whenever required by any of them, an account of all
of his transactions as treasurer. If required, the treasurer shall give a bond
in such sum as the Board of Directors may designate, conditioned upon the
faithful performance of the duties of the treasurer's office and the restoration
to the Corporation at the expiration of his or her term of office or in case of
death, resignation or removal from office, of all books, papers, vouchers, money
or other property of whatever kind in his or her possession or under his or her
control belonging to the Corporation. The treasurer shall perform such other
duties as from time to time may be assigned to him or her.
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<PAGE>
Section 13. Assistant Treasurers. - In the absence or disability of
the treasurer, one or more assistant treasurers shall perform all the duties of
the treasurer and, when so acting, shall have all the powers of, and be subject
to all restrictions upon, the treasurer. Assistant treasurers shall also perform
such other duties as from time to time may be assigned to them.
Section 14. Secretary. - The secretary shall keep the minutes of all
meetings of the stockholders and of the Board of Directors in a book or books
kept for that purpose. He or she shall keep in safe custody the seal of the
Corporation, and shall affix such seal to any instrument requiring it. The
secretary shall have charge of such books and papers as the Board of Directors
may direct. He or she shall attend to the giving and serving of all notices of
the Corporation and shall also have such other powers and perform such other
duties as pertain to the secretary's office, or as the Board of Directors, the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), the president (if any) or any vice chairman of the Board of
Directors may from time to time prescribe.
Section 15. Assistant Secretaries. - In the absence or disability of
the secretary, one or more assistant secretaries shall perform all of the duties
of the secretary and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the secretary. Assistant secretaries shall
also perform such other duties as from time to time may be assigned to them.
Section 16. Controller. - The controller shall be administrative
head of the controller's department. He or she shall be in charge of all
functions relating to accounting and the preparation and analysis of budgets and
statistical reports and shall establish, through appropriate channels, recording
and reporting procedures and standards pertaining to such matters. The
controller shall report to the chief financial officer and shall aid in
developing internal corporate policies whereby the business of the Corporation
shall be conducted with the maximum safety, efficiency and economy. The
controller shall be available to all departments of the Corporation for advice
and guidance in the interpretation and application of policies which are within
the scope of his or her authority. The controller shall perform such other
duties as from time to time may be assigned to him or her.
Section 17. Assistant Controllers. - In the absence or disability of
the controller, one or more assistant controllers shall perform all of the
duties of the controller and, when so acting, shall have all of the powers of,
and be subject to all the restrictions upon, the controller. Assistant
controllers shall also perform such other duties as from time to time may be
assigned to them.
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ARTICLE V
Contracts, Checks, Drafts, Bank Accounts, Etc.
Section 1. Contracts. - The chairman of the Board of Directors, the
deputy chairman of the Board of Directors (if any), the president (if any), any
vice chairman of the Board of Directors (if any), any vice president, the
treasurer and such other persons as the chairman of the Board of Directors may
authorize shall have the power to execute any contract or other instrument on
behalf of the Corporation; no other officer, agent or employee shall, unless
otherwise in these By-Laws provided, have any power or authority to bind the
Corporation by any contract or acknowledgement, or pledge its credit or render
it liable pecuniarily for any purpose or to any amount.
Section 2. Loans. - The chairman of the Board of Directors, the
deputy chairman of the Board of Directors (if any), the president (if any), any
vice chairman of the Board of Directors (if any), any vice president, the
treasurer and such other persons as the Board of Directors may authorize shall
have the power to effect loans and advances at any time for the Corporation from
any bank, trust company or other institution, or from any corporation, firm or
individual, and for such loans and advances may make, execute and deliver
promissory notes or other evidences of indebtedness of the Corporation, and, as
security for the payment of any and all loans, advances, indebtedness and
liability of the Corporation, may pledge, hypothecate or transfer any and all
stocks, securities and other personal property at any time held by the
Corporation, and to that end endorse, assign and deliver the same.
Section 3. Voting of Stock Held. - The chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if any), any vice chairman of the Board of Directors (if any), any vice
president or the secretary may from time to time appoint an attorney or
attorneys or agent or agents of the Corporation to cast the votes that the
Corporation may be entitled to cast as a stockholder or otherwise in any other
corporation, any of whose stock or securities may be held by the Corporation, at
meetings of the holders of the stock or other securities of such other
corporation, or to consent in writing to any action by any other such
corporation, and may instruct the person or persons so appointed as to the
manner of casting such votes or giving such consent, and may execute or cause to
be executed on behalf of the Corporation such written proxies, consents, waivers
or other instruments as such officer may deem necessary or proper in the
premises; or the chairman of the Board of Directors, the deputy chairman of the
Board of Directors (if any), the president (if any), any vice chairman of the
Board of Directors (if any), any vice president or the secretary may attend in
person any meeting of the holders of stock or other securities of such other
corporation and thereat vote or exercise any and all powers of the Corporation
as the holder of such stock or other securities of such other corporation.
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<PAGE>
ARTICLE VI
Certificates Representing Shares
Certificates representing shares of the Corporation shall be signed
by the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), or the vice chairman of the Board of Directors (if any), or
the president of the Corporation (if any) and the secretary or an assistant
secretary. Any and all signatures on such certificates, including signatures of
officers, transfer agents and registrars, may be facsimile.
ARTICLE VII
Dividends
The Board of Directors may declare dividends from funds of the
Corporation legally available therefor.
ARTICLE VIII
Seal
The Board of Directors shall provide a suitable seal or seals, which
shall be in the form of a circle, and shall bear around the circumference the
words "Philip Morris Companies Inc." and in the center the word and figures
"Virginia, 1985."
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall be the calendar year.
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<PAGE>
ARTICLE X
Amendment
The power to alter, amend or repeal the By-Laws of the Corporation
or to adopt new By-Laws shall be vested in the Board of Directors, but By-Laws
made by the Board of Directors may be repealed or changed by the stockholders,
or new By-Laws may be adopted by the stockholders, and the stockholders may
prescribe that any By-Laws made by them shall not be altered, amended or
repealed by the directors.
ARTICLE XI
Emergency By-Laws
If a quorum of the Board of Directors cannot be readily assembled
because of some catastrophic event, and only in such event, these By-Laws shall,
without further action by the Board of Directors, be deemed to have been amended
for the duration of such emergency, as follows:
Section 1. Section 6 of Article II shall read as follows:
Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the directors present at a meeting
of the Board of Directors called in accordance with these By-Laws.
Section 2. The first sentence of Section 10 of Article II shall read
as follows:
Special meetings of the Board of Directors shall be held whenever
called by order of the chairman of the Board of Directors or a
deputy chairman (if any),or of the president (if any) or any vice
chairman of the Board of Directors (if any) or any director or of
any person having the powers and duties of the chairman of the Board
of Directors, the deputy chairman, the president or any vice
chairman of the Board of Directors.
Section 3. Section 12 of Article II shall read as follows:
The directors present at any regular or special meeting called in
accordance with these By-Laws shall constitute a quorum for the
transaction of business at such meeting, and the action of a
majority of such directors shall be the act of the Board of
Directors, provided, however, that in the event that only one
director is present at any such meeting no action except the
election of directors shall be taken until at least two additional
directors have been elected and are in attendance.
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<PAGE>
Exhibit 10.15
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
AGREEMENT by and between Philip Morris Companies Inc., a Virginia
corporation (the "Company") and Murray H. Bring (the "Executive"), dated as of
the 30th day of July, 1998.
WHEREAS, the Company and the Executive previously entered into an initial
employment agreement dated October 12, 1987, which was amended by a letter
agreement dated October 5, 1993, and also entered into a supplemental employment
agreement dated March 24, 1997, which supplemental agreement set forth terms and
conditions that would become applicable in the event of a change of control of
the Company; and
WHEREAS, such prior agreements provide for certain incentives to continued
employment, including certain supplemental retirement benefits, and recognize
the importance of ensuring that the compensation and benefits expectations of
the Executive will be satisfied in the event of a change of control or other
contingencies; and
WHEREAS, the Company wishes to ensure to itself the continued benefit of
the Executive's services for the period extending at least until his Normal
Retirement Date following Executive's attaining age 65; and
WHEREAS, the Executive has agreed to provide such continued services;
NOW THEREFORE, in consideration of the mutual covenants hereinafter set
forth in this Amended and Restated Employment Agreement, which replaces the
prior supplemental employment agreement dated March 24, 1997, the Company and
the Executive agree as follows:
1. Certain Definitions. (a) The "Effective Date" shall mean the first date
during the Change of Control Period (as defined in Section 1(b)) on which a
Change of Control (as defined in Section 2) occurs. Anything in this Agreement
to the contrary notwithstanding, if a Change of Control occurs and if the
Executive's employment with the Company is terminated or the Executive ceases to
be Vice Chairman, External Affairs and General Counsel of Philip Morris
Companies Inc. prior to the date on which the Change of Control occurs, and if
it is reasonably demonstrated by the Executive that such termination of
employment or cessation of status as Vice Chairman, External Affairs and General
Counsel of Philip Morris Companies Inc. (i) was at the request of a third party
who has taken steps reasonably calculated to effect a Change of Control or (ii)
otherwise arose in connection with or anticipation of a Change of Control (an
event described in (i) or (ii) above being hereinafter referred to as a
"Potential Change of Control"), then for all purposes of this Agreement the
"Effective Date" shall mean the date immediately prior to the date of such
termination of employment or cessation of status as Vice Chairman, External
Affairs and General Counsel of Philip Morris Companies Inc.
<PAGE>
(b) The "Change of Control Period" shall mean the period commencing on
the date hereof and ending on the earliest to occur of (x) any date prior to the
Effective Date on which the Executive ceases to hold the position Vice Chairman,
External Affairs and General Counsel of Philip Morris Companies Inc., (y) the
third anniversary of the date hereof, and (z) the Executive's normal retirement
date (the "Normal Retirement Date") under the Philip Morris Salaried Employees'
Retirement Plan (the "Retirement Plan"); provided, however, that commencing on
the date one year after the date hereof, and on each annual anniversary of such
date (such date and each annual anniversary thereof shall be hereinafter
referred to as the "Renewal Date"), unless previously terminated, the Change of
Control Period shall be automatically extended so as to terminate three years
from such Renewal Date, unless at least 60 days prior to the Renewal Date the
Company shall give notice to the Executive that the Change of Control Period
shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not constitute a Change
of Control: (i) any acquisition directly from the Company, (ii) any acquisition
by the Company, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company or (iv) any acquisition by any corporation pursuant to a transaction
which complies with clauses (i), (ii) and (iii) of subsection (c) of this
Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Approval by the shareholders of the Company of a reorganization,
merger, share exchange or consolidation (a "Business Combination"), in each
case, unless, following such Business Combination, (i) all or substantially all
of the individuals and entities who were the beneficial owners, respectively, of
the
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<PAGE>
Outstanding Company Common Stock and Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 80% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction owns the
Company through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of the
Outstanding Company Common Stock and Outstanding Company Voting Securities, as
the case may be, (ii) no Person (excluding any employee benefit plan (or related
trust) of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined voting power of the
then outstanding voting securities of such corporation except to the extent that
such ownership existed prior to the Business Combination and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board at the time
of the execution of the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale or other disposition, (A)
more than 80% of, respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) less than 20% of,
respectively, the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by any Person (excluding any
employee benefit plan (or related trust) of the Company or such corporation),
except to the extent that such Person owned 20% or more of the Outstanding
Company Common Stock or Outstanding Company Voting Securities prior to the sale
or disposition and (C) at least a majority of the members of the board of
directors of such corporation were members of the Incumbent Board at the time of
the execution of the initial agreement, or of the action of the Board, providing
for such sale or other disposition of assets of the Company or were elected,
appointed or nominated by the Board.
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<PAGE>
3. Employment Period. The Company hereby agrees to continue the Executive
in its employ, and the Executive hereby agrees to remain in the employ of the
Company subject to the terms and conditions of this Agreement, for the period
commencing on the Effective Date and ending on the earlier to occur of (x) the
third anniversary of such date and (y) the Executive's Normal Retirement Date
(the "Employment Period").
4. Terms of Employment. (a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be at least commensurate in all material
respects with the most significant of those held, exercised and assigned at any
time during the 120-day period immediately preceding the Effective Date and (B)
the Executive's services shall be performed at the location where the Executive
was employed immediately preceding the Effective Date or any office or location
less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation. (i) Base Salary. During the Employment Period, the
Executive shall receive an annual base salary ("Annual Base Salary"), which
shall be paid at a monthly rate, at least equal to twelve times the highest
monthly base salary paid or payable, including any base salary which has been
earned but deferred, to the Executive by the Company and its affiliated
companies in respect of the twelve-month period immediately preceding the month
in which the Effective Date occurs. During the Employment Period, the Annual
Base Salary shall be reviewed no more than 12 months after the last salary
increase awarded to the Executive prior to the Effective Date and thereafter at
least annually and shall be first increased no more than 12 months after the
last salary increase awarded to the Executive prior to the Effective Date and
thereafter at least annually by the highest of (x) 7%, (y) the average increase
(excluding promotional increases) in base salary awarded to the Executive for
each of the three full fiscal years
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<PAGE>
(annualized in the case of any fiscal year consisting of less than twelve full
months or during which the Executive was employed for less than twelve months)
prior to the Effective Date, and (z) the percentage increase (excluding
promotional increases) in base salary generally awarded to peer executives of
the Company and its affiliated companies for the year of determination. Any
increase in Annual Base Salary shall not serve to limit or reduce any other
obligation to the Executive under this Agreement. Annual Base Salary shall not
be reduced after any such increase and the term Annual Base Salary as utilized
in this Agreement shall refer to Annual Base Salary as so increased. As used in
this Agreement, the term "affiliated companies" shall include any company
controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. In addition to Annual Base Salary, the
Executive shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Bonus"), in cash at least equal to the
higher of (x) the average of the three highest bonuses paid or payable,
including any bonus or portion thereof which has been earned but deferred, to
the Executive by the Company and its affiliated companies in respect of the five
fiscal years immediately preceding the fiscal year in which the Effective Date
occurs (annualized for any fiscal year during such period consisting of less
than twelve full months or with respect to which the Executive has been employed
by the Company for less than twelve full months) and (y) the bonus paid or
payable (annualized as described above), including any bonus or portion thereof
which has been earned but deferred, to the Executive by the Company and its
affiliated companies in respect of the most recently completed fiscal year prior
to the Effective Date (such higher amount being referred to as the "Recent
Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of
the third month of the fiscal year next following the fiscal year for which the
Annual Bonus is awarded, unless the Executive shall elect to defer the receipt
of such Annual Bonus.
(iii) Incentive, Savings and Retirement Plans.
A. During the Employment Period, the Executive shall be
entitled to participate in all incentive, savings and retirement plans,
practices, policies and programs applicable generally to other peer executives
of the Company and its affiliated companies, but in no event shall such plans,
practices, policies and programs provide the Executive with incentive
opportunities (measured with respect to both regular and special incentive
opportunities, to the extent, if any, that such distinction is applicable),
savings opportunities and retirement benefit opportunities, in each case, less
favorable, in the aggregate, than the most favorable of those provided by the
Company and its affiliated companies for the Executive under such plans,
practices, policies and programs as in effect at any time during the 120-day
period immediately preceding the Effective Date or if more favorable to the
Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
5
<PAGE>
B. Notwithstanding any other provision of this Agreement,
upon the filing at any time (whether before, during or after the Employment
Period) of a voluntary or an involuntary petition for relief commencing a case
under Title 11, United States Code (including, without limitation, any petition
filed under chapter 7, chapter 11 or any other chapter thereof or a case under
any successor federal statute) by or against the Company (an "Other Contingent
Event"), the Executive shall immediately become entitled to a single sum payment
equal to the present value of the retirement benefits to which he would be
entitled under all Retirement Arrangements if he continued in employment with
the Company until his Normal Retirement Date, less the present value of the
amounts then accrued and payable at Normal Retirement Date to the Executive
under the Qualified Retirement Arrangements. The "Retirement Arrangements"
consist of the Philip Morris Salaried Employees' Retirement Plan and the Philip
Morris Deferred Profit-Sharing Plan (the two "Qualified Retirement
Arrangements"), and the Philip Morris Benefit Equalization Plan and the
Supplemental Management Employees' Retirement Plan of Philip Morris Companies
Inc. (the two "Nonqualified Retirement Arrangements"). For purposes of
calculating the amount of such single sum payment (before its reduction by
amounts payable under the Qualified Arrangements),
(1) the Executive's compensation taken into account in the computation
of benefits under the Retirement Arrangements shall be determined by
assuming that base compensation increases to $87,500 per month
effective May 1, 1999 and remains constant until the Executive's
Normal Retirement Date and that Incentive Compensation paid in 1999
for 1998 is $1,134,000 and in 2000 for 1999 is $1,253,363 (provided,
however, that to the extent base compensation or Incentive
Compensation has been paid for a portion of the period taken into
account in the determination, the amounts actually paid shall be
utilized for that portion of the period in such determination),
(2) years of accredited service (to a maximum of 35 years) shall be
determined by crediting the Executive with two years of accredited
service for each year of service to age 60, with three years of
accredited service for each year of service from age 60 to age 65,
and with six additional years of accredited service reflecting the
intention of the Executive to continue his employment with the
Company until his Normal Retirement Date,
(3) the periodic annuity amount determined under the Philip Morris
Salaried Employees' Retirement Plan, the Philip Morris Benefit
Equalization Plan, and the Supplemental Management Employees'
Retirement Plan of Philip Morris Companies Inc. shall be calculated
as an amount payable commencing at the Executive's Normal Retirement
Date for the remainder of his life only,
(4) the single sum actuarial equivalent payment of the annuity benefit
determined under (3) immediately above shall be calculated as the
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<PAGE>
present value as of the date of the occurrence of the Other
Contingent Event (using the average of the interest rates
established by the Pension Benefit Guaranty Corporation ("PBGC") to
value immediate annuities in the case of a plan termination for the
24 months preceding the date on which such single sum amount becomes
payable, less one-half of one percent, and the UP-1984 Unisex
Mortality Table or the average of the 30-year Treasury rates for the
24 months preceding the date of the occurrence of the Other
Contingent Event, less one-half of one percent, and the GAM83 Unisex
Mortality Table, whichever assumptions produce the greater single
sum actuarial equivalent value, provided that if the PBGC rates are
no longer published the most recently published PBGC rate shall be
used in computing the PBGC rate average for that portion of the 24
month period during which PBGC rates were no longer published) of
the periodic amounts payable commencing at the Executive's Normal
Retirement Date as computed based on the assumptions set forth in
this Section 4(b)(iii)(B), and
(5) the statutory Internal Revenue Code of 1986 limits on tax-qualified
plan benefits shall be assumed to increase at the rate of 4 percent
per year during the period from the date of the calculation until
the Executive's Normal Retirement Date.
In addition, the portion of the retirement benefit to which the Executive would
be entitled if he continued employment until his Normal Retirement Date that is
attributable to the Philip Morris Deferred Profit-Sharing Plan and the Deferred
Profit-Sharing portion of the Philip Morris Benefit Equalization Plan shall be
computed based on the compensation assumptions specified in (1) of the
immediately preceding sentence; by crediting the account balance existing as of
the date of the Other Contingent Event and the assumed future annual
profit-sharing amounts (which future amounts shall total 10 percent of base
compensation, with such crediting assumed to occur as of February 28 of the year
immediately following the year in which such compensation was earned) with
interest at 6 percent per year from the later of the date of the Other
Contingent Event or, with respect to future amounts, the date assumed credited,
to the Executive's Normal Retirement Date; and by discounting the amounts that
would be credited as of the Executive's Normal Retirement Date based on these
assumptions back to the date of the Other Contingent Event at the rate of 6
percent per year.
The amount computed on the assumptions described above shall be computed for all
Retirement Arrangements and then reduced by the present value (computed on the
basis of the same assumptions) at the date of the Other Contingent Event of the
amounts that would be payable under the Qualified Retirement Arrangements to the
Executive at his Normal Retirement Date if the Executive terminated employment
with the Company on the date of the Other Contingent Event. If actual payment of
the single sum payment is not made within 15 days of the date of the Other
Contingent Event, the amount of the payment shall be increased to reflect the
delay in payment using the actuarial assumptions specified above.
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If the Executive dies prior to retirement and an Other Contingent Event occurs
before receipt by the Executive or his beneficiary of retirement benefits under
the Nonqualified Retirement Arrangements having a present value (determined as
of the date of the Other Contingent Event and on the basis of the actuarial
assumptions described previously in this Section 4(b)(iii)(B)) equal to the
single sum payment computed on the basis of such assumptions and as of such
date, the beneficiary shall be entitled to immediate payment of an amount equal
to the difference between the single sum payment so computed and the present
value at that time of any such retirement benefits previously received. If an
Other Contingent Event occurs after the Executive has retired, the Executive
(or, if the Executive is then deceased, his beneficiary) shall immediately
become entitled to payment of a single sum amount equal to the present value
(determined on the basis of the actuarial assumptions previously set forth in
this Section 4(b)(iii)(B)) on the date of the Other Contingent Event of all
remaining payments projected to be made to the Executive or his beneficiary
under the Nonqualified Retirement Arrangements. The beneficiary of the Executive
shall be the Executive's beneficiary or beneficiaries designated under the
Nonqualified Retirement Arrangements (or in any written designation accepted by
the Company that supercedes such designation), or in the absence of such a
designated beneficiary the Executive's estate.
The single sum amounts determined under the preceding provisions of this Section
4(b)(iii)(B) shall be determined without regard to any amounts previously paid
at the direction of the Executive to the trust established by the Executive
pursuant to the Employee Grantor Trust Agreement between the Executive as
grantor and Morgan Guaranty Trust Company of New York as trustee dated December
13, 1995, or any successor trust (the "Executive's Secular Trust"). After any
such single sum amount is so determined, it shall then be reduced by subtracting
from it the Pre-Tax Secular Trust Equivalent; the result shall be the net amount
actually payable to the Executive or his beneficiary with respect to the
Nonqualified Retirement Arrangements. The Pre-Tax Secular Trust Equivalent shall
be determined by taking the fair market value of the assets held in the
Executive's Secular Trust on the date of the Other Contingent Event, reducing
the value of such assets by the amount of any unpaid taxes on earnings or on
unrealized appreciation that would be realized were the assets immediately sold,
and then converting the resulting after-tax amount to its pre-tax equivalent
based on the tax assumptions set forth in Exhibit B of the Employee Grantor
Trust Enrollment Agreement between the Executive and the Company dated December
13, 1995.
If the Executive should voluntarily terminate employment with the Company prior
to his Normal Retirement Date for reasons other than disability or Good Reason,
the Executive shall promptly pay to the Company an amount equal to the amount,
if any, by which (x) the present value (as of the date of such termination) of
the sum of the Pre-Tax Secular Trust Equivalent and any other payments
previously received under the Nonqualified Retirement Arrangements exceeds (y)
the present value (as of such date) of the amount to which the Executive would
be entitled under this Section 4(b)(iii)(B), determined without regard to any
reduction by the Pre-Tax Secular Trust Equivalent, if his years of accredited
service were reduced by three years for each year of service prior to his Normal
Retirement Date not completed by the Executive and then by six additional years
and if his compensation taken into account in the computation of benefits were
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<PAGE>
determined without regard to any compensation assumed for the period from his
date of termination to his Normal Retirement Date. Present value for this
purpose shall be determined on the basis of the actuarial assumptions specified
above; and Good Reason shall have the meaning specified in Section 5(c) hereof,
except that any failure by the Company to make payments under this Section
4(b)(iii)(B) shall not constitute Good Reason to the extent that the Company is
precluded by applicable law from making such payment.
This Section 4(b)(iii)(B) shall become operative upon the occurrence of an Other
Contingent Event, whether before or after the Executive's termination of
employment or death and irrespective of whether the Effective Date described in
Section 1 or any of the events described in Section 2 of this Agreement have
occurred. In the event of any conflict between the applicable provisions of this
Section and any other provisions of this Agreement or of other agreements
previously entered into between the Company and the Executive, the provisions of
this Section 4(b)(iii)(B) shall govern the determination and payment of benefits
to the Executive or his beneficiaries under the Nonqualified Retirement
Arrangements.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent applicable generally
to other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices, policies and programs provide the Executive
with benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those provided generally
at any time after the Effective Date to other peer executives of the Company and
its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall
be entitled to receive prompt reimbursement for all reasonable expenses incurred
by the Executive in accordance with the most favorable policies, practices and
procedures of the Company and its affiliated companies in effect for the
Executive at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive, as in effect generally at
any time thereafter with respect to other peer executives of the Company and its
affiliated companies.
(vi) Fringe Benefits. During the Employment Period, the Executive
shall be entitled to fringe benefits, including, without limitation, tax and
financial planning services, payment of club dues, and, if applicable, use of an
automobile and payment of related expenses, in accordance with the most
favorable plans, practices, programs and policies of the Company and its
affiliated companies
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in effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
(vii) Office and Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, as provided generally at any time thereafter with
respect to other peer executives of the Company and its affiliated companies.
(viii) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated companies as
in effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.
5. Termination of Employment. (a) Death or Disability. The Executive's
employment shall terminate automatically upon the Executive's death during the
Employment Period. If the Company determines in good faith that the Disability
of the Executive has occurred during the Employment Period (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section 12(b) of this Agreement of its intention to
terminate the Executive's employment. In such event, the Executive's employment
with the Company shall terminate effective on the 30th day after receipt of such
notice by the Executive (the "Disability Effective Date"), provided that, within
the 30 days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative (such
agreement as to acceptability not to be withheld unreasonably).
(b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For the sole and exclusive purposes of this
Agreement, "Cause" shall mean:
(i) the willful and continued failure of the Executive to
perform substantially the Executive's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due to
physical or mental
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illness), after a written demand for substantial performance is delivered to the
Executive by the Board or the Chief Executive Officer of the Company which
specifically identifies the manner in which the Board or Chief Executive Officer
believes that the Executive has not substantially performed the Executive's
duties, or
(ii) the willful engaging by the Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the Company.
For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution duly
adopted by the Board or upon the instructions of the Chief Executive Officer or
a senior officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be done, by the
Executive in good faith and in the best interests of the Company. The cessation
of employment of the Executive shall not be deemed to be for Cause unless and
until there shall have been delivered to the Executive a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Executive and the
Executive is given an opportunity, together with counsel, to be heard before the
Board), finding that, in the good faith opinion of the Board, the Executive is
guilty of the conduct described in subparagraph (i) or (ii) above, and
specifying the particulars thereof in detail.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For the sole and exclusive purposes of this
Agreement, "Good Reason" shall mean:
(i) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Section 4(a) of this Agreement, or any other action by the Company which
results in a diminution in such position, authority, duties or responsibilities,
or in the compensation payable to the Executive, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith and which
is remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive;
(iii) the Company's requiring the Executive to be based at any
office or location other than as provided in Section 4(a)(i)(B) hereof or the
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Company's requiring the Executive to travel on Company business to a
substantially greater extent than required immediately prior to the Effective
Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy Section
11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive. Anything in this Agreement to the
contrary notwithstanding, a termination by the Executive for any reason during
the 30-day period immediately following the first anniversary of the Effective
Date shall be deemed to be a termination for Good Reason for all purposes of
this Agreement.
(d) Notice of Termination. Any termination by the Company for Cause,
or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 12(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination of
the Executive's employment under the provision so indicated and (iii) if the
Date of Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than thirty
days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company, respectively, hereunder or preclude the Executive
or the Company, respectively, from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.
6. Obligations of the Company upon Termination. (a) Good Reason; Other
Than for Cause, Death or Disability. If, during the Employment Period, the
Company shall terminate the Executive's employment other than for Cause or
Disability or the Executive shall terminate employment for Good Reason:
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(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary through
the Date of Termination to the extent not theretofore paid, (2) the product of
(x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or
payable, including any bonus or portion thereof which has been earned but
deferred (and annualized for any fiscal year consisting of less than twelve full
months or during which the Executive was employed for less than twelve full
months), for the most recently completed fiscal year during the Employment
Period, if any (such higher amount being referred to as the "Highest Annual
Bonus") and (y) a fraction, the numerator of which is the number of days in the
current fiscal year through the Date of Termination, and the denominator of
which is 365 and (3) any compensation previously deferred by the Executive
(together with any accrued interest or earnings thereon) and any accrued
vacation pay, in each case to the extent not theretofore paid (the sum of the
amounts described in clauses (1), (2), and (3) shall be hereinafter referred to
as the "Accrued Obligations"); and
B. the amount equal to the product of (1) two and one-half
and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest
Annual Bonus and (3) a fraction, the numerator of which is the number of full
months from the Date of Termination until the Executive's Normal Retirement Date
but which shall be no greater than thirty (30), and the denominator of which is
thirty (30); and
C. an amount equal to the difference between (a) the
actuarial equivalent of the benefit (utilizing actuarial assumptions no less
favorable to the Executive than those in effect under the Retirement Plan
immediately prior to the Effective Date, except as specified below with respect
to increases in base salary and annual bonus) under the Retirement Plan and any
excess or supplemental retirement plan in which the Executive participates
(together, the "SERP") which the Executive would receive if the Executive's
employment continued for two and one-half years after the Date of Termination
assuming for this purpose that all accrued benefits are fully vested, and,
assuming that (1) the Executive's base salary increased on an annualized basis
during the two and one-half year period by the amount required by Section
4(b)(ii) (in the case of Section 4(b)(ii)(z) based on increases (excluding
promotional increases) in base salary for the most recently completed fiscal
year prior to the Date of Termination) had the Executive remained employed, and
(2) the Executive's annual bonus (annualized for any fiscal year consisting of
less than twelve full months or during which the Executive was employed for less
than twelve full months) in each of the two and one-half years (on an annualized
basis) bears the same proportion to the Executive's base salary in such year or
fraction thereof as it did for the last full year prior to the Date of
Termination, and (b) the actuarial equivalent of the Executive's actual benefit
(paid or payable), if any, under the Retirement Plan and the SERP as of the Date
of Termination;
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(ii) for two and one-half years after the Executive's Date of
Termination, or such longer period as may be provided by Section 6(a)(iii) with
respect to the benefits covered thereby or by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would have
been provided to them in accordance with the plans, programs, practices and
policies described in Section 4(b)(iv) and Section 4(b)(vi) of this Agreement if
the Executive's employment had not been terminated in accordance with the most
favorable plans, practices, programs or policies of the Company and its
affiliated companies applicable generally to other peer executives and their
families during the 120-day period immediately preceding the Effective Date or,
if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other peer executives of the Company and its
affiliated companies and their families, provided, however, that if the
Executive becomes reemployed with another employer and is eligible to receive
medical or other welfare benefits under another employer provided plan, the
medical and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility. For
purposes of determining eligibility (but not the time of commencement of
benefits) of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until two and one-half years after the Date of Termination and
to have retired on the last day of such period;
(iii) if two and one-half years after the Executive's Date of
Termination, the Executive would be at least 55 years old and eligible for
retirement benefits (including, without limitation, early retirement benefits)
under the Retirement Plan (assuming continuous service with the Company during
such two and one-half year period), the Company shall continue lifetime medical,
dental and life insurance benefits (including supplemental benefits) to the
Executive and/or the Executive's family at least equal to those that would have
been provided to them in accordance with the plans, programs and policies
described in Section 4(b)(iv) of this Agreement (except the Company's business
travel accident plans) if the Executive's employment had not been terminated, if
and as in effect at any time during the 120-day period immediately preceding the
Effective Date with respect to other peer executives and their families or, if
more favorable to the Executive, as in effect at any time thereafter with
respect to other peer executives and their families; provided, however, that, in
the event that the Executive becomes reemployed with another employer, whether
or not such employer is related to the Corporation or any of its affiliates, and
is eligible to receive medical or other welfare benefits under any
employer-sponsored plan, the medical and other welfare benefits described herein
shall be the secondary coverage for such applicable period of eligibility;
(iv) the Company shall, at its sole expense as incurred, provide
the Executive with outplacement services the scope and provider of which shall
be selected by the Executive in his sole discretion; and
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(v) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive any other amounts or benefits
required to be paid or provided or which the Executive is eligible to receive
under any plan, program, policy or practice or contract or agreement of the
Company and its affiliated companies, including, without limitation, any amounts
payable pursuant to Section 4(b)(iii) (such other amounts and benefits shall be
hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations, the timely
payment or provision of Other Benefits, and the payment of any amounts payable
to the Executive's beneficiary pursuant to Section 4(b)(iii)(B) hereof. Accrued
Obligations shall be paid to the Executive's estate or beneficiary, as
applicable, in a lump sum in cash within 30 days of the Date of Termination.
With respect to the provision of Other Benefits, the term Other Benefits as
utilized in this Section 6(b) shall include, without limitation, and the
Executive's estate and/or beneficiaries shall be entitled to receive, benefits
at least equal to the most favorable benefits provided by the Company and
affiliated companies to the estates and beneficiaries of peer executives of the
Company and such affiliated companies under such plans, programs, practices and
policies relating to death benefits, if any, as in effect with respect to other
peer executives and their beneficiaries at any time during the 120-day period
immediately preceding the Effective Date or, if more favorable to the
Executive's estate and/or the Executive's beneficiaries, as in effect on the
date of the Executive's death with respect to other peer executives of the
Company and its affiliated companies and their beneficiaries.
(c) Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations, the timely payment or provision of Other Benefits, and
the payment of any amounts payable to the Executive or his beneficiary pursuant
to Section 4(b)(iii)(B) hereof. Accrued Obligations shall be paid to the
Executive in a lump sum in cash within 30 days of the Date of Termination. With
respect to the provision of Other Benefits, the term Other Benefits as utilized
in this Section 6(c) shall include, and the Executive shall be entitled after
the Disability Effective Date to receive, disability and other benefits at least
equal to the most favorable of those generally provided by the Company and its
affiliated companies to disabled executives and/or their families in accordance
with such plans, programs, practices and policies relating to disability, if
any, as in effect generally with respect to other peer executives and their
families at any time during the 120-day period immediately preceding the
Effective Date or, if more favorable to the Executive and/or the Executive's
family, as in effect at any time thereafter generally with respect to other peer
executives of the Company and its affiliated companies and their families.
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(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore
unpaid. If the Executive voluntarily terminates employment during the Employment
Period, excluding a termination for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.
7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor shall anything herein limit or
otherwise affect such rights as the Executive may have under any contract or
agreement with the Company or any of its affiliated companies. Amounts which are
vested benefits or which the Executive is otherwise entitled to receive under
any plan, policy, practice or program of or any contract or agreement with the
Company or any of its affiliated companies at or subsequent to the Date of
Termination shall be payable in accordance with such plan, policy, practice or
program or contract or agreement except as explicitly modified by this
Agreement.
8. Full Settlement. The Company's obligation to make the payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced whether or not the Executive obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by law, all
legal fees and expenses which the Executive may reasonably incur as a result of
any contest (regardless of the outcome thereof) by the Company, the Executive or
others of the validity or enforceability of, or liability under, any provision
of this Agreement or any guarantee of performance thereof (including as a result
of any contest by the Executive about the amount of any payment pursuant to this
Agreement), plus in each case interest on any delayed payment at the applicable
Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the Company to
or for the benefit of the Executive (whether paid or payable or distributed or
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distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the Code or any interest or penalties are incurred by the Executive with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and any interest and penalties
imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment,
the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payments.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Coopers &
Lybrand or such other certified public accounting firm as may be designated by
the Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is payable
by the Executive, it shall furnish the Executive with a written opinion that
failure to report the Excise Tax on the Executive's applicable federal income
tax return would not result in the imposition of a negligence or similar
penalty. Any determination by the Accounting Firm shall be binding upon the
Company and the Executive. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will not
have been made by the Company should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder. In the event that the
Company exhausts its remedies pursuant to Section 9(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment by
the Company of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten business days after the Executive is informed
in
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writing of such claim and shall apprise the Company of the nature of such claim
and the date on which such claim is requested to be paid. The Executive shall
not pay such claim prior to the expiration of the 30-day period following the
date on which it gives such notice to the Company (or such shorter period ending
on the date that any payment of taxes with respect to such claim is due). If the
Company notifies the Executive in writing prior to the expiration of such period
that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim,
(ii) take such action in connection with contesting such claim as
the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may, at its sole option, either direct
the Executive to pay the tax claimed and sue for a refund or contest the claim
in any permissible manner, and the Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company directs the Executive to pay
such claim and sue for a refund, the Company shall advance the amount of such
payment to the Executive, on an interest-free basis and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with respect to
such advance or with respect to any imputed income with respect to such advance;
and further provided that any extension of the statute of limitations relating
to payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to
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settle or contest, as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 9(c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 9(c)) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive
of an amount advanced by the Company pursuant to Section 9(c), a determination
is made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
11. Successors. (a) This Agreement is personal to the Executive and
without the prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any
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successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
12. Miscellaneous. (a) This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Virginia, without reference
to principles of conflict of laws. The captions of this Agreement are not part
of the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Murray H. Bring
[Address Intentionally Omitted]
If to the Company:
Philip Morris Companies Inc.
120 Park Avenue
New York, N.Y. 10017
Attention: Corporate Secretary
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement,
shall not be deemed
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to be a waiver of such provision or right or any other provision or right of
this Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, prior to the Effective Date, may be terminated by either the Executive or
the Company at any time. Moreover, if prior to the Effective Date, (i) the
Executive's employment with the Company terminates or (ii) the Executive ceases
to be Vice Chairman, External Affairs and General Counsel of Philip Morris
Companies Inc., except, in each case in connection with a Potential Change of
Control then the Executive shall have no further rights under this Agreement
except for those rights provided under Section 4(b)(iii)(B) of this Agreement.
(g) This Agreement is supplemental to the employment agreement between
the Executive and the Company dated October 12, 1987, which was amended by a
letter agreement dated October 5, 1993, and shall not be construed to reduce or
otherwise limit any rights or benefits to which the Executive is or may become
entitled under such prior 1987 agreement or the 1993 amendment thereto. From and
after the Effective Date this Agreement shall supersede any other agreement
between the parties with respect to the subject matter hereof; provided,
however, that in no event (whether before or after the Effective Date) shall
this Agreement be construed to provide rights or benefits less favorable to the
Executive than those accorded under the prior 1987 agreement or the 1993
amendment thereto.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization from its Board of Directors, the Company
has caused these presents to be executed in its name on its behalf, all as of
the day and year first above written.
/s/ MURRAY H. BRING
------------------------------
MURRAY H. BRING
PHILIP MORRIS COMPANIES INC.
By /s/ Timothy A. Sompolski
---------------------------
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Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Consolidated Operating Results
(in millions) Operating Revenues
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Operating Revenues
Domestic tobacco $15,310 $13,584 $12,462
International tobacco 27,390 26,240 24,087
North American food 17,312 16,838 16,447
International food 9,999 10,852 11,503
Beer 4,105 4,201 4,327
Financial services 275 340 378
- -------------------------------------------------------------------------------
Operating revenues $74,391 $72,055 $69,204
===============================================================================
(in millions) Operating Income
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Operating Income
Domestic tobacco $ 1,489 $ 3,287 $ 4,206
International tobacco 5,029 4,572 4,078
North American food 3,055 2,873 2,628
International food 1,127 1,326 1,303
Beer 451 459 440
Financial services 183 297 193
- -------------------------------------------------------------------------------
Operating companies income 11,334 12,814 12,848
General corporate expenses (645) (479) (442)
Minority interest (128) (87) (43)
Amortization of goodwill (584) (585) (594)
- -------------------------------------------------------------------------------
Operating income $ 9,977 $11,663 $11,769
===============================================================================
Amortization of goodwill is primarily attributable to the North American food
segment.
1998 compared with 1997: Operating revenues for 1998 increased $2.3
billion (3.2%) from 1997, primarily due to domestic and international tobacco
operations. The comparison of operating revenues was affected by the 1998 sales
of several international food businesses and the 1997 sales of Brazilian ice
cream businesses, North American maple-flavored syrup businesses and a
Scandinavian sugar confectionery business. Financial services operating revenues
in 1998 decreased due to the 1997 sale of its real estate business. Excluding
the 1998 and 1997 divested operations, operating revenues increased $2.9 billion
(4.1%) from 1997.
Operating income for 1998 decreased $1.7 billion (14.5%) from 1997.
Operating income was reduced in 1998 and 1997 as a result of pre-tax charges of
$3.4 billion and $1.5 billion, respectively, taken by Philip Morris Incorporated
("PM Inc."), the Company's domestic tobacco subsidiary, for its share of all
fixed and determinable portions of its obligations related primarily to the
settlement of certain tobacco-related litigation. Operating income was further
reduced in 1998 by pre-tax charges of $337 million primarily related to
voluntary early retirement and separation programs at PM Inc. and $116 million
related to the Company's settlement of shareholder litigation. During 1997,
operating income was reduced by a $630 million pre-tax charge to realign the
international food operations. In addition, 1997 operating income was increased
by $877 million of pre-tax gains on the sales of ice cream businesses in Brazil
and real estate operations in the United States. Excluding the foregoing pre-tax
charges and gains and results of operations from businesses sold in 1998 and
1997, operating income increased $1.1 billion (8.3%) from 1997, reflecting
favorable results of operations in domestic tobacco, international tobacco and
North American food operations. Operating companies income, which is defined as
operating income before general corporate expenses, minority interest and
amortization of goodwill, decreased $1.5 billion (11.5%) from 1997 due primarily
to the items noted above. Excluding these items, operating companies income
increased 8.1% on higher earnings from domestic tobacco, international tobacco
and North American food operations.
Currency movements, primarily the strengthening of the U.S. dollar versus
European and Asian currencies, decreased operating revenues by $2.2 billion
($1.4 billion, excluding excise taxes) and operating companies income by $365
million in 1998 versus 1997. In January of 1999, the U.S. dollar began to
strengthen against the euro, the new common currency established by eleven of
the fifteen member countries of the European Union. Although the Company cannot
predict future movements in currency rates, strengthening of the dollar against
the euro, if sustained during 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, more recently,
in Russia and Brazil have been adversely affected by economic instability in
those areas. Although the Company cannot predict future economic developments,
the Company anticipates that economic instability will continue to adversely
affect its businesses in those markets during 1999.
Interest and other debt expense, net, for 1998 decreased $162 million
(15.4%) from 1997. This decline was due primarily to higher interest income,
reflecting higher cash and cash equivalent balances and to lower average debt
outstanding during 1998.
Net earnings of $5.4 billion in 1998 decreased 14.9% from 1997, and basic
EPS of $2.21 in 1998 decreased by 15.3% from 1997. Similarly, diluted EPS
decreased 14.7% to $2.20 from $2.58 in 1997. Net earnings, basic EPS and diluted
EPS in 1998 and 1997 were affected by the after-tax impact of the litigation
settlement charges, voluntary early retirement and separation program charges,
international food realignment charges and gains on divestitures, as previously
noted. Excluding the impact of these items, net earnings increased 9.2% to $7.8
billion, basic
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EPS increased 8.9% to $3.19 and diluted EPS increased 8.9% to $3.17,
respectively, from $7.1 billion, $2.93 and $2.91, respectively, in 1997.
1997 compared with 1996: Operating revenues for 1997 increased $2.9
billion (4.1%) and operating companies income decreased $34 million (0.3%) from
1996. Operating revenues were higher due primarily to increases in domestic and
international tobacco and North American food operations.
Operating companies income was reduced as a result of pre-tax charges of
$1.5 billion taken by PM Inc., for its share of all fixed and determinable
portions of its obligations related to settling health care cost recovery
litigation in Mississippi, Florida and Texas and a one-time charge for settling
the Broin case, a Florida class action brought on behalf of airline flight
attendants. Operating companies income was further reduced by pre-tax charges of
$630 million to realign the international food operations. Operating companies
income was increased by a $774 million pre-tax gain on the sale of ice cream
businesses in Brazil and a $103 million pre-tax gain on the sale of real estate
operations. Excluding these items, operating companies income increased 10.9%,
reflecting favorable results of operations in domestic tobacco, international
tobacco, North American food and beer operations.
Currency movements, primarily the strengthening of the U.S. dollar versus
European, Japanese and other Asian currencies, decreased operating revenues by
$3.2 billion ($1.9 billion, excluding excise taxes) and operating companies
income by $470 million in 1997 versus 1996.
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 in the process of
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. This
program is well underway. Generally, however, those subsidiaries with primarily
North American operations (PM Inc., Kraft Foods North America, Miller Brewing
Company and Philip Morris Capital Corporation) are closer to CDC readiness than
those with extensive international operations (Philip Morris International
("PMI") and Kraft Foods International ("KFI")).
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. The Company's objective is to substantially complete this
effort, as well as the testing and certification of individual systems for CDC
readiness, by June 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 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 business operations after January
1, 2000, have been identified and steps are being undertaken in an attempt to
reasonably ascertain their stage of CDC readiness through questionnaires,
interviews, on-site visits and other available means. In many cases,
governmental agencies and utilities (particularly outside North America) have a
lower level of CDC awareness and are less willing to provide information
concerning their state of CDC readiness. The CDC readiness of Key Business
Partners will continue to be monitored and contingency plans will be developed,
as appropriate, for 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 remediation of the CDC issue, the
Company presently believes that it may experience some disruption in its
business due to the CDC issue. More specifically, because of the interdependent
nature of Business Systems, the Company and its operating subsidiaries could be
materially adversely affected if utilities, private businesses and governmental
entities with which they do business or that provide essential services are not
CDC ready. The Company currently believes that the greatest risks of disruption
in its businesses 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. Although it is not currently
possible to quantify the most reasonably likely worst case scenario, the
possible consequences of the Company or Key Business Partners not being fully
CDC ready in a timely manner include, among other things, temporary plant
closings, delays in the delivery of products, delays in the receipt of supplies,
invoice and collection errors, and inventory and supply obsolescence.
Consequently, the business and results of operations of the Company could be
materially adversely affected by a temporary inability of the Company and its
operating subsidiaries to
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<PAGE>
conduct their businesses in the ordinary course for periods of time due to the
CDC issue. However, the Company believes that its CDC readiness program,
including the contingency planning discussed below, should significantly reduce
the adverse effect any such disruptions may have.
Concurrently with 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 may include stockpiling raw, packaging and
promotional materials, increasing inventory levels 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 contingency planning effort by June 1999. These plans will continue to be
evaluated and modified as additional information becomes available. While the
Company cannot reasonably estimate at this time the cost of implementing
contingency plans (since such costs will depend on the nature and extent of
future Year 2000 events), 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.
It is currently estimated that the aggregate cost of the Company's CDC
compliance/remediation efforts will be approximately $550 million, of which
approximately $325 million has been spent. The remaining costs relate to
remediation efforts, the final testing and certification of Business Systems and
other CDC-related efforts. Generally, the above costs are being expensed as they
are incurred and are being funded through operating cash flow. These amounts do
not include any costs associated with the implementation of 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 identify and remediate 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 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 business
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 Company currently
anticipates that the euro conversion will not have a material adverse impact on
its financial condition or results of operations.
Operating Results by Business Segment
Tobacco
Business Environment
The tobacco industry, both in the United States and abroad, has faced, and
continues to face, a number of issues that may adversely affect the business,
volume, results of operations, cash flows and financial position of PM Inc., 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 purported adverse health effects associated
with both smoking and exposure to environmental tobacco smoke ("ETS"); increased
smoking and health litigation; price increases in the United States related to
the settlement of certain tobacco litigation; actual and proposed excise tax
increases; the issuance of final regulations by the United States Food and Drug
Administration ("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 on tobacco manufacturing,
marketing, advertising and sales (including two European Union directives that,
if implemented, will (i) ban virtually all forms of
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<PAGE>
tobacco advertising and sponsorship in the European Union other than at the
retail point of sale, and (ii) will abolish duty-free tobacco sales among the
member states of the European Union); 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 the "tar" and nicotine
testing and reporting standards established by a 1970 voluntary agreement
between the FTC and domestic cigarette manufacturers. In February 1998, PM Inc.
and three other domestic cigarette manufacturers filed comments on the proposed
revisions. In November 1998, the FTC wrote to the Department of Health and Human
Services requesting its assistance in developing specific recommendations on the
future of the FTC's program for testing the "tar," nicotine and carbon monoxide
content of cigarettes.
FDA regulations: The FDA has promulgated regulations asserting
jurisdiction over cigarettes as "drugs" or "medical devices" under the
provisions of the Food, Drug and Cosmetic Act. These regulations include severe
restrictions on the distribution, marketing and advertising of cigarettes, and
would require the industry to comply with a wide range of labeling, reporting,
recordkeeping, manufacturing and other requirements. The FDA's exercise of
jurisdiction, if not reversed by judicial or legislative action, could lead to
more expansive FDA-imposed restrictions on cigarette operations than those set
forth in the regulations, and could materially adversely affect the business,
volume, results of operations, cash flows and financial position of PM Inc. and
the Company. In August 1998, the Fourth Circuit Court of Appeals ruled that the
FDA does not have the authority to regulate tobacco products, and declared the
FDA's regulations invalid and, in November 1998, that court denied the FDA's
petition for rehearing. The FDA is now petitioning the U.S. Supreme Court to
review the judgment of the Fourth Circuit Court of Appeals in this case. 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 of cigarettes sold in the Commonwealth,
and on a qualified, by-brand basis to provide "nicotine-yield ratings" for their
products based on standards to be 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, such as Texas. Some jurisdictions
outside the United States, including Thailand, have also enacted or proposed
ingredient disclosure laws or regulations.
The U.S. Environmental Protection Agency's report on ETS: In 1993, the
U.S. Environmental Protection Agency (the "EPA") issued a report relating to
certain alleged health effects of ETS. The report included a risk assessment
relating to the alleged 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.
----------------------------------
It is not possible to predict the outcome of the above-described matters, 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
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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
Attorney for the Eastern District of New York relating to the Council for
Tobacco Research-U.S.A., Inc., a research organization of which PM Inc. was a
sponsor; 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; and the United States Attorney for the Northern District of New
York relating to alleged contraband transactions primarily in Canadian-brand
tobacco products. PMI and its subsidiary, Philip Morris Duty Free Inc., have
also received subpoenas in the last referenced investigation. While the outcomes
of these investigations cannot be predicted, PM Inc., PMI and Philip Morris Duty
Free Inc. believe they have acted lawfully.
Smoking and health litigation: As further discussed in Note 16 of the
Notes to Consolidated Financial Statements ("Note 16"), there is litigation
pending in various United States and foreign jurisdictions related to tobacco
products. These cases generally fall within three categories: (i) smoking and
health cases alleging personal injury brought on behalf of individual
plaintiffs, (ii) smoking and health cases alleging personal injury and
purporting to be brought on behalf of a class of individual plaintiffs, and
(iii) health care cost recovery cases brought by governmental and
non-governmental plaintiffs seeking reimbursement for health care expenditures
allegedly caused by cigarette smoking. Governmental plaintiffs have included
local, state and certain foreign governmental entities. Non-governmental
plaintiffs in these cases include union health and welfare trust funds, Blue
Cross/Blue Shield groups, health maintenance organizations, hospitals, native
American tribes, 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.
There have been a number of jury verdicts in individual smoking and health
cases over the past three years. In February 1999, a California jury awarded
$1.5 million in compensatory damages and $50.0 million in punitive damages
against PM Inc. PM Inc. has announced that it will appeal the verdict and the
damage award. Prior to that, 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 $1.0 million jury
award 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. Neither the Company nor its
affiliates were parties to that action.
In recent years, there has been a substantial increase in the number of
smoking and health cases being filed.
As of December 31, 1998, there were approximately 510 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 375
such cases on December 31, 1997, and 185 such cases on December 31, 1996. Many
of these cases are pending in Florida, West Virginia and New York. Fifteen of
the individual cases involve allegations of various personal injuries allegedly
related to exposure to ETS.
In addition, as of December 31, 1998, 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 50 such cases on December 31, 1997, and 20 such cases on December
31, 1996. Most of these actions purport to constitute statewide class actions
and were filed after May 1996 when the Fifth Circuit Court of Appeals, in the
Castano case, reversed a federal district court's certification of a purported
nationwide class action on behalf of persons who were allegedly "addicted" to
tobacco products.
As of December 31, 1998, there were approximately 95 health care cost
recovery actions pending in the United States (excluding the cases covered by
the State Settlement Agreements discussed below), compared with approximately
105 health care cost recovery cases pending on December 31, 1997, and 25 such
cases on December 31, 1996. 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.
There are also a number of tobacco-related actions pending outside the
United States against PMI and its affiliates and subsidiaries including,
approximately 28 smoking and health cases initiated by one or more individuals
(Argentina (20), Brazil (1), Canada (1), Italy (1), Japan (1), the Philippines
(1), Scotland (1) and Turkey (2)), and six smoking and health class actions
(Brazil (2), Canada (3) and Nigeria (1)). In addition, health care cost recovery
actions have been brought in Israel, the Republic of the Marshall Islands and
British Columbia, Canada, and, in the United States, by Thailand, Venezuela and
the Republics of Bolivia, Guatemala, Panama and Nicaragua. Other foreign
entities, including a local agency of the French social security
25
<PAGE>
health insurance system, have stated that they are considering filing health
care cost recovery actions.
In addition to the foregoing smoking and health cases, a number of suits
have been filed by former asbestos manufacturers, asbestos manufacturers'
personal injury settlement trusts and, in one case, by an insurance company
seeking contribution or reimbursement for amounts expended in connection with
the defense and payment of asbestos claims that were allegedly caused in whole
or in part by cigarette smoking. Damages claimed in some of these cases range
into the billions of dollars.
It is not possible to predict the outcome of the litigation pending
against the Company and its subsidiaries. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably. An unfavorable outcome or settlement of a pending smoking and
health or health care cost recovery case could encourage the commencement of
additional similar litigation. There have also been a number of adverse
legislative, regulatory, political and other developments concerning cigarette
smoking and the tobacco industry that have received widespread media attention.
These developments may negatively affect the perception of potential triers of
fact with respect to the tobacco industry, possibly to the detriment of certain
pending litigation, and may prompt the commencement of additional similar
litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of pending litigation. The
present legislative and litigation environment is substantially uncertain, and
it is possible that the Company's business, 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.
Litigation settlements: In November 1998, PM Inc. and certain other United
States tobacco product manufacturers entered into a 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, and the discussion herein is qualified by reference thereto.
PM Inc. recorded pre-tax charges of $3.1 billion and $1.5 billion during
1998 and 1997, respectively, to accrue for its share of all fixed and
determinable portions of its obligations under the tobacco settlements, as well
as $300 million during 1998 for its unconditional obligation under an agreement
in principle to contribute to a tobacco growers trust fund, discussed in Note
16. As of December 31, 1998, PM Inc. had accrued costs of its obligations under
the settlements and to tobacco growers aggregating $1.4 billion, payable
principally before the end of the year 2000. 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 in Note 16), subject to
adjustment for several factors, including inflation, market share and industry
volume: 1999, $4.2 billion (of which $2.7 billion related to the MSA and has
already been paid by the industry); 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 made. PM Inc.'s shipment share in
1998 was approximately 50%.
The State Settlement Agreements also include provisions relating to
advertising and marketing restrictions, public disclosure of certain industry
documents, limitations on challenges to tobacco control and underage use laws
and other provisions. Among other things, the MSA:
(i) prohibits the targeting of youth in the advertising, promotion or
marketing of tobacco products;
(ii) bans the use of cartoon characters in all tobacco advertising and
promotion;
(iii) limits each participating manufacturer in the MSA to one tobacco brand
name sponsorship during any twelve-month period (except for wind-down of
existing contracts). The single permitted sponsorship may not include
major team sports or events in which the intended audience includes a
significant percentage of youth. The agreement limits the advertising and
promotion in connection with such permitted sponsorship, and bans
agreements to name any stadium or arena in the name of a tobacco brand
name;
(iv) bans all outdoor advertising of tobacco products (including, but not
limited to, billboards and tobacco advertising in transportation
facilities, vehicles, enclosed stadia and
26
<PAGE>
shopping malls), with the exception of signs fourteen square feet or less
in dimension at retail establishments that sell tobacco products (other
than solely through vending machines). The settling states may use
removed billboards for anti-tobacco advertising for the duration of the
existing lease period at the expense of the applicable participating
manufacturer;
(v) bars participating manufacturers from entering into agreements that
prohibit a third party from selling, purchasing or displaying
anti-tobacco advertising;
(vi) prohibits payments for tobacco product placement in various media;
(vii) bans participating manufacturers from offering or selling non-tobacco
apparel and other merchandise that bears a tobacco brand name, subject to
specified exceptions;
(viii) prohibits the distribution of free samples of tobacco products except
within an adult-only facility;
(ix) bans gift offers based on the purchase of tobacco products without
sufficient proof that the intended gift recipient is an adult;
(x) prohibits each participating manufacturer from licensing or expressly
authorizing third parties to advertise such manufacturer's tobacco brand
names in any manner prohibited under the agreement to that manufacturer
itself;
(xi) prohibits participating manufacturers from using as a tobacco product
brand name any nationally recognized non-tobacco brand or trade name or
the names of sports teams, entertainment groups or individual
celebrities, subject to specified exceptions;
(xii) prohibits participating manufacturers from selling or manufacturing packs
containing fewer than twenty cigarettes through December 31, 2001, and
bars participating manufacturers from opposing proposed legislation to
prohibit the sale of packs containing fewer than twenty cigarettes;
(xiii) requires participating manufacturers to affirm corporate principles to
comply with the agreement and to reduce underage usage of tobacco
products;
(xiv) imposes requirements applicable to lobbying activities conducted on
behalf of participating manufacturers;
(xv) prohibits participating manufacturers from agreeing to limit or suppress
smoking and health information or research or product development
research;
(xvi) prohibits participating manufacturers from making any material
misrepresentation of fact regarding the health consequences of using
tobacco products; and
(xvii) provides for the dissolution of the Council for Tobacco Research--U.S.A.,
Inc., The Tobacco Institute, Inc. and the Center for Indoor Air Research,
Inc. and establishes rules for the regulation and oversight of any new
tobacco-related trade association.
As of January 22, 1999, the MSA had been approved by courts in 41 states and in
the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands,
American Samoa and Northern Marianas. If a jurisdiction does not obtain final
judicial approval of the MSA by December 31, 2001, the agreement will be
terminated with respect to such jurisdiction.
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 years. 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 January 22, 1999, manufacturers
representing almost all domestic shipments in 1998 had agreed to become subject
to the terms of the MSA.
Operating Results
Operating
(in millions) Operating Revenues Companies Income
- --------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
Domestic tobacco $15,310 $13,584 $12,462 $1,489 $3,287 $4,206
International tobacco 27,390 26,240 24,087 5,029 4,572 4,078
- --------------------------------------------------------------------------------
Total $42,700 $39,824 $36,549 $6,518 $7,859 $8,284
================================================================================
In 1998, current year and historical operating revenues and operating companies
income of the Company's 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.
1998 Compared with 1997
Domestic tobacco: During 1998, PM Inc.'s operating revenues increased $1.7
billion (12.7%) over 1997, due primarily to pricing ($2.1 billion) and improved
product mix ($33 million), partially offset by lower volume ($450 million).
As discussed above, during 1998 and 1997, PM Inc. recorded pre-tax charges
totaling $3.1 billion and $1.5 billion, respectively, as PM Inc. and other
companies in the United States tobacco industry settled tobacco-related
litigation. PM Inc. also recorded an additional pre-tax charge of $300 million
in 1998 for a contribution to be made into a fund to compensate domestic tobacco
growers for the economic impact that they may experience as a result of the
settlement agreements. In addition, PM Inc. recorded pre-tax charges of $319
million related primarily to voluntary early retirement and separation programs
for salaried and hourly employees. On February 24, 1999, PM Inc. announced that
it plans to phase out cigarette production at its Louisville, Kentucky
manufacturing plant by December 2000. PM Inc. estimates that this will result in
a pre-tax charge of approximately $200 million, principally for severance, in
the first half of 1999.
Operating companies income for 1998 decreased $1.8 billion (54.7%) from
1997, due primarily to higher tobacco-related settlement charges ($1.9 billion),
charges for voluntary early retirement and separation programs and severance
27
<PAGE>
($319 million), higher marketing, administration and research costs ($989
million, primarily higher marketing expenses as competition intensified), and
lower volume ($295 million), partially offset by price increases, net of cost
increases ($1.8 billion) and improved product mix. Excluding the impact of
tobacco-related settlements and the voluntary early retirement and separation
programs, PM Inc.'s operating companies income of $5,189 million in 1998
increased 9.4% over $4,744 million in 1997.
Domestic tobacco industry shipment volume during 1998 declined 4.6% from
1997 primarily as a result of settlement-related price increases and
wholesalers' decisions to lower their inventories at the end of the year as
compared with a 1997 increase in wholesaler inventories, which PM Inc. believes
was partially in anticipation of price increases.
PM Inc.'s shipment volume for 1998 was 227.6 billion units, a decrease of
3.2% from 1997. For 1998, PM Inc.'s shipment market share was 49.4%, an increase
of 0.7 share points over 1997. Marlboro shipment volume declined 1.5 billion
units (0.9%) to 162.5 billion units for a 35.3% share of the total industry, an
increase of 1.3 share points over 1997.
Based on shipments, the premium segment accounted for approximately 73.0%
of the domestic cigarette industry volume in 1998, an increase of 0.7 share
points over 1997; however, during the fourth quarter the premium segment
accounted for approximately 72.3% of domestic cigarette industry volume, an
increase of 0.1 share points over the fourth quarter of 1997. In the premium
segment, PM Inc.'s volume decreased 2.4% during 1998, compared with a 3.7%
decrease for the industry, resulting in a premium segment share of 58.4%, an
increase of 0.8 share points over 1997.
In the discount segment, PM Inc.'s shipments decreased 8.1% to 31.0
billion units in 1998, compared with an industry decline of 6.9%, resulting in a
discount segment share of 25.0%, a decrease of 0.3 share points from 1997. Basic
shipment volume declined 111 million units to 23.4 billion units, for an 18.8%
share of the discount segment, an increase of 1.2 share points over 1997.
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
announcement followed similar announcements of price increases of $3.00 per
thousand in July 1998, $2.50 per thousand in May 1998, $2.50 per thousand in
April 1998, $1.25 per thousand in January 1998, $3.50 per thousand in September
1997 and $2.50 per thousand in March 1997. Each $1.00 per thousand increase by
PM Inc. equates to a $.02 increase in the wholesale price 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. The
exercise of the options is subject to certain conditions. Including the $150
million paid in December, the total acquisition price for these trademarks will
be $300 million. L&M, Lark and Chesterfield represented less than 0.2% of
domestic cigarette industry volume in 1998.
International tobacco: During 1998, international tobacco operating
revenues of PMI increased $1.2 billion (4.4%) over 1997, including excise taxes.
Excluding excise taxes, operating revenues increased 2.9%, due primarily to
price increases ($529 million), the consolidation of previously unconsolidated
subsidiaries ($406 million) and favorable volume/mix ($126 million), partially
offset by unfavorable currency movements ($857 million). Operating companies
income for 1998 increased 10.0% over 1997, due primarily to price increases, net
of cost increases ($460 million), favorable volume/mix ($96 million), the
consolidation of previously unconsolidated subsidiaries ($40 million) and lower
fixed manufacturing expenses and marketing, administration and research costs,
partially offset by unfavorable currency movements ($336 million).
PMI's volume increased 7.2 billion units (1.0%) from 1997 to 716.9 billion
units, due primarily to volume gains in the higher-margin markets of Western
Europe and Japan, partially offset by volume declines in certain lower-margin
markets of Asia and Eastern Europe due to weaker business conditions. In PMI's
established markets of Western Europe and Japan, 1998 volume grew a collective
5.8%. Volume advanced strongly in a number of important markets including Italy,
France, the Benelux countries, Spain, Switzerland, the Middle East, Turkey,
Poland, Hungary, Japan, Australia, Argentina and Mexico. In addition, PMI
recorded market share gains in most major markets. In the Czech Republic,
industry and PMI volumes were down, and in Germany, PMI's volume was essentially
flat as a result of a tax-driven price increase. Overall volume growth was led
by Marlboro, which increased 3.8% over 1997, partially offset by volume declines
for L&M in Eastern Europe. Local brands also grew by 4.7% during 1998.
1997 Compared with 1996
Domestic tobacco: PM Inc.'s 1997 operating revenues increased $1.1 billion
(9.0%) over 1996, due primarily to pricing ($783 million), higher volume ($222
million, including excise taxes) and improved product mix. Operating companies
income for 1997 decreased $919 million (21.8%) from 1996, due primarily to
previously discussed tobacco-related litigation settlement charges ($1.5
billion), higher marketing, administration and research costs ($195 million,
primarily higher marketing expense) and higher fixed manufacturing costs ($79
million), partially offset by pricing ($625 million), higher volume ($142
million) and improved product mix. Excluding the impact of litigation settlement
charges, PM Inc.'s operating companies income of $4,744 million in 1997
increased 12.8% over $4,206 million in 1996.
28
<PAGE>
PM Inc.'s 1997 shipment volume was 235.2 billion units, an increase of
1.9% over 1996 on higher Marlboro volume and increased wholesaler purchases,
which PM Inc. believes was partially in anticipation of price increases.
Marlboro shipment volume increased 7.8 billion units (5.0%) to 164.0 billion
units for a 34.0% share of the total industry, an increase of 1.8 share points
over 1996. Domestic tobacco industry volume declined 0.6%; however, PM Inc.
estimates that, excluding the effects of increased wholesaler buying mentioned
above and one less shipping day in 1997, the industry's volume declined by more
than 2.0% from 1996.
Based on shipments, the premium and discount segments accounted for
approximately 72.3% and 27.7%, respectively, of domestic cigarette industry
volume in 1997, versus approximately 71.4% and 28.6%, respectively, in 1996,
reflecting a continued shift to the higher-margin premium segment.
PM Inc.'s 1997 shipment market share was 48.7%, an increase of 1.2 share
points over 1996. In the premium segment, PM Inc.'s volume increased 3.4%,
compared with a 0.6% increase for the industry, resulting in a premium segment
share of 57.6%, an increase of 1.5 share points from 1996, reflecting higher
Marlboro volume. In the discount segment, PM Inc.'s shipments decreased 6.4% to
33.7 billion units in 1997 compared with an industry decline of 4.0%, resulting
in a discount segment share of 25.3%, a decrease of 0.6 share points from 1996.
Within the discount segment, Basic shipment volume increased 355 million units
to 23.5 billion units for a 17.6% share of the discount segment, an increase of
1.0 share point over 1996.
International tobacco: During 1997, tobacco operating revenues of PMI
increased $2.2 billion (8.9%) over 1996, including excise taxes. Excluding
excise taxes, operating revenues increased 7.3%, due primarily to price
increases ($679 million), favorable volume/mix ($618 million) and the
consolidation of previously unconsolidated and newly acquired subsidiaries ($577
million), partially offset by unfavorable currency movements ($961 million).
Operating companies income for 1997 increased 12.1% over 1996, due primarily to
price increases, net of cost increases ($550 million), favorable volume/mix
($371 million) and the consolidation of previously unconsolidated and newly
acquired subsidiaries ($114 million), partially offset by unfavorable currency
movements ($408 million) and higher marketing, administration and research
costs.
PMI's volume grew 49.6 billion units (7.5%) in 1997 over 1996 to 709.7
billion units, including local brands manufactured by Tabaqueira-Empresa
Industrial de Tabacos, S.A., Portugal's leading tobacco company in which PMI
acquired a controlling interest in January 1997. Volume advanced in most major
markets, including Germany, Italy, the Benelux countries, Spain, Central and
Eastern Europe, the Middle East, Turkey, the Asia/Pacific region, Argentina and
Mexico. In addition, PMI recorded market share gains in most major markets. In
France, industry and PMI volumes were down, and in Brazil and Australia, PMI
lost volume and share. However, volume and market share for Marlboro increased
in France and Brazil. Overall volume growth was driven by PMI's portfolio of
international brands, including Marlboro, which increased 5.5% over 1996, and
Bond Street, Parliament, Chesterfield and Virginia Slims, each of which recorded
double-digit volume increases.
Food
Business Environment
Kraft Foods, Inc. ("Kraft"), the largest processor and marketer of retail
packaged food in the United States, and its subsidiary 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, can
intensify price competition and can 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. Despite increased retail prices of
certain products during 1998, high dairy commodity costs had an adverse impact
on Kraft's operating results during the latter half of the year. However, dairy
commodity costs began to moderate early in 1999. Coffee bean prices declined
during the last three quarters of 1998, as compared with 1997, after reaching a
twenty-year high in May 1997. Lower coffee bean prices in 1998 led to price
reductions by Kraft, KFI and their competitors.
During 1998, KFI sold four international food businesses. During 1997, PMI
sold its Brazilian ice cream businesses, Kraft sold North American
maple-flavored syrup businesses and KFI sold a Scandinavian sugar confectionery
business. During 1996, Kraft sold its bagel business and KFI sold margarine
businesses in the U.K. and Italy.
In the fourth quarter of 1997, KFI and the food operations of PMI recorded
realignment charges related primarily to the downsizing or closure of
manufacturing and other facilities, as well as the discontinuance of certain
low-margin product lines. Included in the charges were provisions for
incremental postemployment benefits, primarily related to severance. During
1998, the Company undertook certain actions contemplated by the charges,
including the divestiture or closure of four businesses, the commencement of two
manufacturing facilities closures and consolidation of certain sales force and
headquarters functions, and began to make periodic postemployment payments to
29
<PAGE>
severed employees, the duration of such payments being dictated by the severed
employees' salary grades, years of service and the customs of the respective
countries in which actions were taken. KFI anticipates that the majority of the
remaining postemployment payments will be made by the end of the year 2000.
During January 1999, Kraft announced that it will take a pre-tax charge of
approximately $150 million during 1999, primarily for voluntary retirement
incentive and separation programs for employees in the United States.
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.
Kraft acquired the Taco Bell grocery business during 1996. In Latin America, PMI
acquired nearly all of the remaining voting shares of Industrias de Chocolate
Lacta S.A. ("Lacta"), a Brazilian confectionery company, in the second quarter
of 1996.
Operating Results
Operating
(in millions) Operating Revenues Companies Income
- --------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------
North American food $17,312 $16,838 $16,447 $3,055 $2,873 $2,628
International food 9,999 10,852 11,503 1,127 1,326 1,303
- --------------------------------------------------------------------------------
Total $27,311 $27,690 $27,950 $4,182 $4,199 $3,931
================================================================================
1998 Compared with 1997
North American food: During 1998, operating revenues increased $474
million (2.8%) over 1997, due primarily to favorable volume ($510 million) and
pricing ($212 million, primarily due to commodity-driven price increases),
partially offset by the impact of divestitures ($90 million), unfavorable
product mix ($56 million) and unfavorable currency movements ($103 million).
Operating companies income for 1998 increased $182 million (6.3%) over 1997, due
primarily to volume increases in ongoing operations ($284 million), price
increases, net of cost increases ($166 million, including the impact of lower
manufacturing and overhead costs which moderated the impact of higher cheese
costs), partially offset by unfavorable marketing, administration and research
costs ($118 million, due primarily to higher marketing), unfavorable product mix
($115 million), the impact of divestitures ($22 million) and unfavorable
currency movements ($13 million).
Excluding operating results of the North American food businesses divested
in 1997, operating revenues of $17,312 million in 1998 increased 3.4% over
$16,748 million in 1997, and operating companies income of $3,055 million in
1998 increased 7.2% over $2,851 million in 1997.
Volume gains were driven by beverages, from the strength of ready-to-drink
products, while powdered products decreased slightly; frozen pizza, from the
continued success of rising crust pizza; meals, due to the growth of Taco Bell
grocery products, as well as continued strength in macaroni and cheese dinners;
cereals, aided by new product introductions; cheese, due to volume gains in most
product lines and the introduction of new products; and processed meats, driven
by continued growth of lunch combinations (including new product introductions)
and growth in bacon. Coffee volume was slightly higher in 1998 due in part to
commodity-driven price decreases. Enhancers volume was flat as increases in
spoonable and pourable dressings were offset by declines in meat enhancements.
Desserts and snacks volume was slightly lower, due to declines in dry packaged
desserts and frozen toppings, partially offset by gains in ready-to-eat
puddings. In Canada, volume decreased due to a planned reduction of trade
promotions to more closely align them with business performance.
International food: Operating revenues for 1998 decreased $853 million
(7.9%) from 1997, due to unfavorable currency movements ($463 million), the
impact of divestitures ($403 million), lower volume/mix ($39 million) and
unfavorable pricing, partially offset by the impact of newly acquired and
previously unconsolidated subsidiaries ($57 million). Operating companies income
for 1998 decreased $199 million (15.0%) from 1997, due primarily to higher
marketing, administration and research costs ($179 million), the impact of
divestitures ($46 million) and unfavorable currency movements ($20 million),
partially offset by favorable volume/mix ($24 million) and favorable pricing
($15 million, primarily related to lower coffee costs). The increase in
marketing, administration and research costs reflects an unfavorable comparison
to 1997 due primarily to a 1997 gain of $774 million on the divestiture of the
Brazilian ice cream businesses, partially offset by 1997 charges totaling $630
million for the previously discussed realignment of international food
operations and related incremental postemployment costs.
Excluding the operating results of the divested international food
businesses, the gain on the sale of the Brazilian ice cream businesses and the
charges for realignment of international food operations, discussed above,
operating revenues of $9,963 million in 1998 decreased 4.3% from $10,413 million
in 1997, and operating companies income of $1,126 million in 1998 decreased 0.8%
from $1,135 million in 1997.
KFI's coffee volume decreased during 1998, as volume in the first half of
the year was adversely affected by soft consumption and trade de-stocking in
anticipation of price declines in certain markets, as well as a difficult
comparison to 1997 when shipments were heavy in advance of rising retail prices.
KFI's confectionery volume decreased due to market conditions in Russia and
higher retail pricing in Germany. KFI's cheese and grocery volumes increased due
primarily to higher shipments of cream cheese in Italy, Spain and Australia;
cheese snacks and lunch combinations in the United Kingdom; snacks in
Scandinavia; and powdered soft drinks in the Middle East and China. PMI's food
volume in Latin America for 1998 decreased from 1997, due primarily to lower
powdered soft drink volume in Argentina and lower confectionery volume in
Brazil, partially offset by higher shipments of powdered soft drinks in Brazil
and Mexico, as well as higher shipments of ready-to-drink beverages in Puerto
Rico.
30
<PAGE>
1997 Compared with 1996
North American food: During 1997, operating revenues increased $391
million (2.4%) over 1996, due to volume increases ($576 million), pricing ($275
million, primarily due to commodity-driven cost increases) and the impact of
acquisitions ($93 million), partially offset by the impact of divestitures ($372
million), unfavorable product mix ($155 million) and unfavorable currency
movements ($26 million). Operating companies income for 1997 increased $245
million (9.3%) over 1996, due primarily to price increases and net cost
decreases (aggregating $377 million, aided by productivity-driven cost savings
and lower cheese commodity costs) and volume increases ($335 million), partially
offset by unfavorable product mix ($97 million), the impact of divestitures ($61
million), and higher marketing, administration and research costs ($304 million,
due primarily to higher marketing expense, which included additional marketing
activities for new products). Included in 1997 marketing, administration and
research costs was a gain of $159 million on the sale of maple-flavored syrup
businesses, as well as charges of $64 million related to the discontinuation of
several small operations, Year 2000 systems conversion costs of $38 million and
the above-mentioned additional marketing expense for new product initiatives.
Excluding operating results of the divested North American food businesses
discussed above, operating revenues of $16,748 million in 1997 increased 4.8%
over $15,985 million in 1996, and operating companies income of $2,851 million
in 1997 increased 12.0% over $2,545 million in 1996.
Strong ongoing volume gains were driven by frozen pizza, resulting from
geographic expansion and new products; beverages, from the strength of
ready-to-drink products; meals, due to the acquisition and subsequent growth of
Taco Bell grocery products as well as strength in macaroni and cheese dinners;
cereals, aided by new product introductions; and desserts and snacks, due to new
product introductions and strength in refrigerated ready-to-eat desserts,
shelf-stable puddings and dry packaged desserts. Cheese volume also increased,
benefiting from lower prices due to lower commodity costs, new products and
marketing initiatives. Volume gains were also realized in processed meats,
driven by continued growth of lunch combinations (including new product
introductions) and growth in hot dogs and cold cuts. Coffee volume in 1997
declined from 1996 as customers reacted negatively to commodity-driven price
increases. Volume for pourable salad dressings increased despite intense
competition. In Canada, volume decreased due to a planned exit of lower-margin
foodservice product lines; however, retail volume increased.
International food: Operating revenues for 1997 decreased $651 million
(5.7%) from 1996, due to unfavorable currency movements ($955 million), lower
volume/mix ($70 million) and the impact of divestitures ($295 million),
partially offset by pricing ($397 million) and the impact of newly acquired and
previously unconsolidated subsidiaries ($272 million). Operating companies
income for 1997 increased $23 million (1.8%) over 1996, due primarily to lower
marketing, administration and research costs ($52 million), the impact of newly
acquired and previously unconsolidated subsidiaries ($41 million) and the gain
on the sale of PMI's Brazilian ice cream businesses ($774 million), partially
offset by unfavorable currency movements ($62 million), cost increases, net of
price increases (aggregating $59 million, primarily related to higher coffee and
cocoa costs), the impact of divestitures ($108 million) and charges recorded
during 1997 for the realignment of international food operations ($630 million).
Marketing, administration and research costs included the previously discussed
gain on the divestiture of the Brazilian ice cream businesses and international
food realignment charges.
Excluding the operating results of the divested international food
businesses, the gain on the sale of the Brazilian ice cream businesses and the
charges for realignment of international food operations, discussed above,
operating revenues of $10,578 million in 1997 decreased 3.3% from $10,934
million in 1996, and operating companies income of $1,145 million in 1997
decreased 1.1% from $1,158 million in 1996.
KFI's coffee volume decreased during 1997, reflecting customers' adverse
reactions to commodity-driven price increases. KFI's confectionery volume,
excluding the impact of divestitures, increased slightly due to volume increases
in Ukraine and the former Yugoslavia, partially offset by lower Scandinavian
volume, due to an exceptionally warm summer, and lower volume in Romania and
Bulgaria, reflecting poor economic environments. KFI's cheese and grocery
volumes, excluding the impact of divestitures, increased due primarily to gains
in KFI's Asia/Pacific region, principally China, the Philippines and Australia.
PMI's food volume in Latin America for 1997 increased over 1996, due primarily
to the acquisition of Lacta and higher beverage volume.
Beer
1998 compared with 1997: Operating revenues of the Miller Brewing Company
("Miller") for 1998 decreased $96 million (2.3%) from 1997, due primarily to
lower volume ($97 million). Operating companies income for 1998 decreased $8
million (1.7%) from 1997, due primarily to lower volume ($40 million), the
impact of divestitures ($14 million) and unfavorable price/mix ($10 million),
partially offset by lower manufacturing expenses and marketing, administration
and research costs ($51 million). Excluding the 1997 results of then 20%-owned
Molson Breweries of Canada, operating companies income of $451 million in 1998
increased 1.3% over $445 million in 1997.
Miller's domestic shipment volume of 41.7 million barrels for 1998
decreased 1.8% from 1997, due to decreases in premium and budget brands.
Domestic shipments of premium products were below 1997 as lower shipments of
Miller, Miller Lite and Miller Genuine Draft more than offset double-digit gains
in Icehouse and Foster's. Domestic shipments of near-premium products were
slightly higher than 1997 on increased shipments of the Miller High Life family
and Red Dog. Shipments of budget products declined across all brands. Miller's
estimated market share
31
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of the U.S. malt beverage industry (based on shipments, including exports) was
21.0%, a decline of 0.7 share points from the prior year. Wholesalers' sales to
retailers in 1998 decreased 1.3% from 1997, reflecting lower sales of Miller
Lite, Miller and Miller Genuine Draft, partially offset by increased shipments
of Icehouse and Foster's. Export shipments declined 18.6% from 1997, reflecting
a shift toward international licensing agreements. The increase in international
sales of Miller's products under such agreements more than offset the decrease
in export shipments.
On February 8, 1999, Miller announced an agreement to acquire four
trademarks from the Pabst Brewing Company and the Stroh Brewery Company, subject
to regulatory review. Miller also agreed to increase its contract manufacturing
of Pabst products, including brands that Pabst has agreed to acquire from Stroh
in a separate agreement. Miller estimates that the acquisition and increased
contract manufacturing could result in incremental 1999 operating companies
income, depending upon the timing of regulatory review and the subsequent
beginning of production.
1997 compared with 1996: Miller's operating revenues for 1997 decreased
$126 million (2.9%) from 1996, due to unfavorable price/mix ($114 million) and
lower volume ($12 million). Operating companies income for 1997 increased $19
million (4.3%) over 1996, due primarily to lower marketing, administration and
research costs ($67 million) and lower manufacturing costs ($25 million),
partially offset by unfavorable price/mix ($71 million) and lower volume ($5
million). Included in marketing, administration and research costs was a $12
million gain on the sale of Miller's 20% equity interest in Molson Breweries of
Canada along with a 49% interest in Molson USA, LLC, a beer import operation.
Miller's domestic shipment volume of 42.5 million barrels for 1997
increased 0.8% over 1996, reflecting higher shipments of both premium and budget
brands. Volume for domestic premium products increased on higher shipments of
Miller Lite, Icehouse and Foster's, partially offset by lower shipments of
Miller. Near-premium products grew on higher shipments of Miller High Life and
Red Dog, while budget brands grew on higher shipments of Milwaukee's Best.
Miller's estimated market share of the U.S. malt beverage industry (based on
shipments, including exports) was 21.7%, as compared with 21.8% in the prior
year. Wholesalers' sales to retailers in 1997 increased slightly from 1996,
reflecting higher sales of Miller Lite. Export shipments decreased in 1997,
reflecting a shift toward international licensing and contract brewing
arrangements. International sales of Miller products under such arrangements
more than offset the 1997 decrease in export shipments.
Financial Services
Philip Morris Capital Corporation ("PMCC"): Operating revenues and
operating companies income declined from 1997 due to the sale of Mission Viejo
Company in the third quarter of 1997 for a pre-tax gain of $103 million.
Excluding the impact of the divestiture, operating revenues and operating
companies income increased by 14.1% and 14.4%, respectively, reflecting
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 1998, net cash provided
by operating activities was $8.1 billion compared with $8.3 billion in 1997. The
decrease was due primarily to tobacco settlement payments of $3.5 billion during
1998, partially offset by higher underlying net earnings (net earnings excluding
previously mentioned settlement charges, voluntary early retirement and
separation program charges, 1997 gains on sales of two businesses and the
international food realignment charges). During 1997, net cash provided by
operating activities was $8.3 billion compared with $7.6 billion in 1996. The
increase was due primarily to higher net earnings, excluding litigation
settlement charges.
Net cash used in investing activities: During 1998, 1997 and 1996, net
cash used in investing activities was $2.6 billion, $619 million and $2.1
billion, respectively. The increase from 1997 to 1998 and the decrease from 1996
to 1997 are both primarily attributable to $2.2 billion of cash proceeds from
sales of businesses in 1997. Also affecting the comparison of 1998 to 1997 was
lower cash spent on the acquisition of businesses ($613 million), partially
offset by PM Inc.'s purchase of options to acquire three U.S. trademarks ($150
million).
During 1997, $2.2 billion was provided by the sales of PMI's Brazilian ice
cream businesses, Mission Viejo real estate operations and several other food
and beer businesses. Also during 1997, PMI acquired a controlling interest in a
Portuguese tobacco company and increased its ownership interest in a Mexican
cigarette business for an aggregate cost of $620 million. During 1996, PMI
acquired a controlling interest in a Polish tobacco company and nearly all of
the remaining voting shares of a Brazilian confectionery company for an
aggregate cost of $599 million.
During 1996, the Company sold several domestic and international food
businesses, including the North American bagel business, for proceeds of $612
million.
Capital expenditures for 1998 decreased 3.7%, to $1.8 billion, of which
45% related to tobacco operations and 47% related to food operations, primarily
for modernization and consolidation of manufacturing facilities and expansion of
certain production capacity. Capital expenditures are expected to be
approximately the same amount in 1999 and are currently expected to be funded
from operations.
Net cash used in financing activities: During 1998, the Company's net cash
used in financing operations decreased to $3.9 billion from $5.5 billion in
1997. The decrease was primarily due to a $962 million net repayment of
short-term borrowings and long-term debt during 1997 versus a net issuance of
$332 mil-
32
<PAGE>
lion in 1998 and lower cash paid for the repurchase of common stock in 1998
($498 million).
During 1997, the Company's net cash used in financing activities decreased
to $5.5 billion, compared with $6.4 billion used in 1996, due primarily to lower
stock repurchases, partially offset by higher dividends paid and an increase in
net repayments of short-term borrowings and long-term debt.
Debt and liquidity: The Company's total debt (consumer products and
financial services) was $14.7 billion, $14.1 billion and $15.2 billion at
December 31, 1998, 1997 and 1996, respectively. Total consumer products debt was
$14.0 billion, $13.3 billion and $13.9 billion at December 31, 1998, 1997 and
1996, respectively. At December 31, 1998 and 1997, the Company's ratio of
consumer products debt to total equity was 0.86 and 0.89, respectively. The
ratio of total debt to total equity was 0.91 and 0.95 at December 31, 1998 and
1997, respectively.
Fixed rate debt constituted approximately 91% and 98% of total consumer
products debt at December 31, 1998 and 1997, respectively. The decrease reflects
an interest rate swap agreement entered into by the Company during 1998. The
agreement effectively converts $800 million of fixed rate debt to variable rate
debt. The average interest rate on total consumer products debt, including the
impact of currency and interest rate swap agreements discussed in Market Risk
below, was approximately 7.2% and 7.6% at December 31, 1998 and 1997,
respectively.
The Company and its subsidiaries maintain credit facilities with a number
of lending institutions, amounting to approximately $12.2 billion at December
31, 1998. Approximately $12.0 billion of these facilities were unused at
December 31, 1998. These include revolving bank credit agreements totaling $10.0
billion, which may be used to support commercial paper borrowings by the Company
and 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 that it may
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 December 31, 1998 and 1997 were
"P-1" in the commercial paper market and "A2" for long-term debt obligations.
The Company's credit ratings by Standard & Poor's ("S&P") at December 31, 1998
and 1997 were "A-1" in the commercial paper market and "A" for long-term debt
obligations.
As discussed in Note 16, 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 future annual payments
in the following amounts: 1999, $4.2 billion (of which $2.7 billion had already
been paid by the industry at December 31, 1998); 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 domestic tobacco growers 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, 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.
Equity and dividends: During 1998 and 1997, the Company repurchased 6.5
million and 18.2 million shares of its common stock, respectively, at a cost of
$350 million and $743 million, respectively. Purchases in 1998 were made in the
fourth quarter when the Company resumed repurchases under an existing,
three-year $8 billion authority approved by the Board of Directors in the first
quarter of 1997, the duration of which was extended to November 2001 by the
Board of Directors in the fourth quarter of 1998. Cumulative purchases under the
$8 billion authority totaled $401 million at December 31, 1998.
Dividends paid in 1998 were 2.5% higher than in 1997, reflecting a higher
dividend rate in 1998. During the third quarter of 1998, the Company's Board of
Directors approved a 10% increase in the quarterly dividend rate to $0.44. As a
result, the annualized dividend rate increased to $1.76 from $1.60.
Return on average stockholders' equity decreased to 34.5% in 1998 from
43.3% in 1997. The decrease from 1997 primarily reflects higher average
stockholders' equity and the effect of litigation settlements in 1998.
Cash and cash equivalents: Cash and cash equivalents increased to $4.1
billion at December 31, 1998 from $2.3 billion at December 31, 1997. The
increase primarily reflects cash provided by operations, lower cash spent on
acquisitions and lower common share repurchases, partially offset by litigation
settlement payments and higher dividends.
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.
33
<PAGE>
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 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. At December 31, 1997, the Company
had long and short forward exchange/option contracts with U.S. dollar equivalent
values of $1.3 billion and $1.2 billion, respectively.
The Company also seeks to protect its foreign currency net asset exposure,
primarily the Swiss franc and German mark, through the use of foreign-currency
denominated debt or currency swap agreements. At December 31, 1998 and 1997, the
notional amounts of currency swap agreements aggregated $2.5 billion and $1.4
billion, respectively.
Commodities: The Company is exposed to price risk related to anticipated
purchases of certain commodities used as raw materials by the Company's food
businesses. Accordingly, the Company enters into commodity future, forward and
option contracts to manage fluctuations in prices of anticipated purchases,
primarily coffee, cocoa, sugar, wheat and corn. At December 31, 1998 and 1997,
the Company had net long commodity positions of $158 million and $266 million,
respectively. Unrealized losses on net commodity positions were immaterial at
December 31, 1998 and 1997.
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. The Company's
percentage of fixed rate debt to total debt (consumer products and financial
services) was 93% and 98% at December 31, 1998 and 1997, respectively. The
decrease reflects an interest rate swap agreement entered into by the Company
during 1998. The agreement effectively converts $800 million of fixed rate debt
to variable rate debt. The Company had no interest rate swap agreements at
December 31, 1997.
Use of the above-mentioned derivative financial instruments has not had a
material impact on the Company's financial position at December 31, 1998 and
1997 or the Company's results of operations for the years ended December 31,
1998, 1997 and 1996.
Value at risk: The Company uses a value at risk ("VAR") computation to
estimate the potential one-day loss in the fair value of its interest
rate-sensitive financial instruments and to estimate the one-day loss in pre-tax
earnings of its foreign currency and commodity price-sensitive derivative
financial instruments. The VAR computation includes the Company's debt;
short-term investments; foreign currency forwards, swaps and options; and
commodity futures, forwards and options. Anticipated transactions, foreign
currency trade payables and receivables, and net investments in foreign
subsidiaries, which the foregoing instruments are intended to hedge, were
excluded from the computation.
The VAR estimates were made assuming normal market conditions, using a 95%
confidence interval. The Company used a "variance/co-variance" model to
determine the observed interrelationships between movements in interest rates
and various currencies. These interrelationships were determined by observing
interest rate and forward currency rate movements over the preceding quarter for
the calculation of VAR amounts at December 31, 1998 and 1997 and over each of
the four preceding quarters for the calculation of average VAR amounts during
each year. The values of foreign currency and commodity options do not change on
a one-to-one basis with the underlying currency or commodity and were valued
accordingly in the VAR computation.
The estimated potential one-day loss in fair value of the Company's
interest rate-sensitive instruments, primarily debt, under normal market
conditions and the estimated potential one-day loss in pre-tax earnings from
foreign currency and commodity instruments under normal market conditions, as
calculated in the VAR model, follow:
Earnings Impact
----------------------------------------------
At
(in millions) 12/31/98 Average High Low
- --------------------------------------------------------------------------------
Instruments sensitive to:
Foreign currency rates $41 $17 $41 $ 7
Commodity prices $ 2 $ 4 $ 6 $ 2
- --------------------------------------------------------------------------------
Fair Value Impact
----------------------------------------------
At
(in millions) 12/31/98 Average High Low
- --------------------------------------------------------------------------------
Instruments sensitive to:
Interest rates $47 $45 $60 $36
- --------------------------------------------------------------------------------
34
<PAGE>
Earnings Impact
----------------------------------------------
At
(in millions) 12/31/97 Average High Low
- --------------------------------------------------------------------------------
Instruments sensitive to:
Foreign currency rates $5 $7 $15 $3
Commodity prices $7 $8 $17 $5
- --------------------------------------------------------------------------------
Fair Value Impact
----------------------------------------------
At
(in millions) 12/31/97 Average High Low
- --------------------------------------------------------------------------------
Instruments sensitive to:
Interest rates $37 $40 $47 $37
- --------------------------------------------------------------------------------
The VAR computation is a risk analysis tool designed to statistically estimate
the maximum probable daily loss from adverse movements in interest rates,
foreign currency rates and commodity prices under normal market conditions. The
computation does not purport to represent actual losses in fair value or
earnings to be incurred by the Company, nor does it consider the effect of
favorable changes in market rates. The Company cannot predict actual future
movements in such market rates and does not present these VAR results to be
indicative of future movements in such market rates or to be representative of
any actual impact that future changes in market rates may have on its future
results of operations or financial position.
New Accounting Standards
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.
In 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee ("AcSEC") issued Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP No. 98-1 requires certain costs incurred in
connection with developing or obtaining internal-use software to be capitalized
and other costs to be expensed. The Company adopted SOP No. 98-1 effective
January 1, 1998, and its application for the year ended December 31, 1998 had no
material effect on the Company's financial position or results of operations.
In 1998, AcSEC issued SOP No. 98-5, "Reporting on the Costs of Start-Up
Activities." SOP No. 98-5 establishes standards on accounting for start-up and
organization costs, and in general, requires such costs to be expensed as
incurred. This standard is required to be adopted on January 1, 1999. Adoption
of SOP No. 98-5 will have no material effect on the Company's financial position
or results of operations.
Contingencies
See Note 16 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 or the
conversion to the euro. The performance of each of PMI, KFI and Kraft is
affected by foreign economies and currency movements. Developments in any of
these areas, which are more fully described above and which descriptions are
incorporated into this section by reference, could cause the Company's results
to differ materially from results that have been or may be projected by or on
behalf of the Company. The Company cautions that the foregoing list of important
factors is not exclusive. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.
35
<PAGE>
SELECTED FINANCIAL DATA--ELEVEN-YEAR REVIEW
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Summary of Operations:
Operating revenues $ 74,391 $ 72,055 $ 69,204 $ 66,071
United States export sales 6,005 6,705 6,476 5,920
Cost of sales 26,820 26,689 26,560 26,685
Federal excise taxes on products 3,438 3,596 3,544 3,446
Foreign excise taxes on products 13,140 12,345 11,107 9,486
- --------------------------------------------------------------------------------------------------------------
Operating income 9,977 11,663 11,769 10,526
Interest and other debt expense, net 890 1,052 1,086 1,179
Earnings before income taxes and cumulative effect
of accounting changes 9,087 10,611 10,683 9,347
Pre-tax profit margin 12.2% 14.7% 15.4% 14.1%
Provision for income taxes 3,715 4,301 4,380 3,869
- --------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 5,372 6,310 6,303 5,478
Cumulative effect of accounting changes (28)
Net earnings 5,372 6,310 6,303 5,450
Basic EPS before cumulative effect
of accounting changes 2.21 2.61 2.57 2.18
Per share cumulative effect of accounting changes (0.01)
- --------------------------------------------------------------------------------------------------------------
Basic EPS 2.21 2.61 2.57 2.17
Diluted EPS before cumulative effect
of accounting changes 2.20 2.58 2.54 2.16
Per share cumulative effect of accounting changes (0.01)
Diluted EPS 2.20 2.58 2.54 2.15
Dividends declared per share 1.68 1.60 1.47 1.22
Weighted average shares (millions)--Basic 2,429 2,420 2,456 2,517
Weighted average shares (millions)--Diluted 2,446 2,442 2,482 2,538
- --------------------------------------------------------------------------------------------------------------
Capital expenditures 1,804 1,874 1,782 1,621
Depreciation 1,106 1,044 1,037 1,024
Property, plant and equipment, net (consumer products) 12,335 11,621 11,751 11,116
Inventories (consumer products) 9,445 9,039 9,002 7,862
Total assets 59,920 55,947 54,871 53,811
Total long-term debt 12,615 12,430 12,961 13,107
Total debt--consumer products 13,953 13,258 13,933 14,372
--financial services and real estate 709 845 1,307 1,454
- --------------------------------------------------------------------------------------------------------------
Total deferred income taxes 3,638 3,382 3,336 2,827
Stockholders' equity 16,197 14,920 14,218 13,985
Common dividends declared as a % of Basic EPS 76.0% 61.3% 57.2% 56.2%
Common dividends declared as a % of Diluted EPS 76.4% 62.0% 57.9% 56.7%
Book value per common share outstanding 6.66 6.15 5.85 5.61
Market price per common share--high/low 59.50-34.75 48.13-36.00 39.67-28.54 31.46-18.58
- --------------------------------------------------------------------------------------------------------------
Closing price of common share at year end 53.50 45.25 37.67 30.08
Price/earnings ratio at year end--Basic 24 17 15 14
Price/earnings ratio at year end--Diluted 24 18 15 14
Number of common shares outstanding at
year end (millions) 2,431 2,425 2,430 2,493
Number of employees 144,000 152,000 154,000 151,000
==============================================================================================================
</TABLE>
See notes to the consolidated financial statements regarding acquisitions and
divestitures in 1998, 1997 and 1996; the international food realignment in 1997;
tobacco and other litigation settlement charges in 1998 and 1997; and 1998
charges for early retirement and separation programs for domestic tobacco and
corporate employees.
36
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 65,125 $ 60,901 $ 59,131 $ 56,458 $ 51,169 $ 44,080 $ 31,273
4,942 4,105 3,797 3,061 2,928 2,288 1,863
28,351 26,771 26,082 25,612 24,430 21,868 13,565
3,431 3,081 2,879 2,978 2,159 2,140 2,127
7,918 7,199 6,157 5,416 4,687 3,608 3,755
- -----------------------------------------------------------------------------------------
9,449 7,587 10,059 8,622 7,946 6,789 4,397
1,233 1,391 1,451 1,651 1,635 1,731 670
8,216 6,196 8,608 6,971 6,311 5,058 3,727
12.6% 10.2% 14.6% 12.3% 12.3% 11.5% 11.9%
3,491 2,628 3,669 3,044 2,771 2,112 1,663
- -----------------------------------------------------------------------------------------
4,725 3,568 4,939 3,927 3,540 2,946 2,064
(477) (921) 273
4,725 3,091 4,939 3,006 3,540 2,946 2,337
1.82 1.35 1.82 1.41 1.28 1.06 0.74
(0.18) (0.33) 0.10
- -----------------------------------------------------------------------------------------
1.82 1.17 1.82 1.08 1.28 1.06 0.84
1.81 1.35 1.80 1.40 1.27 1.05 0.73
(0.18) (0.33) 0.10
1.81 1.17 1.80 1.07 1.27 1.05 0.83
1.01 0.87 0.78 0.64 0.52 0.42 0.34
2,597 2,633 2,717 2,773 2,774 2,778 2,796
2,610 2,645 2,741 2,798 2,792 2,797 2,805
- -----------------------------------------------------------------------------------------
1,726 1,592 1,573 1,562 1,355 1,246 1,024
1,025 1,042 963 938 876 755 608
11,171 10,463 10,530 9,946 9,604 8,457 8,648
7,987 7,358 7,785 7,445 7,153 5,751 5,384
52,649 51,205 50,014 47,384 46,569 38,528 36,960
14,975 15,221 14,583 14,213 16,121 14,551 16,812
14,978 16,364 16,269 15,289 17,182 14,887 16,442
1,494 1,792 1,934 1,611 1,560 1,538 1,504
- -----------------------------------------------------------------------------------------
2,496 2,168 2,248 1,803 2,083 1,732 1,559
12,786 11,627 12,563 12,512 11,947 9,571 7,679
55.5% 74.4% 42.9% 59.3% 40.6% 39.6% 40.5%
55.8% 74.4% 43.3% 59.8% 40.9% 40.0% 41.0%
5.00 4.42 4.69 4.53 4.30 3.43 2.77
21.50-15.75 25.88-15.00 28.88-23.17 27.25-16.08 17.33-12.00 15.17-8.33 8.50-6.71
- -----------------------------------------------------------------------------------------
19.17 18.54 25.71 26.75 17.25 13.88 8.50
11 16 14 25 13 13 10
11 16 14 25 14 13 10
2,559 2,631 2,679 2,760 2,778 2,787 2,772
165,000 173,000 161,000 166,000 168,000 157,000 155,000
=========================================================================================
</TABLE>
37
<PAGE>
CONSOLIDATED BALANCE SHEETS
(in millions of dollars, except per share data)
at December 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
Assets
Consumer products
Cash and cash equivalents $ 4,081 $ 2,282
Receivables, net 4,691 4,294
Inventories:
Leaf tobacco 4,729 4,348
Other raw materials 1,728 1,689
Finished product 2,988 3,002
- --------------------------------------------------------------------------------
9,445 9,039
Other current assets 2,013 1,825
- --------------------------------------------------------------------------------
Total current assets 20,230 17,440
Property, plant and equipment, at cost:
Land and land improvements 655 666
Buildings and building equipment 5,386 5,114
Machinery and equipment 13,771 12,667
Construction in progress 1,422 1,555
- --------------------------------------------------------------------------------
21,234 20,002
Less accumulated depreciation 8,899 8,381
- --------------------------------------------------------------------------------
12,335 11,621
Goodwill and other intangible assets
(less accumulated amortization of $5,436 and $4,814) 17,566 17,789
Other assets 3,309 3,211
- --------------------------------------------------------------------------------
Total consumer products assets 53,440 50,061
Financial services
Finance assets, net 6,324 5,712
Other assets 156 174
- --------------------------------------------------------------------------------
Total financial services assets 6,480 5,886
- --------------------------------------------------------------------------------
Total Assets $59,920 $55,947
================================================================================
See notes to consolidated financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities
Consumer products
Short-term borrowings $ 225 $ 157
Current portion of long-term debt 1,822 1,516
Accounts payable 3,359 3,318
Accrued liabilities:
Marketing 2,637 2,149
Taxes, except income taxes 1,408 1,234
Employment costs 968 1,083
Settlement charges 1,135 886
Other 2,608 2,894
Income taxes 1,144 862
Dividends payable 1,073 972
- -----------------------------------------------------------------------------------------------------
Total current liabilities 16,379 15,071
Long-term debt 11,906 11,585
Deferred income taxes 929 889
Accrued postretirement health care costs 2,543 2,432
Other liabilities 7,019 6,218
- -----------------------------------------------------------------------------------------------------
Total consumer products liabilities 38,776 36,195
Financial services
Long-term debt 709 845
Deferred income taxes 4,151 3,877
Other liabilities 87 110
- -----------------------------------------------------------------------------------------------------
Total financial services liabilities 4,947 4,832
- -----------------------------------------------------------------------------------------------------
Total liabilities 43,723 41,027
Contingencies (Note 16)
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 26,261 24,924
Accumulated other comprehensive earnings
(including currency translation of $1,081 and $1,109) (1,106) (1,109)
Cost of repurchased stock (375,426,742 and 380,474,028 shares) (9,893) (9,830)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 16,197 14,920
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 59,920 $ 55,947
=====================================================================================================
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
(in millions of dollars, except per share data)
for the years ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Operating revenues $74,391 $72,055 $69,204
Cost of sales 26,820 26,689 26,560
Excise taxes on products 16,578 15,941 14,651
- --------------------------------------------------------------------------------
Gross profit 30,993 29,425 27,993
Marketing, administration and research costs 17,051 15,720 15,630
Settlement charges (Note 16) 3,381 1,457
Amortization of goodwill 584 585 594
- --------------------------------------------------------------------------------
Operating income 9,977 11,663 11,769
Interest and other debt expense, net 890 1,052 1,086
- --------------------------------------------------------------------------------
Earnings before income taxes 9,087 10,611 10,683
Provision for income taxes 3,715 4,301 4,380
- --------------------------------------------------------------------------------
Net earnings $ 5,372 $ 6,310 $ 6,303
================================================================================
Per share data:
Basic earnings per share $ 2.21 $ 2.61 $ 2.57
================================================================================
Diluted earnings per share $ 2.20 $ 2.58 $ 2.54
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of dollars)
<TABLE>
<CAPTION>
for the years ended December 31,
- ------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided By (Used In) Operating Activities
Net earnings--Consumer products $5,255 $6,152 $6,180
--Financial services 117 158 123
- ------------------------------------------------------------------------------------------------------
Net earnings 5,372 6,310 6,303
Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Depreciation and amortization 1,690 1,629 1,631
International food realignment 630
Deferred income tax provision (benefit) 11 (188) 163
Gain on sale of Brazilian ice cream businesses (774)
Gains on sales of other businesses (196) (320)
Cash effects of changes, net of the effects from acquired and divested
companies:
Receivables, net (352) (168) 35
Inventories (192) (531) (952)
Accounts payable (150) 37 60
Income taxes 565 48 373
Accrued liabilities and other current assets 254 726 (448)
Other 671 653 527
======================================================================================================
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
for the years ended December 31,
- --------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial services
Deferred income tax provision $ 265 $ 257 $ 224
Gain on sale of business (103)
Other (14) 10 38
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,120 8,340 7,634
- --------------------------------------------------------------------------------------------
Cash Provided By (Used In) Investing Activities
Consumer products
Capital expenditures (1,804) (1,874) (1,782)
Purchase of businesses, net of acquired cash (17) (630) (616)
Proceeds from sales of businesses 16 1,784 612
Other (154) 42 (47)
Financial services
Investments in finance assets (736) (652) (439)
Proceeds from finance assets 141 287 217
Proceeds from sale of business 424
- --------------------------------------------------------------------------------------------
Net cash used in investing activities (2,554) (619) (2,055)
- --------------------------------------------------------------------------------------------
Cash Provided By (Used In) Financing Activities
Consumer products
Net issuance (repayment) of short-term borrowings 61 (1,482) (1,119)
Long-term debt proceeds 2,065 2,893 2,699
Long-term debt repaid (1,616) (1,987) (1,979)
Financial services
Net repayment of short-term borrowings (173) (498)
Long-term debt proceeds 174 363
Long-term debt repaid (178) (387)
Repurchase of common stock (307) (805) (2,770)
Dividends paid (3,984) (3,885) (3,462)
Issuance of common stock 265 205 448
Other (200) (74) (88)
- --------------------------------------------------------------------------------------------
Net cash used in financing activities (3,894) (5,521) (6,406)
- --------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 127 (158) (71)
- --------------------------------------------------------------------------------------------
Cash and cash equivalents:
Increase (decrease) 1,799 2,042 (898)
Balance at beginning of year 2,282 240 1,138
- --------------------------------------------------------------------------------------------
Balance at end of year $ 4,081 $ 2,282 $ 240
============================================================================================
Cash paid: Interest--Consumer products $ 1,141 $ 1,219 $ 1,244
============================================================================================
--Financial services $ 79 $ 79 $ 95
============================================================================================
Income taxes $ 2,644 $ 3,794 $ 3,424
============================================================================================
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
Accumulated
Other Comprehensive Earnings
---------------------------------
Earnings
Reinvested Currency Cost of Total
Common in the Translation Repurchased Stockholders'
Stock Business Adjustments Other Total Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 $ 935 $19,811 $ 467 $ (32) $ 435 $(7,196) $13,985
Comprehensive earnings:
Net earnings 6,303 6,303
Other comprehensive earnings, net of income taxes:
Currency translation
adjustments (275) (275) (275)
Net unrealized appreciation
on securities 30 30 30
- -----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive earnings (245)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive earnings 6,058
- -----------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options and issuance
of other stock awards (28) 609 581
Cash dividends declared ($1.47 per share) (3,606) (3,606)
Stock repurchased (2,800) (2,800)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 935 22,480 192 (2) 190 (9,387) 14,218
Comprehensive earnings:
Net earnings 6,310 6,310
Other comprehensive earnings, net of income taxes:
Currency translation
adjustments (1,301) (1,301) (1,301)
Net unrealized appreciation
on securities 2 2 2
- -----------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive earnings (1,299)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive earnings 5,011
- -----------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options and issuance
of other stock awards 14 300 314
Cash dividends declared ($1.60 per share) (3,880) (3,880)
Stock repurchased (743) (743)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 935 24,924 (1,109) (1,109) (9,830) 14,920
Comprehensive earnings:
Net earnings 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 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
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies:
Basis of presentation: The consolidated financial statements include all
significant subsidiaries. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of operating revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
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.
Certain prior years' amounts have been reclassified to conform with the
current year's presentation.
Cash and cash equivalents: Cash equivalents include demand deposits with
banks and all highly liquid investments with original maturities of three months
or less.
Inventories: Inventories are stated at the lower of cost or market. The
last-in, first-out ("LIFO") method is used to cost substantially all domestic
inventories. The cost of other inventories is determined by the average cost or
first-in, first-out methods. It is a generally recognized industry practice to
classify leaf tobacco inventory as a current asset although part of such
inventory, because of the duration of the aging process, ordinarily would not be
utilized within one year.
Impairment of long-lived assets: The Company reviews long-lived assets for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. The Company
performs undiscounted cash flow analyses to determine if an impairment exists.
If an impairment is determined to exist, any related impairment loss is
calculated based on fair value. Impairment losses on assets to be disposed, if
any, are based on the estimated proceeds to be received, less costs of disposal.
Depreciation, amortization and goodwill valuation: Depreciation is
recorded by the straight-line method. Goodwill and other intangible assets
substantially comprise brand names purchased through acquisitions, which are
amortized on the straight-line method over 40 years. The Company periodically
evaluates the recoverability of its intangible assets and measures any
impairment by comparison to estimated undiscounted cash flows from future
operations.
Advertising costs: Advertising costs are expensed as incurred.
Revenue recognition: The Company recognizes operating revenues upon
shipment of goods to customers.
Hedging instruments: The Company utilizes certain financial instruments to
manage its foreign currency, commodity and interest rate exposures. The Company
does not engage in trading or other speculative use of these financial
instruments. To qualify as a hedge, the Company must be exposed to price,
currency or interest rate risk and the financial instrument must reduce the
exposure and be designated as a hedge. Additionally, for hedges of anticipated
transactions, the significant characteristics and expected terms of the
anticipated transaction must be identified and it must be probable that the
anticipated transaction will occur. Financial instruments qualifying for hedge
accounting must maintain a high correlation between the hedging instrument and
the item being hedged, both at inception and throughout the hedged period.
The Company uses forward contracts, options and swap agreements to
mitigate its foreign currency exposure. The corresponding gains and losses on
those contracts are deferred and included in the basis of the underlying hedged
transactions when settled. Options are used to hedge anticipated transactions.
Option premiums are recorded generally as other current assets on the
consolidated balance sheets and amortized to interest and other debt expense,
net over the lives of the related options. The values of options, excluding
their time values, are
43
<PAGE>
recognized as adjustments to the related hedged items. If anticipated
transactions were not to occur, any gains or losses would be recognized in
earnings currently. Foreign currency and related interest rate swap agreements
are used to hedge certain foreign currency net investments. Realized and
unrealized gains and losses on foreign currency swap agreements that are
effective as hedges of net assets in foreign subsidiaries are offset against
currency translation adjustments as a component of stockholders' equity. The
interest differential to be paid or received under the currency and related
interest rate swap agreements is recognized over the life of the related debt
and is included in interest and other debt expense, net. Gains and losses on
terminated foreign currency swap agreements, if any, are recorded as currency
translation adjustments, which is a component of stockholders' equity.
Commodity futures and forward contracts are used by the Company to procure
raw materials, primarily coffee, cocoa, sugar, wheat and corn. Commodity futures
and options are also used to hedge the price of certain commodities, primarily
coffee and cocoa. Realized gains and losses on commodity futures, forward
contracts and options are deferred as a component of inventories and are
recognized when related raw material costs are charged to cost of sales. If the
anticipated transaction were not to occur, the gains and losses would be
recognized in earnings currently.
Interest rate swap agreements are accounted for on an accrual basis with
the net receivable or payable recognized as an adjustment to interest expense.
Gains and losses on terminated interest rate swaps, if any, are recognized over
the remaining life of the arrangement, or immediately, if the hedged items do
not remain outstanding. The fair value of the interest rate swap agreements and
changes in these fair values as a result of changes in market interest rates are
not recognized in the consolidated financial statements.
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.
Stock-based compensation: The Company accounts for employee stock
compensation plans in accordance with the intrinsic value-based method permitted
by SFAS No. 123, "Accounting for Stock-Based Compensation," which generally does
not result in compensation cost.
Software costs: The Company capitalizes certain computer software and
software development costs incurred in connection with developing or obtaining
computer software for internal use in accordance with Statement of Position No.
98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which was adopted by the Company as of January 1,
1998. The adoption of SOP 98-1 had no material effect on the Company's financial
position or results of operations.
Capitalized costs are amortized on a straight-line basis over the
estimated useful lives of the software.
Note 2. Divestitures:
During 1997, the Company sold several domestic and international food
businesses, including its Brazilian ice cream businesses and its North American
maple-flavored syrup businesses, for total proceeds of $1.5 billion and net
pre-tax gains of $958 million. In addition, the Company sold its equity interest
in a Canadian beer operation and sold a minority interest in a beer import
operation for proceeds of $306 million and a pre-tax gain of $12 million. The
Company also sold its real estate operations for total proceeds of $424 million
and a pre-tax gain of $103 million.
During 1996, the Company sold several domestic and international food
businesses, including its North American bagel business, for total proceeds of
$612 million and net pre-tax gains of $320 million.
44
<PAGE>
The operating results of these businesses were not material to the
Company's consolidated operating results in any of the periods presented.
Pre-tax gains on these divestitures were included in marketing, administration
and research costs on the Company's consolidated statements of earnings.
Note 3. Acquisitions:
During December 1998, the Company's domestic tobacco subsidiary paid $150
million for options to purchase the voting and non-voting common stock of a
company ("the acquiree"), the sole assets of which are three U.S. cigarette
brands. The exercise of the options is subject to regulatory approval. Upon
exercise of these options, the Company will acquire all the common stock of the
acquiree for an additional $150 million.
During 1997, the Company acquired a controlling interest in a Portuguese
tobacco company at a cost of $217 million and increased its ownership interest
in a Mexican cigarette business from 28.8% to 50.0% at a cost of $403 million.
During 1996, the Company acquired a controlling interest in a Polish
tobacco company, at a cost of $285 million and nearly all of the remaining
voting shares of a Brazilian confectionery company, at a cost of $314 million.
The effects of these and other smaller acquisitions were not material to
the Company's financial position or results of operations in any of the periods
presented.
Note 4. Food Realignment Charges:
In the fourth quarter of 1997, the Company's international food operations
recorded a charge of $342 million related primarily to the downsizing or closure
of manufacturing and other facilities, as well as the discontinuance of certain
low-margin product lines. The Company also recorded a charge of $288 million for
incremental postemployment benefits, primarily related to severance.
In 1996, the Company's North American food and international food
operations charged $252 million and $68 million, respectively, to marketing,
administration and research costs. These charges related primarily to the
downsizing and closure of certain food manufacturing facilities, related
incremental postemployment costs, primarily severance, and an early retirement
program.
These charges, which were recorded to marketing, administration and
research costs, reduced earnings before income taxes by $630 million and $320
million in 1997 and 1996, respectively.
Note 5. Inventories:
The cost of approximately 50% of inventories in 1998 and 1997 was determined
using the LIFO method. The stated LIFO values of inventories were approximately
$1.1 billion and $1.0 billion lower than the current cost of inventories at
December 31, 1998 and 1997, respectively.
Note 6. Short-Term Borrowings and Borrowing Arrangements:
At December 31, the Company's short-term borrowings and related average interest
rates consisted of the following:
(in millions)
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
Average Average
Amount Year-End Amount Year-End
Outstanding Rate Outstanding Rate
===============================================================================
Consumer products:
Bank loans $260 10.3% $194 8.8%
Amount reclassified
as long-term debt (35) (37)
- -------------------------------------------------------------------------------
$225 $157
===============================================================================
The fair values of the Company's short-term borrowings at December 31, 1998 and
1997, based upon market rates, approximate the amounts disclosed above.
The Company and its subsidiaries maintain credit facilities with a number
of lending institutions, amounting to approximately $12.2 billion at December
31, 1998. Approximately $12.0 billion of these facilities were unused at
December 31, 1998. Certain of these facilities are used to support commercial
paper borrowings, are available for acquisitions and other corporate purposes
and require the maintenance of a fixed charges coverage ratio.
The Company's credit facilities include revolving bank credit agreements
totaling $10.0 billion. Included in this total are an agreement for $2.0
billion, which expires in October 1999, and an agreement for $8.0 billion,
expiring in 2002, which enable the Company to refinance short-term debt on a
long-term basis. Accordingly, short-term borrowings intended to be refinanced
were reclassified as long-term debt.
45
<PAGE>
Note 7. Long-Term Debt:
At December 31, 1998 and 1997 the Company's long-term debt consisted of
the following:
(in millions)
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
Consumer products:
Short-term borrowings, reclassified $ 35 $ 37
Notes, 6.15% to 9.25% (average
effective rate 7.39%), due
through 2008 9,615 9,735
Debentures, 6.00% to 8.50%
(average effective rate 9.90%),
$1.9 billion face amount, due
through 2027 1,691 1,830
Foreign currency obligations:
Swiss franc, 1.39% to 5.50%
(average effective rate 4.96%),
due through 2000 463 857
German mark, 5.63% to 6.38%
(average effective rate 5.63%),
due through 2008 1,566 341
Other foreign 122 61
Other 236 240
- -------------------------------------------------------------------------------
13,728 13,101
Less current portion of long-term debt (1,822) (1,516)
- -------------------------------------------------------------------------------
$11,906 $11,585
===============================================================================
Financial services:
Eurodollar note, 6.63%, due 1999 $ 200 $ 200
Foreign currency obligations:
French franc, 6.88%, due 2006 179 169
German mark, 6.50% and 5.38%,
(average effective rate
5.89%) due 2003 and 2004 330 311
ECU note, 8.50%, due 1998 165
- -------------------------------------------------------------------------------
$ 709 $ 845
===============================================================================
Aggregate maturities of long-term debt, excluding short-term borrowings
reclassified as long-term debt, are as follows:
Consumer Financial
(in millions) Products Services
- --------------------------------------------------------------------------------
1999 $1,822 $200
2000 1,662
2001 1,843
2002 1,402
2003 1,251 150
2004-2008 4,795 359
2009-2013 248
Thereafter 815
- --------------------------------------------------------------------------------
Based on market quotes, where available, or interest rates currently available
to the Company for issuance of debt with similar terms and remaining maturities,
the aggregate fair value of consumer products and financial services long-term
debt, including current portion of long-term debt, at December 31, 1998 and 1997
was $15.4 billion and $14.6 billion, respectively.
Note 8. Capital Stock:
In 1997, the Company's Board of Directors declared a three-for-one split of the
Company's common stock, changed the common stock's par value from $1.00 to
$0.33 1/3 per share and increased the number of authorized shares of common
stock from 4 billion to 12 billion shares. All references in the consolidated
financial statements to shares and related prices, weighted average number of
shares, per share amounts and stock plan data have been adjusted to reflect the
split.
Shares of common stock issued, repurchased and outstanding were as
follows:
Shares Shares Net Shares
Issued Repurchased Outstanding
===============================================================================
Balances,
January 1, 1996 2,805,961,317 (312,451,299) 2,493,510,018
Exercise of stock options
and issuance of other
stock awards 23,672,505 23,672,505
Repurchased (85,836,249) (85,836,249)
- -------------------------------------------------------------------------------
Balances,
December 31, 1996 2,805,961,317 (374,615,043) 2,431,346,274
Exercise of stock options
and issuance of other
stock awards 12,345,228 12,345,228
Repurchased (18,204,213) (18,204,213)
- -------------------------------------------------------------------------------
Balances,
December 31, 1997 2,805,961,317 (380,474,028) 2,425,487,289
Exercise of stock options
and issuance of other
stock awards 11,501,286 11,501,286
Repurchased (6,454,000) (6,454,000)
- -------------------------------------------------------------------------------
Balances,
December 31, 1998 2,805,961,317 (375,426,742) 2,430,534,575
===============================================================================
At December 31, 1998, 173,607,574 shares of common stock were reserved for stock
options and other stock awards under the Company's stock plans and 10 million
shares of Serial Preferred Stock, $1.00 par value, were authorized, none of
which have been issued.
Note 9. Stock Plans:
Under the Philip Morris 1997 Performance Incentive Plan (the "Plan"), the
Company may grant to eligible employees stock options, stock appreciation
rights, restricted stock, and other stock-based awards, as well as cash-based
annual and long-term incentive awards. Up to 120 million shares of common stock
may be issued under the Plan, of which no more than 36 million shares may be
awarded as restricted stock. Shares available to be granted at December 31, 1998
were 85,883,360.
46
<PAGE>
Stock options are granted at an exercise price of not less than fair value
on the date of the grant. Stock options granted under the Plan generally become
exercisable on the first anniversary of the grant date and have a maximum term
of ten years.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." The Company applies the intrinsic value-based
methodology permitted by SFAS No. 123 in accounting for the Plan. Accordingly,
no compensation expense has been recognized other than for restricted stock
awards. Had compensation cost for stock option awards under the Plan been
determined on the fair value at the grant date, the Company's net earnings,
basic EPS and diluted EPS would have been $5,280 million, $2.17 and $2.16,
respectively, for the year ended December 31, 1998; $6,218 million, $2.57 and
$2.55, respectively, for the year ended December 31, 1997; and $6,235 million,
$2.54 and $2.51, respectively, for the year ended December 31, 1996. The
foregoing impact of compensation cost, calculated in accordance with the fair
value method prescribed by SFAS No. 123, was determined using a modified
Black-Scholes methodology and the following assumptions:
Weighted
Average Expected
Risk-Free Expected Expected Dividend Fair Value at
Interest Rate Life Volatility Yield Grant Date
================================================================================
1998 5.52% 5 23.83% 4.03% $ 7.78
1997 6.38 5 27.86 3.65 10.83
1996 6.70 5 23.80 3.83 7.73
================================================================================
Option activity was as follows for the years ended December 31, 1996, 1997
and 1998:
Weighted
Shares Subject Options Average
to Option Exercisable Exercise Price
================================================================================
Balance at
January 1, 1996 85,224,372 62,102,802 $20.09
Options granted 22,627,215 36.08
Options exercised (25,310,940) 18.94
Options canceled (1,327,266) 26.21
- --------------------------------------------------------------------------------
Balance at
December 31, 1996 81,213,381 58,949,796 24.81
Options granted 16,105,390 43.88
Options exercised (12,782,568) 19.86
Options canceled (890,644) 34.75
- --------------------------------------------------------------------------------
Balance at
December 31, 1997 83,645,559 67,827,399 29.13
Options granted 18,652,100 39.74
Options exercised (12,042,497) 22.56
Options canceled (3,051,498) 31.74
- --------------------------------------------------------------------------------
Balance at
December 31, 1998 87,203,664 68,864,594 $32.21
================================================================================
The weighted average exercise prices of options exercisable at December 31,
1998, 1997 and 1996 were $30.21, $25.69 and $20.56, respectively.
The following table summarizes the status of stock options outstanding and
exercisable as of December 31, 1998, by range of exercise price:
Options Outstanding Options Exercisable
---------------------------------- -----------------------
Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
================================================================================
$11.80-$17.23 10,965,163 3 years $15.70 10,965,163 $15.70
18.35- 26.28 24,813,444 5 years 24.16 24,813,444 24.16
28.27- 40.00 36,608,512 8 years 37.89 18,291,382 36.06
41.62- 58.72 14,816,545 8 years 43.89 14,794,605 43.88
- --------------------------------------------------------------------------------
87,203,664 68,864,594
========== ==========
The Company may grant shares of restricted stock and rights to receive shares of
stock to eligible employees, giving them in most instances all of the rights of
stockholders, except that they may not sell, assign, pledge or otherwise
encumber such shares and rights. Such shares and rights are subject to
forfeiture if certain employment conditions are not met. During 1998, 1997 and
1996 the Company granted 603,650, 692,100 and 180,000 shares, respectively, of
restricted stock to eligible U.S. based employees and also issued to eligible
non-U.S. employees rights to receive 120,500 and 392,400 like shares,
respectively, during 1998 and 1997. At December 31, 1998, restrictions on the
stock, net of forfeitures, lapse as follows: 1999-120,300 shares; 2000-654,000
shares; 2002-1,263,450 shares; 2003-290,250 shares; and 2004 and
thereafter-636,000 shares.
The fair value of the restricted shares and rights at the date of grant is
amortized to expense ratably over the restriction period. The Company recorded
compensation expense related to restricted stock and other stock awards of $34
million, $29 million and $37 million for the years ended December 31, 1998, 1997
and 1996, respectively. The unamortized portion is reported as a reduction of
earnings reinvested in the business and was $59 million and $49 million at
December 31, 1998 and 1997, respectively.
47
<PAGE>
Note 10. Earnings per Share:
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share," which established standards for computing and presenting both basic and
diluted earnings per share ("EPS"). Basic and diluted EPS were calculated using
the following for the years ended December 31, 1998, 1997 and 1996:
(in millions)
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Net earnings $5,372 $6,310 $6,303
================================================================================
Weighted average shares for
basic EPS 2,429 2,420 2,456
Plus incremental shares from conversions:
Restricted stock and stock rights 1 1 8
Stock options 16 21 18
- --------------------------------------------------------------------------------
Weighted average shares for
diluted EPS 2,446 2,442 2,482
================================================================================
In 1998, 1997 and 1996, options on 14,797,260, 11,988,118 and 18,737,224 shares
of common stock, respectively, were not included in the calculation of weighted
average shares for diluted EPS because their effects would be antidilutive.
Note 11. Pre-tax Earnings and Provision for Income Taxes:
Pre-tax earnings and provision for income taxes consisted of the following for
the years ended December 31, 1998, 1997 and 1996:
(in millions)
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Pre-tax earnings:
United States $5,134 $ 7,515 $ 7,399
Outside United States 3,953 3,096 3,284
- -------------------------------------------------------------------------------
Total pre-tax earnings $9,087 $10,611 $10,683
================================================================================
Provision for income taxes:
United States federal:
Current $1,614 $ 2,027 $ 1,836
Deferred 171 12 438
- -------------------------------------------------------------------------------
1,785 2,039 2,274
State and local 350 354 430
- -------------------------------------------------------------------------------
Total United States 2,135 2,393 2,704
- -------------------------------------------------------------------------------
Outside United States:
Current 1,475 1,851 1,727
Deferred 105 57 (51)
- -------------------------------------------------------------------------------
Total outside
United States 1,580 1,908 1,676
- -------------------------------------------------------------------------------
Total provision for
income taxes $3,715 $ 4,301 $ 4,380
================================================================================
At December 31, 1998, applicable United States federal income taxes and foreign
withholding taxes have not been provided on approximately $3.4 billion of
accumulated earnings of foreign subsidiaries that are expected to be permanently
reinvested. If these amounts were not considered permanently reinvested,
additional deferred income taxes of approximately $173 million would have been
provided.
The Company and its subsidiaries are subject to tax examinations in
various U.S. and foreign jurisdictions. The Company believes that adequate tax
payments have been made and accruals recorded for all years.
The effective income tax rate on pre-tax earnings differed from the U.S.
federal statutory rate for the following reasons for the years ended December
31, 1998, 1997 and 1996:
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
U.S. federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes,
net of federal tax benefit 2.5 2.2 2.6
Rate differences--foreign
operations 0.6 3.7 3.3
Goodwill amortization 2.0 1.7 1.8
Other 0.8 (2.1) (1.7)
- ------------------------------------------------------------------------------
Effective tax rate 40.9% 40.5% 41.0%
==============================================================================
The tax effects of temporary differences which gave rise to consumer products
deferred income tax assets and liabilities consisted of the following at
December 31, 1998 and 1997:
(in millions)
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
Deferred income tax assets:
Accrued postretirement and
postemployment benefits $ 1,104 $ 1,084
Accrued liabilities 568 577
Realignment and other reserves 356 427
Settlement charges 476 261
Other 154 167
- -------------------------------------------------------------------------------
Total deferred income tax assets 2,658 2,516
- -------------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment (1,866) (1,695)
Prepaid pension costs (279) (326)
- -------------------------------------------------------------------------------
Total deferred income tax liabilities (2,145) (2,021)
- -------------------------------------------------------------------------------
Net deferred income tax assets $ 513 $ 495
===============================================================================
Financial services deferred income tax liabilities are primarily attributable to
temporary differences from investments in finance leases.
48
<PAGE>
Note 12. Segment Reporting:
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
supersedes previously issued segment reporting disclosure rules and requires
reporting of segment information that is consistent with the way in which
management operates the Company. The adoption of SFAS No. 131 at December 31,
1998 did not have any impact on the Company's financial position or the results
of operations. The segment disclosures presented for prior years have been
restated to conform with the presentation adopted for the current year.
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. The Company's assets are managed on a worldwide basis by major
products and accordingly, asset information is reported for the tobacco, food,
beer and financial services segments. Goodwill and amortization of goodwill is
principally attributable to the North American food segment. Other assets
consist primarily of cash and cash equivalents. The accounting policies of the
segments are the same as those described in the Summary of Significant
Accounting Policies.
Reportable segment data were as follows:
For the years ended December 31,
(in millions)
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Operating revenues:
Domestic tobacco $15,310 $13,584 $12,462
International tobacco 27,390 26,240 24,087
North American food 17,312 16,838 16,447
International food 9,999 10,852 11,503
Beer 4,105 4,201 4,327
Financial services 275 340 378
- -------------------------------------------------------------------------------
Total operating revenues $74,391 $72,055 $69,204
===============================================================================
Operating companies income:
Domestic tobacco $ 1,489 $ 3,287 $ 4,206
International tobacco 5,029 4,572 4,078
North American food 3,055 2,873 2,628
International food 1,127 1,326 1,303
Beer 451 459 440
Financial services 183 297 193
- -------------------------------------------------------------------------------
Total operating companies
income 11,334 12,814 12,848
General corporate expenses (645) (479) (442)
Minority interest (128) (87) (43)
Amortization of goodwill (584) (585) (594)
- -------------------------------------------------------------------------------
Total operating income 9,977 11,663 11,769
Interest and other debt
expense, net (890) (1,052) (1,086)
- -------------------------------------------------------------------------------
Total earnings before
income taxes $ 9,087 $10,611 $10,683
===============================================================================
Operating companies income for the domestic tobacco segment included pre-tax
tobacco litigation settlement charges of $3,381 million and $1,457 million for
the years ended December 31, 1998 and 1997, respectively. General corporate
expenses for the year ended December 31, 1998 included a pre-tax charge of $116
million related to the settlement of shareholder litigation. In addition, during
1998 pre-tax charges of $319 million and $18 million were recorded for voluntary
separation and early retirement and severance programs by the domestic tobacco
operations and the Company's corporate headquarters, respectively. See Notes 2,
3 and 4 regarding divestitures, acquisitions and food realignment charges.
49
<PAGE>
For the years ended December 31,
(in millions)
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Depreciation expense:
Domestic tobacco $ 216 $ 171 $ 172
International tobacco 267 236 206
North American food 267 268 268
International food 227 246 270
Beer 108 104 104
- --------------------------------------------------------------------------------
1,085 1,025 1,020
Other 21 19 17
- --------------------------------------------------------------------------------
Total depreciation expense $ 1,106 $ 1,044 $ 1,037
================================================================================
Assets:
Tobacco $16,395 $15,012 $13,545
Food 31,397 31,170 33,241
Beer 1,503 1,451 1,705
Financial services 6,480 5,886 5,917
- --------------------------------------------------------------------------------
55,775 53,519 54,408
Other 4,145 2,428 463
- --------------------------------------------------------------------------------
Total assets $59,920 $55,947 $54,871
================================================================================
Capital expenditures:
Domestic tobacco $ 217 $ 483 $ 457
International tobacco 588 455 372
North American food 534 440 430
International food 307 297 382
Beer 129 115 122
- --------------------------------------------------------------------------------
1,775 1,790 1,763
Other 29 84 19
- --------------------------------------------------------------------------------
Total capital expenditures $ 1,804 $ 1,874 $ 1,782
================================================================================
The Company's operations outside the United States, which are principally in the
tobacco and food businesses, are organized into geographic regions within each
segment, with Europe being the most significant. Total tobacco and food segment
revenues attributable to customers located in Germany were $9.2 billion, $9.5
billion and $10.4 billion for the years ended December 31, 1998, 1997 and 1996,
respectively.
Geographic data for operating revenues and long-lived assets (which
consist of all financial services assets and non-current consumer products
assets other than goodwill and other intangible assets) were as follows:
For the years ended December 31,
(in millions)
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Operating revenues:
United States--domestic $35,432 $33,208 $31,993
--export 6,005 6,705 6,476
Europe 25,169 24,796 24,232
Other 7,785 7,346 6,503
- --------------------------------------------------------------------------------
Total operating revenues $74,391 $72,055 $69,204
================================================================================
Long-lived assets:
United States $15,616 $14,533 $13,985
Europe 4,159 4,057 4,575
Other 2,349 2,128 2,123
- --------------------------------------------------------------------------------
Total long-lived assets $22,124 $20,718 $20,683
================================================================================
Note 13. Benefit Plans:
The Company and its subsidiaries sponsor noncontributory defined benefit pension
plans covering substantially all U.S. employees. Pension coverage for employees
of the Company's non-U.S. subsidiaries is provided, to the extent deemed
appropriate, through separate plans, many of which are governed by local
statutory requirements. In addition, the Company and its U.S. and Canadian
subsidiaries provide health care and other benefits to substantially all retired
employees. Health care benefits for retirees outside the United States and
Canada are generally covered through local government plans.
Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 does
not change the measurement or recognition of those plans, but revises the
disclosure requirements for pension and other postretirement benefit plans for
all years presented.
Pension Plans: Net pension cost (income) consisted of the following for
the years ended December 31, 1998, 1997 and 1996:
(in millions) U.S. Plans Non-U.S. Plans
- -------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------
Service cost $ 156 $ 137 $ 143 $ 91 $ 83 $ 80
Interest cost 406 382 373 165 163 166
Expected return on
plan assets (615) (564) (533) (150) (135) (131)
Amortization:
Net gain on
adoption of
SFAS No. 87 (24) (24) (25)
Unrecognized net
loss (gain) from
experience
differences 9 (4) (1)
Prior service cost 15 14 14 6 6 3
Termination,
settlement and
curtailment 251 (22) (35)
- -------------------------------------------------------------------------------
Net pension cost
(income) $ 189 $ (77) $ (54) $ 108 $ 116 $ 118
===============================================================================
During 1998, 1997 and 1996, the Company instituted early retirement and
workforce reduction programs and, during 1997 and 1996, the Company also sold
businesses. These actions resulted in additional termination benefits and
curtailment losses of $279 million, net of settlement gains of $28 million in
1998, settlement gains of $22 million in 1997 and settlement gains of $69
million, net of additional termination benefits of $34 million in 1996.
50
<PAGE>
The changes in benefit obligations and plan assets, as well as the funded
status of the Company's pension plans at December 31, 1998 and 1997 were as
follows:
(in millions) U.S. Plans Non-U.S. Plans
- -------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------
Benefit obligation at
January 1 $ 5,523 $ 4,880 $ 2,701 $ 2,642
Service cost 156 137 91 83
Interest cost 406 382 165 163
Benefits paid (396) (309) (129) (79)
Termination, settlement
and curtailment 305 (22)
Actuarial losses 238 461 263 80
Currency 95 (188)
Other (12) (6) 15
- -------------------------------------------------------------------------------
Benefit obligation at
December 31 6,220 5,523 3,201 2,701
- -------------------------------------------------------------------------------
Fair value of plan assets at
January 1 8,085 7,101 2,189 1,927
Actual return on plan assets 973 1,308 116 269
Contributions 14 15 53 49
Benefits paid (372) (292) (93) (70)
Currency 39 (26)
Actuarial (losses) gains 3 (47) (56) 40
- -------------------------------------------------------------------------------
Fair value of plan assets at
December 31 8,703 8,085 2,248 2,189
- -------------------------------------------------------------------------------
Excess (Deficit) of plan assets
versus benefit obligations
at December 31 2,483 2,562 (953) (512)
Unrecognized actuarial
(gains) losses (1,718) (1,659) 171 (187)
Unrecognized prior
service cost 107 121 37 40
Unrecognized net transition
obligation (58) (83) 12 11
- -------------------------------------------------------------------------------
Net prepaid pension asset
(liability) $ 814 $ 941 $ (733) $ (648)
===============================================================================
The combined domestic and foreign pension plans resulted in a net prepaid
pension asset of $81 million and $293 million at December 31, 1998 and 1997,
respectively. These amounts were recognized in the Company's consolidated
balance sheets at December 31, 1998 and 1997 as other assets of $1.9 billion and
$1.7 billion, respectively, for those plans in which plan assets exceeded their
accumulated benefit obligations and other liabilities of $1.8 billion and $1.4
billion, respectively, for those plans in which the accumulated benefit
obligations exceeded their plan assets.
For domestic plans with accumulated benefit obligations in excess of plan
assets, the projected benefit obligation, accumulated benefit obligation and
fair value of plan assets were $1,484 million, $1,374 million and $1,123
million, respectively, as of December 31, 1998 and $297 million, $229 million
and $54 million, respectively, as of December 31, 1997. For foreign plans with
accumulated benefit obligations in excess of plan assets, the projected benefit
obligation, accumulated benefit obligation and fair value of plan assets were
$1,111 million, $996 million and $155 million, respectively, as of December 31,
1998 and $935 million, $814 million and $115 million, respectively, as of
December 31, 1997.
The following weighted-average assumptions were used to determine the
Company's obligations under the plans:
U.S. Plans Non-U.S. Plans
- -------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------
Discount rate 7.00% 7.25% 5.37% 6.30%
Expected rate of return on
plan assets 9.00 9.00 7.63 7.18
Rate of compensation
increase 4.50 4.50 3.73 4.18
===============================================================================
The Company and certain of its subsidiaries sponsor deferred profit-sharing
plans covering certain salaried, nonunion and union employees. Contributions and
costs are determined generally as a percentage of pre-tax earnings, as defined
by the plans. Certain other subsidiaries of the Company also maintain defined
contribution plans. Amounts charged to expense for defined contribution plans
totaled $201 million, $200 million and $199 million in 1998, 1997 and 1996,
respectively.
Postretirement Benefit Plans: Net postretirement health care costs
consisted of the following for the years ended December 31, 1998, 1997 and 1996:
(in millions)
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Service cost $ 56 $ 54 $ 59
Interest cost 182 182 180
Amortization:
Unrecognized net (gain) loss from
experience differences (3) (3) 4
Unrecognized prior service cost (12) (12) (12)
Other expense (income) 30 (8)
- -------------------------------------------------------------------------------
Net postretirement health
care costs $253 $221 $223
===============================================================================
During 1998, 1997 and 1996 the Company instituted early retirement and workforce
reduction programs and, in 1996, the Company also sold businesses. These actions
resulted in additional postretirement health care costs of $20 million and
curtailment losses of $10 million in 1998 and curtailment gains in 1996, all of
which are included in other expense (income) above.
51
<PAGE>
The Company's postretirement health care plans currently are not funded.
The changes in the benefit obligations of the plans at December 31, 1998 and
1997 were as follows:
(in millions)
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
at January 1 $2,627 $2,426
Service cost 56 54
Interest cost 182 182
Benefits paid (135) (136)
Termination, settlement and curtailment 107
Plan amendments 1 6
Actuarial (gains) losses (67) 95
- -------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
at December 31 2,771 2,627
Unrecognized actuarial losses (201) (173)
Unrecognized prior service cost 96 109
- -------------------------------------------------------------------------------
Accrued postretirement health care costs $2,666 $2,563
===============================================================================
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for U.S. plans was 8.0% in 1997, 7.5% in 1998
and 7.0% in 1999, gradually declining to 5.0% by the year 2003 and remaining at
that level thereafter. For Canadian plans, the assumed health care cost trend
rate was 13.0% in 1997, 12.0% in 1998 and 11.0% in 1999, gradually declining to
4.0% by the year 2005 and remaining at that level thereafter. A
one-percentage-point increase in the assumed health care cost trend rates for
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1998 and postretirement health care cost (service cost and interest
cost) for the year then ended by approximately 9.6% and 13.9%, respectively. A
one-percentage-point decrease in the assumed health care cost trend rates for
each year would decrease the accumulated postretirement benefit obligation as of
December 31, 1998 and postretirement health care cost (service cost and interest
cost) for the year then ended by approximately 7.9% and 10.9%, respectively.
The accumulated postretirement benefit obligations for U.S. plans at
December 31, 1998 and 1997 were determined using assumed discount rates of 7.0%
and 7.25%, respectively. The accumulated postretirement benefit obligation at
December 31, 1998 and 1997 for Canadian plans was determined using an assumed
discount rate of 6.50%.
Note 14. Additional Information:
For the years ended December 31,
(in millions)
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
Research and
development expense $ 506 $ 533 $ 515
===============================================================================
Advertising expense $2,416 $2,530 $2,605
===============================================================================
Interest and other debt expense, net:
Interest expense $1,144 $1,184 $1,183
Interest income (254) (132) (97)
- -------------------------------------------------------------------------------
$ 890 $1,052 $1,086
===============================================================================
Interest expense of financial
services operations included
in cost of sales $ 77 $ 67 $ 80
===============================================================================
Rent expense $ 429 $ 443 $ 430
===============================================================================
Note 15. Financial Instruments:
Derivative financial instruments: The Company operates internationally,
with manufacturing and sales facilities in various locations around the world.
Derivative financial instruments are used by the Company for purposes other than
trading, principally to reduce exposures to market risks resulting from
fluctuations in interest rates and foreign exchange rates by creating offsetting
exposures. The Company is not a party to leveraged derivatives.
The Company has foreign currency and related interest rate swap agreements
which were executed to reduce the Company's borrowing costs and serve as hedges
of the Company's net assets in foreign subsidiaries, principally those
denominated in Swiss francs. At December 31, 1998 and 1997, the notional
principal amounts of these agreements were $3.3 billion and $1.4 billion,
respectively. Aggregate maturities at December 31, 1998 were as follows (in
millions): 1999, $371; 2000, $1,015; 2002, $182; 2003, $150; and 2004 and
thereafter $1,604. The notional amount is used to calculate interest payments
which are exchanged over the life of the swap transaction and is equal to the
amount of foreign currency or dollar principal exchanged at maturity.
Forward exchange contracts and foreign currency options are used by the
Company to reduce the effect of fluctuating foreign currencies on foreign
currency denominated intercompany and third party transactions. 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. At
December 31, 1997, the Company had long and short forward exchange/option
contracts with U.S. dollar equivalent values of $1.3 billion and $1.2 billion,
respectively.
52
<PAGE>
Credit exposure and credit risk: The Company is exposed to credit loss in
the event of nonperformance by counterparties. However, the Company does not
anticipate nonperformance and such exposure was not material at December 31,
1998.
Fair value: The aggregate fair value, based on market quotes, of the
Company's total debt at December 31, 1998 was $15.6 billion as compared to its
carrying value of $14.7 billion. The aggregate fair value of the Company's total
debt at December 31, 1997 was $14.7 billion as compared to its carrying value of
$14.1 billion.
The carrying values of the foreign currency and related interest rate swap
agreements, the forward currency contracts and the currency option contracts,
which did not differ materially from their fair values, were not material.
See Notes 6 and 7 for additional disclosures of fair value for short-term
borrowings and long-term debt.
Note 16. Contingencies:
Legal proceedings covering a wide range of matters are pending in various United
States and foreign jurisdictions against the Company, its subsidiaries and
affiliates, including Philip Morris Incorporated ("PM Inc."), the Company's
domestic tobacco subsidiary, Philip Morris International Inc. ("PMI"), the
Company's international tobacco subsidiary, and their respective indemnitees.
Various types of claims are raised in these proceedings, including product
liability, consumer protection, antitrust, tax, patent infringement, employment
matters and claims for contribution.
Overview of Tobacco-Related Litigation
Types and number of cases: Pending claims related to tobacco products
generally fall within three categories: (i) smoking and health cases alleging
personal injury brought on behalf of individual plaintiffs, (ii) smoking and
health cases alleging personal injury and purporting to be brought on behalf of
a class of individual plaintiffs, and (iii) health care cost recovery cases
brought by governmental and non-governmental plaintiffs seeking reimbursement
for health care expenditures allegedly caused by cigarette smoking. Governmental
plaintiffs have included local, state and certain foreign governmental entities.
Non-governmental plaintiffs in these cases include union health and welfare
trust funds ("unions"), Blue Cross/Blue Shield groups, health maintenance
organizations ("HMOs"), hospitals, native American tribes, 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.
In recent years, there has been a substantial increase in the number of
smoking and health cases being filed.
As of December 31, 1998, there were approximately 510 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 375
such cases on December 31, 1997, and 185 such cases on December 31, 1996. Many
of these cases are pending in Florida, West Virginia and New York. Fifteen of
the individual cases involve allegations of various personal injuries allegedly
related to exposure to environmental tobacco smoke ("ETS").
In addition, as of December 31, 1998, 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 50 such cases on December 31, 1997, and 20 such cases on December
31, 1996. Most of these actions purport to constitute statewide class actions
and were filed after May 1996 when the Fifth Circuit Court of Appeals, in the
Castano case, reversed a federal district court's certification of a purported
nationwide class action on behalf of persons who were allegedly "addicted" to
tobacco products.
During 1997 and 1998, PM Inc. and certain other United States tobacco
product manufacturers entered into agreements settling the asserted and
unasserted health care cost recovery and other claims of all 50 states and
several commonwealths and territories of the United States. The settlements are
in the process of being approved by the courts, and some of the settlements are
being challenged by various third parties. As of December 31, 1998, there were
approximately 95 health care cost recovery actions pending in the United States
(excluding the cases covered by the settlements), compared with approximately
105 health care cost recovery cases pending on December 31, 1997, and 25 such
cases on December 31, 1996.
There are also a number of tobacco-related actions pending outside the
United States against PMI and its affiliates and subsidiaries including, as of
December 31, 1998, approximately 27 smoking and health cases initiated by one or
more individuals (Argentina (20), Brazil (1), Canada (1), Italy (1), Japan (1),
Scotland (1) and Turkey (2)), and six smoking and health class
53
<PAGE>
actions (Brazil (2), Canada (3) and Nigeria (1)). In addition, health care cost
recovery actions have been brought in Israel, the Republic of the Marshall
Islands and British Columbia, Canada, and, in the United States, by the
Republics of Bolivia, Guatemala, Panama and Nicaragua.
Pending and upcoming trials: As of January 22, 1999, trials against PM
Inc. and, in one case, the Company, were underway in the Engle smoking and
health class action in Florida (discussed below) and in individual smoking and
health cases in California and Tennessee.
Additional cases are scheduled for trial during 1999, including three
health care cost recovery actions brought by unions in Ohio (February),
Washington (September) and New York (September), and two smoking and health
class actions in Illinois (August) and Alabama (August). Also, twelve individual
smoking and health cases against PM Inc. and, in some cases, the Company, are
currently scheduled for trial during 1999. Trial dates, however, are subject to
change.
Verdicts in individual cases: During the past three years, juries have
returned verdicts for defendants in three individual smoking and health cases
and in one individual ETS smoking and health 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. Also in June 1998, a Florida jury
awarded the estate of a deceased smoker in a smoking and health case against
another United States cigarette manufacturer $500,000 in compensatory damages,
$52,000 for medical expenses and $450,000 in punitive damages. A Florida appeals
court has ruled that this case was tried in the wrong venue and, accordingly,
defendants are seeking to set aside the verdict and retry the case in the
correct venue. 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. Neither the Company nor its affiliates were parties to that
action.
Litigation settlements: In November 1998, PM Inc. and certain other United
States tobacco product manufacturers entered into a 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.
PM Inc. recorded pre-tax charges of $3,081 million and $1,457 million
during 1998 and 1997, respectively, to accrue for its share of all fixed and
determinable portions of its obligations under the tobacco settlements, as well
as $300 million during 1998 for its unconditional obligation under an agreement
in principle to contribute to a tobacco growers trust fund, discussed below. As
of December 31, 1998, PM Inc. had accrued costs of its obligations under the
settlements and to tobacco growers aggregating $1,359 million, payable
principally before the end of the year 2000. 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 (of which $2.7 billion related to the MSA and has
already been paid by the industry); 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 made. PM Inc.'s shipment share in
1998 was approximately 50%.
The State Settlement Agreements also include provisions relating to
advertising and marketing restrictions, public disclosure of certain industry
documents, limitations on challenges to tobacco control and underage use laws
and other provisions.
54
<PAGE>
As of January 22, 1999, the MSA had been approved by courts in 41 states
and in the District of Columbia, Puerto Rico, Guam, the United States Virgin
Islands, American Samoa and Northern Marianas. If a jurisdiction does not obtain
final judicial approval of the MSA by December 31, 2001, 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 grower 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 by the tobacco growing states. It is
currently contemplated that the trust will be funded by industry participants
over twelve 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 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 market share.
The Company believes that the State Settlement Agreements may materially
adversely affect the business, volume, results of operations, cash flows or
financial position of PM Inc. and the Company in future years. 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 January 22, 1999, manufacturers
representing almost all domestic shipments in 1998 had agreed to become subject
to the terms of the MSA.
A description of the smoking and health litigation, health care cost
recovery litigation and certain other proceedings pending against the Company
and/or its subsidiaries and affiliates follows.
Smoking and Health Litigation
Plaintiffs' allegations of liability in smoking and health cases are based on
various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, breach of special duty, conspiracy, concert of
action, violations of deceptive trade practice laws and consumer protection
statutes, and claims under the federal Racketeer Influenced and Corrupt
Organization Act ("RICO") and state RICO statutes. In certain of these cases,
plaintiffs claim that cigarette smoking exacerbated the injuries caused by their
exposure to asbestos. Plaintiffs in the smoking and health actions seek various
forms of relief, including compensatory and punitive damages, treble/multiple
damages and other statutory damages and penalties, creation of medical
monitoring funds, disgorgement of profits, and injunctive and equitable relief.
Defenses raised in these cases include lack of proximate cause, assumption of
the risk, comparative fault and/or contributory negligence, statutes of
limitations and preemption by the Federal Cigarette Labeling and Advertising
Act.
In May 1996, the Fifth Circuit Court of Appeals 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 (Castano, et al. v.
The American Tobacco Company, et al.). Since this class decertification, lawyers
for plaintiffs have filed numerous smoking and health class action suits in
various state and federal courts. In general, these cases purport to be brought
on behalf of residents of a particular state or states and raise "addiction"
claims similar to those raised in the Castano case and, in some cases, claims of
physical injury as well. As of December 31, 1998, smoking and health class
actions were pending in Alabama, Arkansas, California, the District of Columbia,
Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, 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, West Virginia and Wisconsin,
as well as in Canada, Brazil and Nigeria. Class certification has been denied or
reversed by courts in 13 smoking and health class actions involving PM Inc. in
Louisiana, the District of Columbia, New York (2), Pennsylvania, Puerto Rico,
New Jersey (5), 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.
55
<PAGE>
Engle trial: Trial in this Florida class action case began in July 1998.
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, involves evidence concerning certain
"common" class issues relating to the plaintiff class's causes of action.
Entitlement to punitive damages will be decided at the end of Phase One, but no
amount will be set at that time.
If plaintiffs prevail in Phase One, the first two stages of Phase Two will
involve individual determination of specific causation and other individual
issues regarding entitlement to compensatory damages for the class
representatives. Stage three of Phase Two will involve an assessment of the
amount of punitive damages, if any, that individual class representatives will
be awarded. Stage four of Phase Two will involve 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.
Health Care Cost Recovery Litigation
In certain of the pending proceedings, domestic and foreign governmental
entities and non-governmental plaintiffs, including unions, Blue Cross/Blue
Shield groups, HMOs, hospitals, native American tribes, 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 State Settlement Agreements described
above, as of December 31, 1998, there were approximately 95 health care cost
recovery cases pending 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 Republic of the
56
<PAGE>
Marshall Islands, and British Columbia, Canada, and, in the United States, by
the Republics of Bolivia, Guatemala, Panama and Nicaragua. Other foreign
governmental entities have stated that they are considering filing health care
cost recovery actions. 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 recovered funds to strengthen
Medicare.
Courts have ruled on preliminary motions to dismiss various claims in
approximately 50 health care cost recovery actions. Although many of the rulings
in cases not settled by the State Settlement Agreements have been favorable to
the industry, a number have been adverse, including rulings in the three union
cases currently scheduled for trial in 1999. In late January and in February of
1999, the Third and Second Circuit Courts of Appeal are scheduled to hear oral
argument on appeals from lower court rulings on motions to dismiss various
claims in health care cost recovery actions filed by unions. The Company cannot
predict the ultimate outcome of such appeals.
Certain Other Tobacco-Related Litigation
Since September 1997, 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.
Since June 1998, five class actions have been filed 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, unjust enrichment, and seek injunctive and equitable
relief.
Since July 1998, two suits have been filed in California courts alleging
that domestic cigarette manufacturers, including PM Inc. and others, have
violated the 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.
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.
Certain Other Actions
In September 1997, a putative class action suit consolidating several previously
filed class actions was filed in Wisconsin alleging that Kraft Foods, Inc.
("Kraft"), and others engaged in a conspiracy to fix and depress the prices of
bulk cheese and milk through their trading activity on the National Cheese
Exchange. Plaintiffs seek injunctive and equitable relief and treble damages. In
June 1998, the court denied Kraft's motion to dismiss as to the antitrust and
tortious interference claims and granted Kraft's motion to dismiss on breach of
contract and false advertising claims. In October 1997, a putative class action
suit was filed in Illinois against Kraft only and, in April 1998, a putative
class action suit was filed in California against Kraft and others. Both of
these suits contain allegations similar to those in the Wisconsin class action,
but the Illinois case seeks a class comprising all of Kraft's milk suppliers,
and the California case seeks a class comprising all of defendants' milk
suppliers in California. In December 1998, the courts in both the Illinois and
California cases granted Kraft's motions to dismiss the complaints.
57
<PAGE>
In November 1998, the United States District Court in the Southern
District of New York approved an agreement settling a class action suit filed on
behalf of all persons who purchased common stock of the Company between June 11,
1991 and May 6, 1994 (Kurzweil, et al. v. Philip Morris Companies Inc., et al.).
It is anticipated that the settlement will also result in the dismissal of
another class action suit that was filed on behalf of certain persons who
purchased common stock of the Company between July 10, 1991, and April 1, 1993
(Lawrence, et al. v. Philip Morris Companies Inc., et al.). The Company recorded
a pre-tax charge of $116 million in the fourth quarter of 1998 in connection
with these matters.
-------------------------------
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 $2.7 billion. In addition, the Italian lira equivalent of
$3.7 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
eighty-one of the assessments. The decisions to overturn forty-three 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, and it is possible that some of these actions could be decided
unfavorably. An unfavorable outcome or settlement of a pending smoking and
health or health care cost recovery case could encourage the commencement of
additional similar litigation. There have also been a number of adverse
legislative, regulatory, political and other developments concerning cigarette
smoking and the tobacco industry that have received widespread media attention.
These developments may negatively affect the perception of potential triers of
fact with respect to the tobacco industry, possibly to the detriment of certain
pending litigation, and may prompt the commencement of additional similar
litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of pending litigation. The
present legislative and litigation environment is substantially uncertain, and
it is possible that the Company's business, 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.
58
<PAGE>
Note 17. Quarterly Financial Data (Unaudited):
(in millions, except per share data) 1998 Quarters
- --------------------------------------------------------------------------------
1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
Operating revenues $18,383 $18,978 $18,587 $18,443
================================================================================
Gross profit $ 7,449 $ 7,903 $ 7,842 $ 7,799
================================================================================
Net earnings $ 1,382 $ 1,736 $ 1,980 $ 274
================================================================================
Per share data:
Basic EPS $ 0.57 $ 0.72 $ 0.81 $ 0.11
================================================================================
Diluted EPS $ 0.57 $ 0.71 $ 0.81 $ 0.11
================================================================================
Dividends declared $ 0.40 $ 0.40 $ 0.44 $ 0.44
================================================================================
Market price--high $ 47.88 $ 41.56 $ 48.13 $ 59.50
--low $ 39.06 $ 34.75 $ 38.06 $ 45.00
================================================================================
During 1998, the Company recorded the following pre-tax charges for tobacco and
shareholder litigation settlements, voluntary early retirement and separation
programs ("VERS") and severance.
(in millions) 1998 Quarters
- --------------------------------------------------------------------------------
1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
Tobacco settlements $806 $199 $111 $2,265
Shareholder settlement 116
VERS and severance 95 232 10
- --------------------------------------------------------------------------------
$901 $431 $121 $2,381
================================================================================
1997 Quarters
----------------------------------------
(in millions, except per share data) 1st 2nd 3rd 4th
================================================================================
Operating revenues $18,217 $18,413 $18,092 $17,333
================================================================================
Gross profit $ 7,376 $ 7,600 $ 7,420 $ 7,029
================================================================================
Net earnings $ 1,773 $ 1,836 $ 1,406 $ 1,295
================================================================================
Per share data:
Basic EPS $ 0.73 $ 0.76 $ 0.58 $ 0.54
================================================================================
Diluted EPS $ 0.72 $ 0.75 $ 0.58 $ 0.53
================================================================================
Dividends declared $ 0.40 $ 0.40 $ 0.40 $ 0.40
================================================================================
Market price--high $ 46.58 $ 48.13 $ 46.56 $ 45.88
--low $ 36.00 $ 37.25 $ 39.94 $ 36.94
================================================================================
During the fourth quarter of 1997, the Company sold several international food
businesses, including its Brazilian ice cream businesses, for total proceeds of
$1.1 billion and net pre-tax gains of $775 million. In addition, the Company
sold its equity interest in a Canadian beer operation and sold a minority
interest in a beer import operation for proceeds of $306 million and a pre-tax
gain of $12 million.
During the fourth quarter of 1997, the Company recorded a charge of $342
million related primarily to the downsizing or closure of manufacturing and
other facilities, as well as the discontinuance of certain low-margin product
lines of its international food operations. The Company also recorded a charge
of $288 million for incremental postemployment benefits, primarily related to
severance.
During the third and fourth quarters of 1997, the Company recorded
litigation settlement charges of $812 million and $645 million, respectively.
-------------------------------
The principal stock exchange, on which the Company's common stock (par value
$0.33 1/3 per share) is listed, is the New York Stock Exchange. At January 31,
1999, there were approximately 144,900 holders of record of the Company's common
stock.
59
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Philip Morris Companies Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, stockholders' equity and cash flows present
fairly, in all material respects, the consolidated financial position of Philip
Morris Companies Inc. and its subsidiaries at December 31, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 25, 1999
COMPANY REPORT ON FINANCIAL STATEMENTS
The consolidated financial statements and all related financial information
herein are the responsibility of the Company. The financial statements, which
include amounts based on judgments, have been prepared in accordance with
generally accepted accounting principles. Other financial information in the
annual report is consistent with that in the financial statements.
The Company maintains a system of internal controls that it believes
provides reasonable assurance that transactions are executed in accordance with
management's authorization and properly recorded, that assets are safeguarded,
and that accountability for assets is maintained. The system of internal
controls is characterized by a control-oriented environment within the Company,
which includes written policies and procedures, careful selection and training
of personnel, and audits by a professional staff of internal auditors.
PricewaterhouseCoopers LLP, independent accountants, have audited and
reported on the Company's consolidated financial statements. Their audits were
performed in accordance with generally accepted auditing standards.
The Audit Committee of the Board of Directors, composed of six
non-management directors, meets periodically with PricewaterhouseCoopers LLP,
the Company's internal auditors and management representatives to review
internal accounting control, auditing and financial reporting matters. Both
PricewaterhouseCoopers LLP and the internal auditors have unrestricted access to
the Audit Committee and may meet with it without management representatives
being present.
60
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE COMPANY
Certain active subsidiaries of the Company and their subsidiaries as of
December 31, 1998, are listed below. The names of certain subsidiaries, which
considered in the aggregate would not constitute a significant subsidiary, have
been omitted.
STATE OR
COUNTRY OF
NAME ORGANIZATION
---- ------------
AB Estrella ............................................... Sweden
AB Kraft Jacobs Suchard Lietuva ........................... Lithuania
AGF SP, Inc. .............................................. Japan
Ajinomoto General Foods, Inc. ............................. Japan
Aktieselskabet F.C. Af 11. juni 1971 ...................... Denmark
Aktieselskabet FMD af 11. juni 1920 ....................... Denmark
Aktieselskabet M Af 2. januar 1992 ........................ Denmark
A/O Almaty Tobacco Company ................................ Kazakhstan
A/O Krasnadortabakprom .................................... Russia
A/O Philip Morris NEVA .................................... Russia
A/S Freia ................................................. Norway
A/S Maarud ................................................ Norway
Beijing Kraft Food Corporation Limited .................... China
Branded Restaurant Group Inc. ............................. Delaware
Burlington Foods, Inc. .................................... Delaware
C.A. Tabacalera Nacional .................................. Venezuela
Cafe GRAND'MERE S.A. ...................................... France
Callard & Bowser-Suchard, Inc. ............................ Delaware
Capri Sun, Inc. ........................................... Delaware
Celis Brewery, Inc. ....................................... Texas
Churny Company, Inc. ...................................... Delaware
Comptoir De La Confiserie ................................. France
Cote d'Or Italia S.r.l. ................................... Italy
Dart & Kraft Finance N.V. ................................. Netherlands
Antilles
Dart Resorts Inc. ......................................... Delaware
Dong Suh Foods Corporation ................................ Korea
Dong Suh Oil & Fats Co., Ltd. ............................. Korea
Egri Dohanygyar kft. ...................................... Hungary
El Gallito Industrial, S.A. ............................... Costa Rica
Estrella A/S .............................................. Denmark
Fabriques de Tabac Reunies S.A. ........................... Switzerland
Fattorie Osella S.p.A. .................................... Italy
Franklin Baker Company of the Philippines ................. Philippines
FTR Holding S.A. .......................................... Switzerland
Gardner's Good Foods, Inc. ................................ New Jersey
General Foods Credit Corporation .......................... Delaware
General Foods Credit Investors No. 1 Corporation .......... Delaware
General Foods Credit Investors No. 2 Corporation .......... Delaware
<PAGE>
STATE OR
COUNTRY OF
NAME ORGANIZATION
---- ------------
General Foods Credit Investors No. 3 Corporation .......... Delaware
General Foods Foreign Sales Corporation ................... Virgin Islands
(U.S.)
Gevaliarosteriet AB ....................................... Sweden
Grant Holdings, Inc. ...................................... Pennsylvania
Grant Transit Co. ......................................... Delaware
Grundstucksgemeinschaft Kraft Jacobs Suchard GbR .......... Germany
HAG-Coffex ................................................ France
HAG GF AG ................................................. Germany
HNB Investment Corp. ...................................... Delaware
Jacob Leinenkugel Brewing Company, Inc. ................... Wisconsin
Jacobs Suchard do Brasil Alimentos LTDA ................... Brazil
Jacobs Suchard Figaro A.S. ................................ Slovak Republic
Jacobs Suchard Pavlides SA ................................ Greece
The Kenco Coffee Company Limited .......................... United Kingdom
Kharkiv Tobacco Factory ................................... Ukraine
Kraft Canada Inc. ......................................... Canada
Kraft Food Ingredients Corp. .............................. Delaware
Kraft Foods AS ............................................ Norway
Kraft Foods (Australia) Limited ........................... Australia
Kraft Foods de Mexico S.A. de C.V. ........................ Mexico
Kraft Foods Egypt LLC ..................................... Egypt
Kraft Foods Holding (Europa) GmbH.......................... Switzerland
Kraft Foods Holdings Norway, Inc. ......................... Delaware
Kraft Foods, Inc. ......................................... Delaware
Kraft Foods International, Inc. ........................... Delaware
Kraft Foods International Services, Inc. .................. Delaware
Kraft Foods Limited ....................................... Australia
Kraft Foods Limited (Asia) ................................ Hong Kong
Kraft Foods Manufacturing Corporation ..................... Delaware
Kraft Foods (New Zealand) Limited ......................... New Zealand
Kraft Foods (Philippines), Inc. ........................... Philippines
Kraft Foods (Puerto Rico), Inc. ........................... Puerto Rico
Kraft Foods (Singapore) Pte Ltd ........................... Singapore
Kraft Foods (Thailand) Limited ............................ Thailand
Kraft Freia Marabou AB .................................... Sweden
Kraft Freia Marabou ApS ................................... Denmark
Kraft Freia Marabou Danmark A/S ........................... Denmark
Kraft Guangtong Food Company, Limited ..................... China
Kraft Hellas SA ........................................... Greece
Kraft Jacobs Suchard AG ................................... Switzerland
Kraft Jacobs Suchard (Australia) Pty. Ltd. ................ Australia
Kraft Jacobs Suchard BV ................................... Netherlands
Kraft Jacobs Suchard Bulgaria AD .......................... Bulgaria
Kraft Jacobs Suchard Central & Eastern Europe Service BV .. Netherlands
Kraft Jacobs Suchard Erzeugnisse GmbH & Co. KG ............ Germany
Kraft Jacobs Suchard France ............................... France
Kraft Jacobs Suchard GmbH (Bremen) ........................ Germany
Kraft Jacobs Suchard (Holdings) Limited (United Kingdom) .. United Kingdom
Kraft Jacobs Suchard Hungaria KFT ......................... Hungary
2
<PAGE>
STATE OR
COUNTRY OF
NAME ORGANIZATION
---- ------------
Kraft Jacobs Suchard Iberia, S.A. ......................... Spain
Kraft Jacobs Suchard Ireland Ltd. ......................... Ireland
Kraft Jacobs Suchard Laverune ............................. France
KJS Limited ............................................... Hong Kong
Kraft Jacobs Suchard Limited .............................. United Kingdom
Kraft Jacobs Suchard Management & Consulting AG ........... Switzerland
Kraft Jacobs Suchard Manufacturing GmbH & Co KG ........... Germany
KJS Namur SA .............................................. Belgium
Kraft Jacobs Suchard Oesterreich Gesellschaft MBH ......... Austria
Kraft Jacobs Suchard Polska Sp. z o.o. .................... Poland
Kraft Jacobs Suchard Portugal Productos Alimentares Lda. .. Portugal
Kraft Jacobs Suchard Produktion GmbH ...................... Germany
Kraft Jacobs Suchard R & D, Inc. .......................... Delaware
Kraft Jacobs Suchard Reims ................................ France
Kraft Jacobs Suchard Romania SA ........................... Romania
Kraft Jacobs Suchard S.A. ................................. Belgium
Kraft Jacobs Suchard (Schweiz) AG ......................... Switzerland
Kraft Jacobs Suchard Service AG (Switzerland) ............. Switzerland
Kraft Jacobs Suchard S.p.A. ............................... Italy
Kraft Jacobs Suchard spol. s r.o. ......................... Czech Republic
Kraft Jacobs Suchard Strasbourg ........................... France
Kraft Jacobs Suchard Ukraina Open Joint Stock Company ..... Ukraine
Kraft Japan, K.K. ......................................... Japan
Kraft Korea Inc. .......................................... Korea, Republic of
Kraft Lacta Suchard Brasil, S.A. .......................... Brazil
Kraft Pizza Company ....................................... Delaware
Kraft Suchard Argentina, S.A. ............................. Argentina
Kraft Tianmei Food (Tianjin) Co., Ltd. .................... China
Krema Limited ............................................. Ireland
La Loire Investment Corp. ................................. Delaware
La Seine Investment Corp. ................................. Delaware
Le Rhone Investment Corp. ................................. Delaware
MBC Holdings, Inc. ........................................ Wisconsin
Marsa Kraft Jacobs Suchard Sabanci Gida Sanayi ve
Ticaret A.S. .............................................. Turkey
Martlet Importing Co. Inc. ................................ New York
Massalin Particulares S.A. ................................ Argentina
Maxpax France SA .......................................... France
Michigan Investment Corp. ................................. Delaware
Miller Brewing Company .................................... Wisconsin
Miller Brewing do Brasil, Ltda. ........................... Brazil
Miller Brewing 1855, Inc. ................................. Delaware
Miller Brewing of Europe, Ltd. ............................ United Kingdom
Mirabell Salzburger Confiserie-und Bisquit GmbH ........... German Democratic
Rep.
Molson Breweries U.S. Holdings Inc. ....................... Delaware
Molson USA, LLC ........................................... Delaware
Oy Estrella AB ............................................ Finland
Oy Kraft Freia Marabou Finland AB ......................... Finland
Packaged Food & Beverage Co., Inc. ........................ Delaware
Perdue Trademark Subsidiary, Inc. ......................... Delaware
Phenix Leasing Corporation ................................ Delaware
3
<PAGE>
STATE OR
COUNTRY OF
NAME ORGANIZATION
---- ------------
Phenix Management Corporation ............................. Delaware
Philip Morris Asia Limited ................................ Hong Kong
Philip Morris Belgium S.A. ................................ Belgium
P.M. Beverage Holdings, Inc. .............................. Delaware
Philip Morris Brasil S.A. ................................. Delaware
Philip Morris Capital Corporation ......................... Delaware
Philip Morris Capital (Ireland) Limited ................... Ireland
Philip Morris Corporate Services Inc. ..................... Delaware
Philip Morris Europe S.A. ................................. Switzerland
Philip Morris Finance Europe B.V. ......................... Netherlands
Philip Morris G.m.b.H. .................................... Germany
Philip Morris Holland B.V. ................................ Netherlands
Philip Morris Incorporated ................................ Virginia
Philip Morris International Finance Corporation ........... Delaware
Philip Morris International Inc. .......................... Delaware
Philip Morris Izhora ...................................... Russia
Philip Morris Kabushiki Kaisha ............................ Japan
Philip Morris Korea C.H. .................................. Korea
Philip Morris Latin America Inc. .......................... Delaware
Philip Morris Limited ..................................... Australia
Philip Morris (Malaysia) Sdn. Bhd. ........................ Malaysia
Philip Morris Management Corp. ............................ New York
Philip Morris Mexico S.A. de C.V. ......................... Mexico
Philip Morris Products Inc. ............................... Virginia
Philip Morris Overseas Limited ............................ Delaware
Philip Morris Polska S.A. ................................. Poland
Philip Morris Romania S.R.L. .............................. Romania
Philip Morris SA, Philip Morris Sabanci Pazarlama ve
Satis A.S. ................................................ Turkey
Philip Morris Sales Inc. .................................. Delaware
Philip Morris Sdn. Bhd. ................................... Brunei
Philip Morris Services India Inc. ......................... Delaware
Philip Morris Singapore Pte. Ltd. ......................... Singapore
Philip Morris World Trade S.A. ............................ Switzerland
PHILSA Philip Morris Sabanci Sigara ve Tutunculuk Sanayi
ve Ticaret, A.S. .......................................... Turkey
Pietro Negroni Limited .................................... United Kingdom
Pietro Negroni S.A. ....................................... Switzerland
PMCC Investors No. 1 Corporation .......................... Delaware
PMCC Investors No. 2 Corporation .......................... Delaware
PMCC Investors No. 3 Corporation .......................... Delaware
PMCC Investors No. 4 Corporation .......................... Delaware
PMCC Leasing Corporation .................................. Delaware
Porta Pack Corporation .................................... Delaware
Premierfoods Corporation .................................. Taiwan
P.T. Kraft Ultrajaya Indonesia ............................ Indonesia
Riespri, S.A. ............................................. Spain
Roskill Cartage and Storage Limited ....................... New Zealand
Rye Ventures, Inc. ........................................ Delaware
San Dionisio Realty Corporation ........................... Philippines
SB Leasing Inc. ........................................... Delaware
Seven Seas Foods, Inc. .................................... Delaware
Shipyard Brewing Company LLC .............................. Maine
4
<PAGE>
STATE OR
COUNTRY OF
NAME ORGANIZATION
---- ------------
Suchard Limited ........................................... United Kingdom
Suchard Schokolade Ges. mbH Bludenz ....................... Austria
Superior AgResource, Inc. ................................. Delaware
Tabacalera Centroamericana S.A. ........................... Guatemala
Tabacalera Costarricense S.A. ............................. Costa Rica
Tabak A.S. ................................................ Czech Republic
Tabaqueira - Empresa Industrial de Tabacos, S.A. .......... Portugal
Taloca AG ................................................. Switzerland
Taloca Ltda. .............................................. Brazil
UAB Philip Morris Lietuva ................................. Lithuania
Vict. Th. Engwall & Co., Inc. ............................. Delaware
Votesor BV ................................................ Netherlands
Wolverine Investment Corp. ................................ Delaware
5
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 13
to the registration statement of Philip Morris Companies Inc. (the "Company") on
Form S-14 (File No. 2-96149) and in the Company's registration statements on
Form S-3 (File No. 333-35143) and Form S-8 (File Nos. 333-28631, 333-20747,
333-16127, 33-1479, 33-1480, 33-10218, 33-13210, 33-14561, 33-17870, 33-37115,
33-38781, 33-39162, 33-40110, 33-48781, 33-59109, 33-63975 and 33-63977) of our
reports dated January 25, 1999, on our audits of the consolidated financial
statements and financial statement schedule of the Company as of December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1998, which reports are included or incorporated by reference in this Annual
Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
March 17, 1999
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1998 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 24th day of February, 1999.
/s/ ELIZABETH E. BAILEY
-----------------------
Elizabeth E. Bailey
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1998 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 24th day of February, 1999.
/s/ MURRAY H. BRING
-------------------
Murray H. Bring
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1998 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 24th day of February, 1999.
/s/ HAROLD BROWN
----------------
Harold Brown
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1998 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 24th day of February, 1999.
/s/ WILLIAM H. DONALDSON
------------------------
William H. Donaldson
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1998 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 24th day of February, 1999.
/s/ JANE EVANS
--------------
Jane Evans
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1998 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 24th day of February, 1999.
/s/ ROBERT E.R. HUNTLEY
-----------------------
Robert E.R. Huntley
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1998 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 24th day of February, 1999.
/s/ RUPERT MURDOCH
------------------
Rupert Murdoch
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director
of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his true and lawful attorney, for him
and in his name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form
10-K of the Company for the year ended December 31, 1998 and any amendments
or supplements to said Annual Report and to cause the same to be filed with
the Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform
all and every act and thing whatsoever requisite or desirable to be done in
and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 15th day of March, 1999.
/s/ JOHN D. NICHOLS
-------------------
John D. Nichols
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1998 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 24th day of February, 1999.
/s/ LUCIO A. NOTO
-----------------
Lucio A. Noto
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director
of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his true and lawful attorney, for him
and in his name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form
10-K of the Company for the year ended December 31, 1998 and any amendments
or supplements to said Annual Report and to cause the same to be filed with
the Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform
all and every act and thing whatsoever requisite or desirable to be done in
and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 15th day of March, 1999.
/s/ RICHARD D. PARSONS
----------------------
Richard D. Parsons
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1998 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 24th day of February, 1999.
/s/ JOHN S. REED
----------------
John S. Reed
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1998 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 24th day of February, 1999.
/s/ CARLOS SLIM HELU
--------------------
Carlos Slim Helu
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C.
Camilleri, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or facsimile
signature, electronic transmission or otherwise, the Annual Report on Form 10-K
of the Company for the year ended December 31, 1998 and any amendments or
supplements to said Annual Report and to cause the same to be filed with the
Securities and Exchange Commission, together with any exhibits, financial
statements and schedules included or to be incorporated by reference therein,
hereby granting to said attorneys full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things which
said attorneys may do or cause to be done by virtue of these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand
and seal this 24th day of February, 1999.
/s/ STEPHEN M. WOLF
-------------------
Stephen M. Wolf
<PAGE>
EXHIBIT 99.1
CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS
As described in Item 3 of this Annual Report on Form 10-K and Note 16 to the
Company's consolidated financial statements included as Exhibit 13 hereto, 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 Philip Morris International, 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 have
included local, state and certain foreign governmental entities.
Non-governmental plaintiffs in these cases include union health and welfare
trust funds, Blue Cross/Blue Shield groups, health maintenance organizations,
hospitals, native American tribes, 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 October 1, 1998, are
also described. Prior developments in these cases are described in the Company's
Quarterly Reports on Form 10-Q.
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 Philip Morris International, as of March 1, 1999, and describes
certain developments since October 1, 1998.
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.
CAPUTO (formerly LETOURNEAU) V. IMPERIAL TOBACCO LIMITED, ET AL., ONTARIO COURT
OF JUSTICE, TORONTO, CANADA, FILED JANUARY 13, 1995.
THE SMOKER HEALTH DEFENSE ASSOCIATION, ET AL. V. SOUZA CRUZ, S.A. AND PHILIP
MORRIS MARKETING, S.A., 19TH LOWER CIVIL COURT OF THE CENTRAL COURTS OF THE
JUDICIARY DISTRICT OF SAO PAULO, BRAZIL, FILED JULY 25, 1995.
NORTON, ET AL. V. RJR NABISCO HOLDINGS CORPORATION, ET AL., SUPERIOR COURT,
MADISON COUNTY, INDIANA, FILED MAY 3, 1996.
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 November 1998, the intermediate
appellate court
1
<PAGE>
affirmed the trial court's certification of the medical monitoring class. In
February 1999, the Louisiana Supreme Court declined to hear defendants' appeal
of the class certification ruling.
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. In
November 1998, the appellate court upheld the trial court's decertification of
the class and dismissal of the case.
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.
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 December 1998, the
court denied plaintiffs' motion for class certification.
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.
2
<PAGE>
SELCER, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NEVADA, FILED MARCH 3, 1997.
INSOLIA, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT
COURT, WESTERN DISTRICT, WISCONSIN, FILED APRIL 21, 1997. In December 1998, the
court denied plaintiffs' motion for class certification.
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. In October 1998, the trial
court denied plaintiffs' motion for class certification.
CLAY, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, SOUTHERN DISTRICT, ILLINOIS, BENTON DIVISION, FILED MAY 22,
1997.
ANDERSON, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, EASTERN DISTRICT, TENNESSEE, FILED MAY 23, 1997.
TAYLOR, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., CIRCUIT COURT,
WAYNE COUNTY, MICHIGAN, FILED MAY 23, 1997.
LYONS, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES
DISTRICT COURT, NORTHERN DISTRICT, GEORGIA, FILED MAY 27, 1997. In December
1998, plaintiffs voluntarily dismissed this case without prejudice.
KIRSTEIN (formerly ENRIGHT), ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET
AL., SUPERIOR COURT, MIDDLESEX COUNTY, NEW JERSEY, FILED MAY 28, 1997. In
October 1998, the court denied plaintiffs' motion for class certification.
TEPPER, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, MIDDLESEX
COUNTY, NEW JERSEY, FILED MAY 28, 1997. In October 1998, the court denied
plaintiffs' motion for class certification.
BROWN, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT, SAN
DIEGO COUNTY, CALIFORNIA, FILED JUNE 10, 1997.
LIPPINCOTT, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR
COURT, MIDDLESEX COUNTY, NEW JERSEY, FILED JUNE 13, 1997. In October 1998, the
court denied plaintiffs' motion for class certification.
BRAMMER, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT, IOWA, FILED JUNE 20, 1997.
KNOWLES, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, LOUISIANA, FILED JUNE 30, 1997. In December 1998,
plaintiffs voluntarily dismissed this case without prejudice.
DALEY, ET AL. V. AMERICAN BRANDS, INC., ET AL., UNITED STATES DISTRICT COURT,
NORTHERN DISTRICT, ILLINOIS, FILED JULY 7, 1997.
3
<PAGE>
PISCITELLO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT,
MIDDLESEX COUNTY, NEW JERSEY, FILED JULY 28, 1997. In October 1998, the court
denied plaintiffs' motion for class certification.
DASILVA, ET AL. V. NIGERIAN TOBACCO COMPANY, ET AL., HIGH COURT OF LAGOS STATE,
NIGERIA, FILED SEPTEMBER 8, 1997.
BUSH, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, TEXAS, FILED SEPTEMBER 10, 1997.
NWANZE, ET AL. V. PHILIP MORRIS COMPANIES INC., ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT, NEW YORK, FILED SEPTEMBER 29, 1997.
BADILLO, ET AL. V. 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.
DIENNO, ET AL. V. LIGGETT GROUP, INC., ET AL., UNITED STATES DISTRICT COURT,
NEVADA, FILED DECEMBER 22, 1997. In December 1998, this case was consolidated
with the BADILLO case mentioned above.
JACKSON, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT
COURT, CENTRAL DISTRICT, UTAH, FILED FEBRUARY 13, 1998.
PARSONS, ET AL. V. A C & S, INC., ET AL., CIRCUIT COURT, KANAWHA COUNTY, WEST
VIRGINIA, FILED FEBRUARY 27, 1998.
NATIONAL ASSOCIATION FOR ASSISTANCE TO CONSUMERS AND WORKERS V. SOUZA CRUZ S.A.
AND PHILIP MORRIS BRASIL S.A., THE FIFTH COURT OF BANKRUPTCIES AND
REORGANIZATIONS OF THE CAPITAL DISTRICT OF THE STATE OF RIO DE JANEIRO, BRAZIL,
FILED MARCH 16, 1998.
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.
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COLLIER, ET AL. V. PHILIP MORRIS INCORPORATED, UNITED STATES DISTRICT COURT,
SOUTHERN DISTRICT OF MISSISSIPPI, FILED MAY 26, 1998. In March 1999, plaintiffs
filed a motion to voluntarily 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.
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.
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 March 1, 1999, and describes certain developments since October
1, 1998. Exhibit 99.2 hereto sets forth the status of the Master Settlement
Agreement ("MSA")in each of the respective settling jurisdictions.
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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.
COUNTY OF LOS ANGELES V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., SUPERIOR COURT,
SAN DIEGO COUNTY, CALIFORNIA, FILED AUGUST 5, 1996. This case was dismissed with
prejudice in December 1998.
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.
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.
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 October 1998, the trial court granted plaintiffs' motion
to certify a class consisting of all Ohio labor health and welfare funds and, in
February 1999, the Court of Appeals declined to review the trial court's class
certification. The trial of this case began on February 22, 1999.
NORTHWEST LABORERS-EMPLOYERS HEALTH AND SECURITY TRUST FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT,
WASHINGTON, FILED MAY 21, 1997. In December 1998, the court denied defendants'
motion for judgment on the pleadings.
UNIVERSITY OF SOUTHERN ALABAMA V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED
STATES DISTRICT COURT, SOUTHERN DISTRICT, ALABAMA, FILED MAY 23, 1997. In March
1999, the Court of Appeals reversed the trial court's dismissal of this case.
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.
THE LOWER BRULE SIOUX TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL
COURT, LOWER BRULE SIOUX TRIBE, FILED JUNE 4, 1997.
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HAWAII HEALTH AND WELFARE TRUST FUND FOR OPERATING ENGINEERS V. PHILIP MORRIS,
INC., ET AL., UNITED STATES DISTRICT COURT, HAWAII, FILED JUNE 13, 1997. In
January 1999, the court granted defendants' motion to dismiss based on the
remoteness doctrine.
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.
THE MUSCOGEE CREEK NATION, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL.,
DISTRICT COURT, MUSCOGEE CREEK NATION, OKMULGEE DISTRICT, 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.
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.
CONSTRUCTION LABORERS OF GREATER ST. LOUIS WELFARE FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, MISSOURI,
FILED SEPTEMBER 2, 1997.
THE ARKANSAS CARPENTERS HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, ARKANSAS, FILED SEPTEMBER
4, 1997.
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.
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TEAMSTERS UNION NO. 142 HEALTH AND WELFARE TRUST FUND AND SHEET METAL WORKERS
LOCAL UNION NO. 20 WELFARE AND BENEFIT FUND V. PHILIP MORRIS INCORPORATED, ET
AL., CIRCUIT COURT OF ST. JOSEPH COUNTY, INDIANA, FILED SEPTEMBER 12, 1997.
CROW CREEK SIOUX TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL COURT,
CROW CREEK SIOUX TRIBE, FILED SEPTEMBER 14, 1997.
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.
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. In December 1998, the court dismissed the
case with prejudice noting that the "remoteness doctrine was the principle
catalyst for this decision."
REPUBLIC OF THE MARSHALL ISLANDS V. THE AMERICAN TOBACCO COMPANY, ET AL., HIGH
COURT, REPUBLIC OF THE MARSHALL ISLANDS, FILED OCTOBER 20, 1997. In December
1998, the court granted a motion to dismiss for lack of personal jurisdiction
with respect to the "holding company" and "unaffiliated" defendants, including
the Company, but denied the motion with respect to the "manufacturer"
defendants, including PM Inc. and Philip Morris Products Inc.
CENTRAL STATES JOINT BOARD V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED OCTOBER 20, 1997. In December
1998, the court granted defendants' motion to dismiss.
INTERNATIONAL BROTHERHOOD OF TEAMSTERS, LOCAL 734 V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED OCTOBER
20, 1997. In December 1998, the court granted defendants' motion to dismiss.
TEXAS CARPENTERS HEALTH BENEFIT FUND, ET AL. V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, EASTERN DISTRICT, TEXAS, BEAUMONT DIVISION, FILED
OCTOBER 31, 1997.
UNITED FOOD AND COMMERCIAL WORKERS UNIONS AND EMPLOYERS HEALTH AND WELFARE FUND
V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT,
ALABAMA, FILED NOVEMBER 13, 1997.
B.A.C. LOCAL 32 INSURANCE TRUST FUND, ET AL. V. PHILIP MORRIS, INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, MICHIGAN, FILED NOVEMBER
14, 1997.
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.
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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.
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.
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.
CARPENTERS & JOINERS WELFARE FUND, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL.,
UNITED STATES DISTRICT COURT, MINNESOTA, FILED DECEMBER 31, 1997.
STEAMFITTERS LOCAL UNION NO. 614 HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS,
INC., ET AL., CIRCUIT COURT, THIRTEENTH JUDICIAL DISTRICT, TENNESSEE, FILED
JANUARY 7, 1998. In January 1999, the court granted defendants' motion to
dismiss as to plaintiffs' antitrust claim, but otherwise denied the motion.
WOODS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, MIDDLE DISTRICT, NORTH CAROLINA, FILED FEBRUARY 13, 1998.
NATIONAL ASBESTOS WORKERS MEDICAL FUND, ET AL. V. PHILIP MORRIS INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK, FILED
FEBRUARY 27, 1998. In October 1998, the court denied defendants' motion to
dismiss.
MILWAUKEE CARPENTERS, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT
COURT, MILWAUKEE COUNTY, WISCONSIN, FILED MARCH 4, 1998.
GROUP HEALTH PLAN, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT
COURT, MINNESOTA, FILED MARCH 11, 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.
GREAT LAKES SALES & MARKETING, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL.
(FORMERLY WILLIAMS & DRAKE COMPANY, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET
AL.), UNITED STATES DISTRICT COURT, WESTERN DISTRICT, PENNSYLVANIA, FILED MARCH
23, 1998. In December 1998, the court dismissed this case with prejudice.
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CONWED CORPORATION AND LEUCADIA, INC. V. RJ REYNOLDS TOBACCO COMPANY, ET AL.,
UNITED STATES DISTRICT COURT, MINNESOTA, FILED APRIL 9, 1998.
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 25 health care cost recovery
actions filed by unions.
ARKANSAS BLUE CROSS AND BLUE SHIELD, ET AL. V. PHILIP MORRIS INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED APRIL 29,
1998.
BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC., ET AL. V. PHILIP MORRIS,
INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, NEW YORK,
FILED APRIL 29, 1998. In February 1999, the court denied certain defendants'
motions to dismiss for failure to state a claim and failure to join necessary
parties.
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.
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.
THE REPUBLIC OF GUATEMALA V. THE TOBACCO INSTITUTE, INC., ET AL., UNITED STATES
DISTRICT COURT, DISTRICT OF COLUMBIA, FILED MAY 11, 1998.
UTAH LABORERS' HEALTH AND WELFARE FUND, ET AL. V. PHILIP MORRIS INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT, UTAH, FILED JUNE 13, 1998.
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.
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.
CITY OF ST. LOUIS V. AMERICAN TOBACCO, ET AL., CIRCUIT COURT OF THE CITY OF ST.
LOUIS, MISSOURI, FILED NOVEMBER 23, 1998.
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COUNTY OF ST. LOUIS V. AMERICAN TOBACCO, ET AL., CIRCUIT COURT OF ST. LOUIS,
MISSOURI, FILED DECEMBER 3, 1998.
ALLEGHENY GENERAL HOSPITAL, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, WESTERN DISTRICT, PENNSYLVANIA, FILED DECEMBER 10, 1998.
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.
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.
CERTAIN OTHER ACTIONS
The following lists certain other actions pending against the Company and/or
various subsidiaries and others. The "National Cheese Exchange" cases
referenced below are described in Note 16 to the Company's consolidated
financial statements, and the other categories of cases are described in
Item 3 of this Annual Report on Form 10-K.
NATIONAL CHEESE EXCHANGE CASES
o CONSOLIDATED ACTION
o SERVAIS, ET AL. V. KRAFT FOODS, INC. AND THE NATIONAL CHEESE
EXCHANGE, INC., CIRCUIT COURT OF DANE COUNTY, WISCONSIN, FILED
MAY 5, 1997.
o DODSON, ET AL. V. KRAFT FOODS, INC., ET AL., CIRCUIT COURT OF
DANE COUNTY, WISCONSIN, FILED JULY 1, 1997.
o NOLL, ET AL. V. KRAFT FOODS, INC., ET AL., CIRCUIT COURT OF
DANE COUNTY, WISCONSIN, FILED JULY 11, 1997.
o VINCENT, ET AL. V. KRAFT FOODS, INC., CIRCUIT COURT OF COOK COUNTY,
ILLINOIS, FILED OCTOBER 27, 1997. In December 1998, the court granted
defendant's motion to dismiss.
o 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 December 1998, the court granted defendants' motion to
dismiss.
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ASBESTOS CONTRIBUTION CASES
o RAYMARK INDUSTRIES, INC. V. R. J. REYNOLDS TOBACCO COMPANY, ET AL.,
CIRCUIT COURT, FOURTH JUDICIAL CIRCUIT, DUVAL COUNTY, FLORIDA, FILED
SEPTEMBER 15, 1997.
o 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.
o FIBREBOARD CORPORATION AND OWENS CORNING V. THE AMERICAN TOBACCO
COMPANY, ET AL., SUPERIOR COURT OF ALAMEDA COUNTY, CALIFORNIA, FILED
DECEMBER 11, 1997.
o KEENE CREDITORS TRUST V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET
AL., SUPREME COURT OF NEW YORK COUNTY, NEW YORK, FILED DECEMBER 19,
1997.
o 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.
o 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.
o RAYMARK INDUSTRIES, INC. V. R. J. REYNOLDS TOBACCO COMPANY, ET. AL.,
CIRCUIT COURT, FOURTH JUDICIAL CIRCUIT, DUVAL COUNTY, FLORIDA, FILED
DECEMBER 31, 1997.
o 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.
o 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.
o 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.
PROPOSITION 65 CASES
o 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.
o 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 1998, the court coordinated
this case with IN RE TOBACCO CASES II discussed above.
MARLBORO LIGHT/ULTRA LIGHT CASES
o 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.
12
<PAGE>
o CUMMIS, ET AL. V. PHILIP MORRIS COMPANIES, INC. AND PHILIP MORRIS,
INC., SUPERIOR COURT, MIDDLESEX COUNTY, NEW JERSEY, FILED JULY 9, 1998.
o 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.
o ASPINALL, ET AL. V. PHILIP MORRIS COMPANIES, INC. AND PHILIP MORRIS
INCORPORATED, UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MASSACHUSETTS, FILED NOVEMBER 24, 1998.
o 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.
o MCCLURE, ET AL. V. PHILIP MORRIS COMPANIES INC. AND PHILIP MORRIS
INCORPORATED, CIRCUIT COURT OF DAVIDSON COUNTY, TENNESSEE, FILED
JANUARY 19, 1999.
MSA-RELATED CASES
o HISE, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED DISTRICT
COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA, FILED DECEMBER 15, 1998.
o 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.
o FLOYD V. STATE OF WISCONSIN, ET AL., CIRCUIT COURT OF MILWAUKEE COUNTY,
WISCONSIN, FILED FEBRUARY 10, 1999.
RETAIL LEADERS CASE
o R.J. REYNOLDS TOBACCO COMPANY V. PHILIP MORRIS INCORPORATED, UNITED
STATES DISTRICT COURT, MIDDLE DISTRICT OF NORTH CAROLINA, FILED
MARCH 12, 1999.
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 37 of those jurisdictions. Interventions and/or
challenges to the MSA (or appeals thereof) are pending in 11 jurisdictions. In
addition, as described in Item 3 of this Annual Report on Form 10-K 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
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
HAWAII X
IDAHO X X
ILLINOIS X X
INDIANA X X
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
IOWA X X
KANSAS X X
KENTUCKY X X
LOUISIANA X X
MAINE X X
MARYLAND X X
MASSACHUSETTS X X
MICHIGAN X X
MISSOURI X X
MONTANA X X
NEBRASKA X X
NEVADA X X
NEW HAMPSHIRE X X
NEW JERSEY X X
NEW MEXICO X X
NEW YORK X X
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
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SOUTH DAKOTA X X
TENNESSEE X X
UTAH X X
VERMONT X X
VIRGIN ISLANDS X X
VIRGINIA X X
WASHINGTON X X
WEST VIRGINIA X
WISCONSIN X X
WYOMING X X
</TABLE>
3
<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 Tobacco Smoking and Health Class Action In Progress
Co., et al.
Iron Workers Local Union No. 17 Health Care Cost Recovery Action In Progress
Insurance Fund, et al. v. Philip
Morris, Inc., et al.
The People of the State of California, Proposition 65 Action June 28, 1999
et al. v. Brown & Williamson Tobacco
Corporation, et al.
Clay, et al. v. The American Tobacco Smoking and Health Class Action August 1999
Company, Inc., et al. Specific Date to be Set
Northwest Laborers-Employers Health and Health Care Cost Recovery Action September 7, 1999
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 Morris Smoking and Health Class February 4, 2000
Incorporated, et al. Action
Thomas and Owens Corning v. R.J. Asbestos Contribution Action February 14, 2000
Reynolds Tobacco Company, et al.
Carpenters & Joiners Welfare Fund, et Health Care Cost Recovery Action March 1, 2000
al. v. Philip Morris Incorporated, et
al.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
CASE TYPE OF ACTION TRIAL DATE
---- -------------- ----------
<S> <C> <C>
Conwed Corporation and Leucadia, Inc. Health Care Cost Recovery Action March 1, 2000
v. RJ Reynolds Tobacco Company, et al.
Group Health Plan, et al. v. Philip Health Care Cost Recovery Action March 1, 2000
Morris, Inc., et al.
Thompson, et al. v. American Tobacco Smoking and Health Class Action March 1, 2000
Company, Inc., et al.
West Virginia--Ohio Valley Area Health Care Cost Recovery March 7, 2000
International Brotherhood of Electrical Action
Workers Welfare Fund v. The American
Tobacco Company, et al.
National Asbestos Workers Medical Fund, Health Care Cost Recovery Action April 5, 2000
et al. v. Philip Morris
Incorporated, et al.
West Virginia Laborers' Pension Fund, Health Care Cost Recovery June 6, 2000
et al. v. Philip Morris, Inc., et al. Action
</TABLE>
Below is a schedule setting forth by month the number of individual smoking
and health cases against PM Inc. and, in one case, the Company, that are
currently scheduled for trial through the end of the year 2000.
<TABLE>
<CAPTION>
1999 2000
- ---- ----
<S> <C>
May (2) March (1)
June (2) April (1)
September (1) May (1)
October (1) September (1)
</TABLE>
2
