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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, 1999
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 Identification No.)
incorporation or organization)
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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<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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<S> <C>
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 25, 2000, was approximately $45 billion. At such date,
there were 2,314,475,814 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, 1999, 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 27, 2000,
to be filed with the Securities and Exchange Commission, 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.," is 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
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, 1999, 1998 and 1997) are set forth
in Note 11 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, 1999 (the "1999 Annual Report").
In 1999, operating companies income for domestic tobacco was approximately
32.8% of consolidated operating companies income, up from 13.1% in 1998 and
25.7% in 1997. Both the decrease from 1997 to
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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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1998 and the increase from 1998 to 1999 were due primarily to charges recorded
in 1998 and 1997 for tobacco litigation settlements (discussed below in Item 3.
LEGAL PROCEEDINGS). International tobacco contributed 33.5% of consolidated
operating companies income in 1999, compared with 44.4% and 35.7%, respectively,
in 1998 and 1997. North American food and international food contributed 21.0%
and 7.7%, respectively, to consolidated operating companies income in 1999,
compared with 27.0% and 9.9%, respectively, in 1998 and 22.4% and 10.3%,
respectively, in 1997. Beer and financial services contributed 3.5% and 1.5%,
respectively, to consolidated operating companies income in 1999, compared with
4.0% and 1.6%, respectively, in 1998, and 3.6% and 2.3%, respectively, in 1997.
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 and
territories of 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 208.2 billion units in 1999, a
decrease of 8.5% from 1998. PM Inc. accounted for 49.6% of the cigarette
industry's total shipments in the United States in 1999 (an increase of 0.2
share points over 1998). The industry's cigarette shipments in the United States
decreased by 9.0% in 1999. PM Inc.'s and the industry's volume declines are due
primarily to price increases associated with tobacco litigation settlements and
excise tax increases. 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) (%)
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1999........................................... 419.3 208.2 49.6
1998........................................... 460.8 227.6 49.4
1997........................................... 482.9 235.2 48.7
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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 152.8 billion units in 1999 (down 6.0% from
1998), equating to 36.4% of the United States market (up 1.2 share points over
1998).
In 1999 and 1998, the premium and discount segments accounted for
approximately 73% and 27%, respectively, of domestic cigarette industry volume.
PM Inc.'s share of the premium segment was 59.5% in 1999, an increase of 1.1
share points over 1998. Shipments of premium cigarettes accounted for 88.0% of
PM Inc.'s 1999 volume, up from 86.4% in 1998. In 1999, United States industry
shipments within the discount segment declined 10.3% from 1998 levels;
PM Inc.'s 1999 shipments within this category declined 19.5%, resulting in a
share of 22.4% of the discount segment (down 2.6 share points from 1998).
During 1998, PM Inc. 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 trademarks, L&M, LARK and CHESTERFIELD. During
1999, PM Inc. substantially completed its acquisition of the acquiree.
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* Source: Management Science Associates.
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Including the $150 million paid in December 1998, the total acquisition price
was approximately $300 million. L&M, LARK and CHESTERFIELD accounted for less
than 0.2% of domestic cigarette industry volume in 1999 and 1998.
During 1999, PM Inc. announced plans to phase out cigarette production
capacity at its Louisville, Kentucky manufacturing plant by August 2000. The
closure of this facility will occur in stages, as cigarette production is
shifted to other PM Inc. manufacturing facilities in the United States. As a
result of this announcement, PM Inc. recorded pre-tax charges of $183 million
during 1999. These charges included enhanced severance, pension and
post-retirement benefits in accordance with the terms of the underlying plans,
affecting approximately 1,500 hourly and salaried employees.
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 continue to be materially adversely
affected by price increases related to 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 declined 6.3% in
1999 to 672.1 billion units due primarily to the impact of regional economic
crises. Volume for 1999 includes approximately 4.2 billion units of incremental
volume from year 2000 business as customers purchased additional product in
anticipation of business disruptions from the century date change. Philip Morris
International estimates that its share of the international cigarette market
(which is defined as worldwide cigarette volume excluding the United States and
duty-free shipments) was 13.5% in 1999, down from 13.7% in 1998. Philip Morris
International estimates that international cigarette market shipments were
approximately 4.7 trillion units in 1999, down slightly from 1998. Philip Morris
International's leading brands--MARLBORO, L&M, PHILIP MORRIS, BOND STREET,
CHESTERFIELD, PARLIAMENT, LARK, MERIT and VIRGINIA SLIMS--collectively accounted
for approximately 10.2% of the international cigarette market, down from 10.4%
in 1998. Shipments of Philip Morris International's principal brand, MARLBORO,
decreased 1.9% in 1999, and represented more than 6% of the international
cigarette market in 1999 and 1998.
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 50
markets, including Argentina, Australia, Austria, Belgium, the Czech Republic,
Finland, France, Germany, Greece, Hong Kong, Hungary, Italy, Japan, Mexico, the
Netherlands, Poland, Portugal, Saudi Arabia, Singapore, Spain, Switzerland and
Turkey.
In 1999, Philip Morris International took a number of measures to invest in
and expand its international manufacturing base. Philip Morris International
increased its ownership interests in affiliated companies in Portugal and Poland
and conducted facilities expansions in Germany, Portugal, Holland, Switzerland,
Poland, Romania, Turkey, Ukraine, Russia, Kazakhstan and Indonesia.
In 1999, Philip Morris International announced the closure of a cigarette
factory and the corresponding reduction of cigarette production capacity in
Brazil. Prior to the factory closure, existing employees were offered voluntary
dismissal benefits. These benefits were accepted by half of the approximately
1,000 employees at the facility. During the third quarter of 1999, the factory
was closed and the remaining employees were dismissed. A pre-tax charge of
$136 million was recorded by PM International to write down the tobacco
machinery and equipment no longer in use and to recognize the cost of enhanced
severance benefits.
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
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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 below under
TAXES, LEGISLATION, REGULATION AND OTHER MATTERS REGARDING TOBACCO AND
SMOKING--STATE SETTLEMENT AGREEMENTS, 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.
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. However, in light of
recent reductions in the federal price-support program for tobacco farmers,
PM Inc. announced in February 2000 that it would conduct a pilot partnering
program with a limited number of tobacco growers in order to ensure adequate
supply of burley tobacco. Under the terms of the program, PM Inc. would agree in
advance to purchase certain amounts of burley tobacco directly from growers in
the program. 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 and anticipated 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 adverse health effects associated with both
smoking and exposure to environmental tobacco smoke ("ETS"); increased smoking
and health litigation and jury verdicts against PM Inc., including in Phase One
of the ENGLE class action trial discussed below in Item 3. LEGAL PROCEEDINGS;
the filing of a civil lawsuit by the U.S. federal government against various
cigarette manufacturers and others as discussed below in Item 3. LEGAL
PROCEEDINGS; price increases in the United States related to the settlement of
certain tobacco litigation; actual and proposed excise tax increases; an
increase in diversion into the United States market of product intended for sale
outside the United States; the issuance of final regulations by the United
States Food and Drug Administration (the "FDA") that, if upheld by the courts,
would regulate cigarettes as "drugs" or "medical devices"; governmental and
grand jury investigations; actual and proposed requirements regarding disclosure
of cigarette ingredients and other proprietary information; governmental and
private bans and restrictions on smoking; actual and proposed price controls and
restrictions on imports in certain jurisdictions outside the United States;
actual and proposed restrictions affecting tobacco manufacturing, marketing,
advertising and sales outside the United States; proposed legislation to
eliminate the United States 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, increased pressure from anti-smoking
groups and unfavorable press reports; and other tobacco legislation
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that may be considered by the Congress, the states and other jurisdictions
inside and outside the United States.
EXCISE TAXES--Cigarettes are subject to substantial federal, state and local
excise taxes in the United States and to similar taxes in most foreign markets.
The United States federal excise tax on cigarettes is currently $0.34 per pack
of 20 cigarettes and is scheduled to increase to $0.39 per pack on January 1,
2002. In general, excise taxes and other taxes on cigarettes have been
increasing. These taxes vary considerably and, when combined with sales taxes
and the current federal excise tax, may be as high as $1.66 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 2001 budget proposal
includes an additional increase of $0.25 per pack in the federal excise tax, as
well as a contingent special assessment related to youth smoking rates.
Increases in other cigarette-related taxes have been proposed at the state and
local level and in many jurisdictions outside the United States.
In the opinion of PM Inc. and PMI, increases in excise and similar taxes
have had an adverse impact on sales of cigarettes. Any future increases, the
extent of which cannot be predicted, could result in volume declines for the
cigarette industry, including PM Inc. and PMI, and might cause sales to shift
from the premium segment to the discount segment.
FEDERAL TRADE COMMISSION ("FTC")--In September 1997, the FTC issued a
request for public comments on its proposed revision of its "tar" and nicotine
test methodology and reporting procedures established by a 1970 voluntary
agreement among domestic cigarette manufacturers. In February 1998, PM Inc. and
three other domestic cigarette manufacturers filed comments on the proposed
revisions. In November 1998, the FTC wrote to the Department of Health and Human
Services requesting its assistance in developing specific recommendations on the
future of the FTC's program for testing the "tar," nicotine and carbon monoxide
content of cigarettes.
FDA REGULATIONS--The FDA has promulgated regulations asserting jurisdiction
over cigarettes as "drugs" or "medical devices" under the provisions of the
Food, Drug and Cosmetic Act. These regulations include severe restrictions on
the distribution, marketing and advertising of cigarettes, and would require the
industry to comply with a wide range of labeling, reporting, recordkeeping,
manufacturing and other requirements. The FDA's exercise of jurisdiction, if not
reversed by judicial or legislative action, could lead to more expansive
FDA-imposed restrictions on cigarette operations than those set forth in the
regulations, and could materially adversely affect the business, volume, results
of operations, cash flows and financial position of PM Inc. and the Company. In
August 1998, the Fourth Circuit Court of Appeals ruled that the FDA does not
have the authority to regulate tobacco products, and declared the FDA's
regulations invalid. In April 1999, the U.S. Supreme Court agreed to review the
Fourth Circuit's decision and in December 1999 heard oral arguments. The
ultimate outcome of this litigation cannot be predicted.
The Company has recently stated publicly that while it continues to strongly
oppose the FDA's regulations asserting jurisdiction over cigarettes as "drugs"
or "medical devices" under the provisions of the Food, Drug and Cosmetic Act, it
is prepared to discuss new federal legislation that would provide for reasonable
regulation of cigarettes as cigarettes.
INGREDIENT DISCLOSURE LAWS--The Commonwealth of Massachusetts has enacted
legislation to require cigarette manufacturers to report yearly the flavorings
and other ingredients used in each brand style of cigarettes sold in the
Commonwealth, and on a qualified, by-brand basis to provide "nicotine-yield
ratings" for their products based on standards established by the Commonwealth.
Enforcement of the ingredient disclosure provisions of the statute could result
in the public disclosure of valuable proprietary information. In December 1997,
a federal district court in Boston granted the tobacco company plaintiffs a
preliminary injunction and enjoined the Commonwealth from enforcing the
ingredient disclosure provisions of the legislation. In November 1998, the First
Circuit Court of Appeals affirmed this ruling. In addition, both parties'
cross-motions for summary judgment are pending before the district court. The
ultimate outcome of this lawsuit cannot be predicted. Similar legislation has
been enacted or proposed in
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other states. Some jurisdictions outside the United States have also enacted or
proposed some form of ingredient disclosure legislation or regulation.
HEALTH EFFECTS OF SMOKING AND EXPOSURE TO ETS--Reports with respect to the
health risks of cigarette smoking have been publicized for many years, and the
sale, promotion and use of cigarettes continue to be subject to increasing
governmental regulation. Since 1964, the Surgeon General of the United States
and the Secretary of Health and Human Services have released a number of reports
linking cigarette smoking with a broad range of health hazards, including
various types of cancer, coronary heart disease and chronic lung disease, and
recommending various governmental measures to reduce the incidence of smoking.
The 1988, 1990, 1992 and 1994 reports focus upon the addictive nature of
cigarettes, the effects of smoking cessation, the decrease in smoking in the
United States, the economic and regulatory aspects of smoking in the Western
Hemisphere, and cigarette smoking by adolescents, particularly the addictive
nature of cigarette smoking in adolescence.
Studies with respect to the health risks of ETS to nonsmokers (including
lung cancer, respiratory and coronary illnesses, and other conditions) have also
received significant publicity. In 1986, the Surgeon General of the United
States and the National Academy of Sciences reported that nonsmokers were at
increased risk of lung cancer and respiratory illness due to ETS. In 1993, the
United States Environmental Protection Agency (the "EPA") issued a report
relating to certain health effects of ETS. The report included a risk assessment
relating to the association between ETS and lung cancer in nonsmokers, and a
determination by the EPA to classify ETS as a "Group A" carcinogen. In
July 1998, a federal district court vacated those sections of the report
relating to lung cancer, finding that the EPA may have reached different
conclusions had it complied with certain relevant statutory requirements. The
federal government has appealed the court's ruling. The ultimate outcome of this
litigation cannot be predicted.
In October 1997, at the request of the United States Senate Judiciary
Committee, the Company provided the Committee with a document setting forth the
Company's position on a number of issues. On the issues of the role played by
cigarette smoking in the development of lung cancer and other diseases in
smokers, and whether nicotine, as found in cigarette smoke, is addictive, the
Company stated that despite the differences that may exist between its views and
those of the public health community, it would, in order to ensure that there
will be a single, consistent public health message on these issues, refrain from
debating the issues other than as necessary to defend itself and its opinions in
the courts and other forums in which it is required to do so. The Company also
stated that in relation to these issues, and the health effects of exposure to
ETS, the Company is prepared to defer to the judgment of public health
authorities as to what health warning messages will best serve the public
interest.
In 1999, the Company launched a Web site that includes, among other things,
views of public health authorities on smoking, disease causation in smokers and
addiction. Consistent with the Company's position set forth in its October 1997
submission to the United States Senate Judiciary Committee (discussed above),
the Web site advises smokers and potential smokers to rely on the messages of
public health authorities in making all smoking-related decisions. The site
furthers the Company's efforts to implement this position.
OTHER LEGISLATIVE INITIATIVES--In recent years, various members of Congress
have introduced legislation, some of which has been the subject of hearings or
floor debate, that would subject cigarettes to various regulations under the
Department of Health and Human Services or regulation under the Consumer
Products Safety Act, establish anti-smoking educational campaigns or
anti-smoking programs, or provide additional funding for governmental
anti-smoking activities, further restrict the advertising of cigarettes,
including requiring additional warnings on packages and in advertising,
eliminate or reduce the tax deductibility of tobacco advertising, provide that
the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act
not be used as a defense against liability under state statutory or common law,
and allow state and local governments to restrict the sale and distribution of
cigarettes. Legislative initiatives adverse to the tobacco industry have also
been considered in a number of jurisdictions outside the United States.
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It is not possible to determine the outcome of the FDA regulatory initiative
or the related litigation discussed above, or to predict what, if any, other
foreign or domestic governmental legislation or regulations will be adopted
relating to the manufacturing, advertising, sale or use of cigarettes, or to the
tobacco industry generally. However, if any or all of the foregoing were to be
implemented, the business, volume, results of operations, cash flows and
financial position of PM Inc., PMI and the Company could be materially adversely
affected.
GOVERNMENTAL AND GRAND JURY INVESTIGATIONS--PM Inc. has received requests
for information (including grand jury subpoenas) in connection with governmental
investigations, and has cooperated with respect to such requests. Present and
former employees of PM Inc. have testified in connection with certain of these
matters. The investigations include two grand jury investigations being
conducted by: the United States Attorney for the Northern District of New York,
relating to alleged contraband transactions primarily in Canadian-brand tobacco
products; and the United States Attorney for the Western District of New York,
apparently relating to the sale of cigarettes by third parties upon which state
taxes had allegedly not been paid. PMI and its subsidiary, Philip Morris Duty
Free Inc., have also received subpoenas in connection with the investigation
being conducted by the United States Attorney for the Northern District of New
York. While the outcomes of these investigations cannot be predicted, PM Inc.,
PMI and Philip Morris Duty Free Inc. believe they have acted lawfully.
In September 1999, the United States Department of Justice announced that it
had concluded its investigation of matters relating to issues raised in
testimony provided by tobacco industry executives before Congress in 1994 and
other related matters, and that the investigation is closed. In February 2000,
the United States Department of Justice Antitrust Division advised that it has
closed its investigation in the Eastern District of Pennsylvania relating to
tobacco leaf purchases.
TOBACCO-RELATED LITIGATION--There is substantial litigation pending related
to tobacco products in the United States and certain foreign jurisdictions,
including the ENGLE class action trial currently underway in Florida in which
PM Inc. is a defendant and a civil health care cost recovery action filed by the
United States Department of Justice in September 1999 against domestic tobacco
manufacturers and others, including the Company and PM Inc. (See Item 3. LEGAL
PROCEEDINGS, for a discussion of such litigation.)
STATE SETTLEMENT AGREEMENTS--As discussed in Item 3. LEGAL PROCEEDINGS,
during 1997 and 1998, PM Inc. and other major domestic tobacco product
manufacturers entered into agreements with states and various U.S. jurisdictions
settling asserted and unasserted health care cost recovery and other claims.
These settlements provide for substantial annual payments. They also place
numerous restrictions on the tobacco industry's conduct of its business
operations, including restrictions on the advertising and marketing of
cigarettes. Among these are restrictions or prohibitions on the following:
targeting youth; use of cartoon characters; use of brand name sponsorships and
brand name non-tobacco products; outdoor and transit brand advertising; payments
for product placement; and free sampling. In addition, the settlement agreements
require companies to affirm corporate principles to reduce underage use of
cigarettes; impose requirements regarding lobbying activities; mandate public
disclosure of certain industry documents; limit the industry's ability to
challenge certain tobacco control and underage use laws; and provide for the
dissolution of certain tobacco-related trade associations and place restrictions
on the establishment of any replacement organizations.
FOOD PRODUCTS
Kraft and Kraft Foods International have taken a number of actions to
improve their business portfolios and operating efficiencies. During
January 2000, Kraft announced that it had agreed to purchase the outstanding
common stock of Balance Bar Co., a maker of energy and nutrition snack products,
for approximately $268 million. In a separate transaction, Kraft also announced
that it has acquired Boca Burger, Inc., a privately-held manufacturer and
marketer of soy-based meat alternatives, for approximately $100 million. During
1999, Kraft Foods International sold two international food businesses, and
Philip Morris International sold one international food business. During 1998,
Kraft Foods International sold
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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. The impact of acquisitions and
divestitures has not had a material effect on the Company's results of
operations.
During 1999, Kraft announced that it was offering voluntary retirement
incentive or separation programs to certain eligible hourly and salaried
employees in the United States. Employees electing to terminate employment under
the terms of these programs were entitled to enhanced retirement or severance
benefits. Approximately 1,100 hourly and salaried employees accepted the
benefits offered by these programs and elected to retire or terminate. As a
result, Kraft recorded a pre-tax charge of $157 million during 1999.
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. 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, powdered beverages,
processed meats and other grocery 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 1999, approximately 81% of operating revenues
for the international food businesses were derived from sales 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; 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.
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
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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 the second half of 1998, the cost of certain United States
dairy commodities reached record high levels. Dairy commodity costs moderated
during the first half of 1999, increased briefly during the beginning of the
third quarter of 1999 and on average have been below the levels seen in 1998.
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 were lower during
1998 and most of 1999 after reaching a twenty-year high in May 1997. However,
coffee bean prices have been volatile in recent months due to drought conditions
in Brazil in late 1999.
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 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
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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.
During the latter part of the second quarter of 1999, the Belgian government
and the European Union banned the sale of poultry, poultry-derived products,
beef, pork and their derivative products produced in Belgium, resulting from the
discovery in Belgium of dioxin contamination in animal feed. Although none of
Kraft Foods International's products were contaminated, in the ensuing
political, media and consumer uncertainty, some of Kraft Foods International's
products in several countries were affected by delays in production and
transportation from plants to the trade.
BEER
PRODUCTS
Miller's brands include MILLER LITE, MILLER LITE ICE, MILLER GENUINE DRAFT,
MILLER GENUINE DRAFT LIGHT 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; MEISTER BRAU, MILWAUKEE'S
BEST and MAGNUM MALT LIQUOR in the below-premium segment; and SHARP'S
non-alcohol brew. Miller's brand in the specialty segment is LEINENKUGEL. 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. During 1999,
Miller purchased four trademarks from the Pabst Brewing Company ("Pabst") and
the Stroh Brewery Company ("Stroh"). Miller began brewing and shipping the newly
acquired brands, HENRY WEINHARD'S in the premium segment, OLDE ENGLISH 800 and
MICKEY'S in the near-premium segment and HAMM'S in the below premium segment,
during the second quarter of 1999. Miller's license agreement for the rights to
brew and sell LOWENBRAU in the United States expired on September 30, 1999.
Miller's total shipment volume (which excludes international shipments of
Miller products by other brewers under license and contract brewing
arrangements) of 44.2 million barrels for 1999 increased 3.5% from 1998. Export
shipments decreased 8.3%, with a planned, corresponding increase in licensee
volume. Domestic shipments of 43.3 million barrels increased 3.8% from 1998 due
to the newly-acquired brands. Miller's estimated market share of the U.S. malt
beverage industry (based on shipments) was 21.6% in 1999, up from 21.2% in 1998.
Wholesalers' sales of Miller's products to retailers in 1999 increased 3.3% from
1998. Domestic shipments of premium-priced brands in 1999 increased slightly to
82.2% 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-alcoholic 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
- ----------- -------- -------- -----------------
(IN THOUSANDS OF (%)
BARRELS)
<S> <C> <C> <C>
1999........................................... 204,200 44,175 21.6
1998........................................... 201,751 42,674 21.2
1997........................................... 201,246 43,675 21.7
</TABLE>
During 1999, Miller acquired a brewery in Tumwater, Washington as part of
the purchase of brands from Pabst and Stroh. In addition, Miller recorded a
pre-tax charge of $29 million to write down three other breweries to their
estimated fair values. One of the breweries is presently closed, while the
remaining two are not expected to generate sufficient future cash flows to
recover the recorded cost of the facilities.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
Beer is distributed primarily through independent wholesalers. 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.
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.
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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. Total assets of PMCC were $7.7 billion at December 31, 1999, up from
$6.5 billion at December 31, 1998, 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, 1999, the Company employed approximately 137,000 people
worldwide.
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 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 1999, 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, including this Annual Report on Form 10-K. One can identify these
forward-looking statements by use of words such as "expects," "plans,"
"believes," "will," "estimates," "intends," "projects," "goals" and other words
of similar meaning. One can also identify them by the fact that they do not
relate strictly to historical or current facts. 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
and outcomes to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company; any such statement is qualified
by reference to the following cautionary statements.
The tobacco industry continues to be subject to health concerns relating to
the use of tobacco products and exposure to ETS, legislation, including actual
and potential excise tax increases, increasing
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marketing and regulatory restrictions, governmental regulation, privately
imposed smoking restrictions, governmental and grand jury investigations,
litigation, including risks associated with adverse jury and judicial
determinations, courts reaching conclusions at variance with the Company's
understanding of applicable law, bonding requirements and the absence of
adequate appellate remedies to get timely relief from any of the foregoing, and
the effects of price increases related to concluded tobacco litigation
settlements and excise tax increases on consumption rates. Each of the Company's
consumer products subsidiaries is subject to intense competition, changes in
consumer preferences, the effects of changing prices for its raw materials and
local economic conditions. Their results are dependent upon their continued
ability to promote brand equity successfully, to anticipate and respond to new
consumer trends, to develop new products and markets and to broaden brand
portfolios, in order to compete effectively with lower priced products in a
consolidating environment at the retail and manufacturing levels and to improve
productivity. In addition, Philip Morris International, Kraft Foods
International and Kraft are subject to the effects of foreign economies
particularly the timing of economic recoveries in Latin America and Eastern
Europe and related shifts in consumer preferences, currency movements and the
conversion to the euro. Developments in any of these areas, which are more fully
described elsewhere in Part I hereof and in the Management's Discussion &
Analysis of Financial Condition and Results of Operations ("MD&A") on pages
19-33 of the Company's 1999 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 11
to the Company's consolidated financial statements, incorporated herein by
reference to the Company's 1999 Annual Report.
Subsidiaries of the Company export tobacco and tobacco-related products,
coffee products, grocery products, cheese, processed meats and beer. In 1999,
the value of all exports from the United States by these subsidiaries amounted
to approximately $5 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 59 cigarette or component manufacturing facilities in 31 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 53 manufacturing and processing facilities
and 262 distribution centers and depots throughout the United States, as well as
88 foreign manufacturing and processing facilities in 35 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.
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BEER
Miller owns and operates nine breweries, located in Milwaukee, Wisconsin
(two); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia; Irwindale,
California; Trenton, Ohio; Chippewa Falls, Wisconsin; and Tumwater, Washington.
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.
During 1999, Miller recorded a pre-tax charge of $29 million to write-down
the book value of three brewing facilities to their estimated fair values. One
of the facilities is presently closed, while the remaining two small facilities
are not expected to generate sufficient future cash flows to recover the
recorded cost of the facilities.
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.
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 the
following categories: (i) smoking and health cases alleging personal injury
brought on behalf of individual plaintiffs, (ii) smoking and health cases
primarily alleging personal injury and purporting to be brought on behalf of a
class of individual plaintiffs, (iii) health care cost recovery cases brought by
governmental (both domestic and foreign) and non-governmental plaintiffs seeking
reimbursement for health care expenditures allegedly caused by cigarette smoking
and/or disgorgement of profits, and (iv) other tobacco-related litigation,
including suits by former asbestos manufacturers seeking contribution or
reimbursement for amounts expended in connection with the defense and payment of
asbestos claims that were allegedly caused in whole or in part by cigarette
smoking. Damages claimed in some of the smoking and health class actions, health
care cost recovery cases and other tobacco-related litigation range into the
billions of dollars. Plaintiffs' theories of recovery and the defenses raised in
the smoking and health and health care cost recovery cases are discussed below.
Exhibit 99.1 hereto lists the smoking and health class actions, health care cost
recovery cases and certain other actions pending as of February 15, 2000, and
discusses certain developments in such cases since November 1, 1999.
As of February 15, 2000, there were approximately 380 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 510
such cases on December 31, 1998, and approximately 375 such cases on
December 31, 1997. Approximately 12 of the individual cases involve allegations
of various personal injuries allegedly related to exposure to ETS. In addition,
approximately 500 additional individual cases have been filed in Florida by
current and former flight attendants claiming personal injuries allegedly
related to ETS. The flight attendants were members of an ETS smoking and health
class action which was settled in 1998. The terms of the court-approved
settlement in that case allows class members to file individual lawsuits seeking
compensatory damages, but prohibits them from seeking punitive damages.
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As of February 15, 2000, there were approximately 50 smoking and health
putative class actions pending in the United States against PM Inc. and, in some
cases, the Company (including eight that involve allegations of various personal
injuries related to exposure to ETS), compared with approximately 60 such cases
on December 31, 1998, and approximately 50 such cases on December 31, 1997. Many
of these actions purport to constitute statewide class actions and were filed
after May 1996 when the United States Court of Appeals for the Fifth Circuit, 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 February 15, 2000, there were approximately 60 health care cost
recovery actions pending in the United States (excluding the cases covered by
the 1998 Master Settlement Agreement discussed below), compared with
approximately 95 health care cost recovery cases pending on December 31, 1998,
and 105 cases on December 31, 1997.
There are also a number of tobacco-related actions pending outside the
United States against PMI and its affiliates and subsidiaries, including
approximately 55 smoking and health cases initiated by one or more individuals
(Argentina (38), Brazil (2), Canada (1), Germany (3), Hong Kong (1), Ireland
(1), Italy (1), Japan (1), the Philippines (1), Poland (2), Scotland (1), Spain
(1) and Turkey (2)), compared with approximately 27 such cases on December 31,
1998. In addition, there are 10 smoking and health putative class actions
pending outside the United States (Australia (2), Brazil (3), Canada (3), Israel
(1) and Nigeria (1)), compared with six in December 1998. In addition, during
the past two years, health care cost recovery actions have been brought in
Israel, the Marshall Islands, British Columbia, Canada and France (by a local
agency of the French social security health insurance system) and, in the United
States, by Bolivia, Ecuador (not yet served), Guatemala (dismissed, as discussed
below), Ontario (not yet served), Panama, Nicaragua, Thailand (voluntarily
dismissed), Ukraine, Venezuela and the States of Goias, Rio de Janeiro and Sao
Paulo (not yet served), Brazil.
FEDERAL GOVERNMENT'S LAWSUIT
In September 1999, the U.S. government filed a lawsuit in the U.S. District
Court for the District of Columbia against various cigarette manufacturers and
others, including the Company and PM Inc., asserting claims under three federal
statutes, the Medical Care Recovery Act, the Medicare Secondary Payer provisions
of the Social Security Act, and the Racketeer Influenced and Corrupt
Organizations Act ("RICO"). The lawsuit seeks to recover an unspecified amount
of health care costs for tobacco-related illnesses allegedly caused by
defendants' fraudulent and tortious conduct and paid for by the government under
various federal health care programs, including Medicare, military and veterans'
health benefits programs, and the Federal Employees Health Benefits Program. The
complaint alleges that such costs total more than $20 billion annually. It also
seeks various types of equitable and declaratory relief, including disgorgement,
an injunction prohibiting certain actions by the defendants, and a declaration
that the defendants are liable for the federal government's future costs of
providing health care resulting from defendants' alleged past tortious and
wrongful conduct. In December 1999, the Company and PM Inc. filed a motion to
dismiss this lawsuit on numerous grounds, including that the statutes invoked by
the government do not provide a basis for the relief sought. The Company and
PM Inc. believe that they have a number of valid defenses to the lawsuit and
will vigorously defend it.
INDUSTRY TRIAL RESULTS
There have been several jury verdicts in tobacco-related litigation during
the past three years. In July 1999, a Louisiana jury returned a verdict in favor
of defendants in an individual smoking and health case against other cigarette
manufacturers. Also in July 1999, the jury in the Engle smoking and health class
action pending in Florida returned a verdict against PM Inc. and several other
tobacco companies in "Phase One" of the trial, which concerned certain issues
determined by the trial court to be "common" to the purported causes of action
of the plaintiff class. Liability and damages in relation to any individual
class
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member were not decided in Phase One (see "Engle Trial", below, for a more
detailed discussion of the Phase One verdict and certain other developments in
this case). In June 1999, a Mississippi jury returned a verdict in favor of
defendants, including PM Inc., in an action brought on behalf of an individual
who died allegedly as a result of exposure to ETS. In May 1999, a Missouri jury
returned a verdict in favor of defendant in an individual smoking and health
case against another cigarette manufacturer. Also in May 1999, a Tennessee jury
returned a verdict in favor of defendants, including PM Inc., in two of three
individual smoking and health cases consolidated for trial. In the third case
(not involving PM Inc.), the jury found liability against defendants and
apportioned fault equally between plaintiff and defendants. Under Tennessee's
system of modified comparative fault, because the jury found plaintiff's fault
equal to that of defendants, recovery was not permitted.
In March 1999, an Oregon jury awarded $800,000 in actual damages, $21,500 in
medical expenses and $79.5 million in punitive damages against PM Inc. In
February 1999, a California jury awarded $1.5 million in compensatory damages
and $50 million in punitive damages against PM Inc. The punitive damage awards
in the Oregon and California actions have been reduced to $32 million and
$25 million, respectively. PM Inc. is appealing the verdicts and the damage
awards in these cases.
In March 1999, a jury returned a verdict in favor of defendants, including
PM Inc., in a union health care cost recovery action brought on behalf of
approximately 114 employer-employee trust funds in Ohio.
Previously, juries had returned verdicts for defendants in three individual
smoking and health cases and in one individual ETS smoking and health case. In
January 1999, a Florida court set aside a jury award totaling approximately
$1 million in a smoking and health case against another United States cigarette
manufacturer and ordered a new trial in the case. In June 1998, a Florida
appeals court reversed a $750,000 jury verdict awarded in August 1996 against
another United States cigarette manufacturer, and the Florida Supreme Court has
heard oral arguments on this ruling. In 1997, a court in Brazil awarded
plaintiffs in a smoking and health case the Brazilian currency equivalent of
$81,000, attorneys' fees and a monthly annuity for 35 years equal to two-thirds
of the deceased smoker's last monthly salary. In March 1999, an appeals court
reversed the trial court's award and dismissed the case. Neither the Company nor
its affiliates were parties to that action.
In December 1999, a French court, in an action brought on behalf of a
deceased smoker, found that another cigarette manufacturer had a duty to warn
him about risks associated with smoking prior to 1976, when the French
government required warning labels on cigarette packs, and failed to do so. The
court did not determine causation or liability, which shall be considered in
future proceedings. Neither the Company nor its affiliates are parties to this
action.
ENGLE TRIAL
Trial in this Florida smoking and health class action case began in
July 1998. The plaintiff class seeks compensatory and punitive damages, each in
excess of $100 billion, as well as attorneys' fees and court costs. The class
consists of all Florida residents and citizens, and their survivors, "who have
suffered, presently suffer or have died from diseases and medical conditions
caused by their addiction to cigarettes that contain nicotine."
In July 1999, the jury returned a verdict against defendants in Phase One of
the three-phase trial plan. The Phase One verdict concerned certain issues
determined by the trial court to be "common" to the causes of action of the
plaintiff class. Among other things, the jury found that smoking cigarettes
causes 20 diseases or medical conditions, that cigarettes are addictive or
dependence-producing, defective and unreasonably dangerous, that defendants made
materially false statements with the intention of misleading smokers, that
defendants concealed or omitted material information concerning the health
effects and/or the addictive nature of smoking cigarettes and agreed to
misrepresent and conceal the health effects and/or the addictive nature of
smoking cigarettes, and that defendants were negligent and engaged in extreme
and outrageous conduct or acted with reckless disregard with the intent to
inflict emotional
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distress. The jury also found that defendants' conduct "rose to a level that
would permit a potential award or entitlement to punitive damages."
Liability and damages in relation to any individual class member were not
decided in Phase One. Phase Two of the trial commenced on November 1, 1999.
During this phase, the claims of three of the named plaintiffs are being
adjudicated in a consolidated trial before the same jury that returned the
verdict in Phase One. Under the trial plan, the jury in Phase Two will determine
issues of specific causation, reliance, affirmative defenses, and other
individual-specific issues related to the claims of the named plaintiffs and
their entitlement to damages, if any.
Phase Three of the trial plan would address other class members' claims,
including issues of specific causation, reliance, affirmative defenses and other
individual-specific issues regarding entitlement to damages, in individual
trials before separate juries.
By order dated July 30, 1999, and supplemented on August 2, 1999 (together,
the "order"), the trial judge amended the trial plan in respect of the manner of
determining punitive damages, if any. The order provides that the jury in Phase
Two will determine punitive damages, if any, on a dollar-amount basis for the
entire qualified class. By order of September 3, 1999, the Third District Court
of Appeal quashed the July 30, 1999 and August 2, 1999 orders of the trial judge
and stated that both compensatory and punitive damages must be tried on an
individual as opposed to class-wide basis. On September 17, 1999, the Third
District Court of Appeal, on its own motion, vacated its September 3 order, and,
on October 20, 1999, ruled that defendants could not challenge the trial plan
for determining punitive damages at this stage of the proceedings; the ruling
expressly declined to address the merits of whether a class-wide determination
of punitive damages is permissible but deferred the court's review of that issue
for any appropriate subsequent appeal. Defendants sought review by the Florida
Supreme Court of the Third District Court of Appeal's ruling. In December 1999,
the Florida Supreme Court denied defendants' petition for review, noting that it
did so without prejudicing defendants' rights to raise the same issues in
subsequent appeals.
It is unclear how the trial court's order will be implemented. The order
provides that the punitive damage amount, if any, should be standard as to each
class member and acknowledges that the actual size of the class will not be
known until the last case has withstood appeal, i.e., the punitive damage
amount, if any, determined for the entire qualified class, would be divided
equally among those plaintiffs who are ultimately successful. The order does not
address whether defendants would be required to pay the punitive damage award,
if any, prior to a determination of claims of all class members, a process that
could take years to conclude. PM Inc. and the Company do not believe that an
adverse class-wide punitive damage award in Phase Two would permit entry of a
judgment at that time that would require the posting of a bond to stay its
execution pending appeal or that any party would be entitled to execute on such
a judgment in the absence of a bond. However, in a worst case scenario, it is
possible that a judgment for punitive damages could be entered in an amount not
capable of being bonded, resulting in an execution of the judgment before it
could be set aside on appeal. PM Inc. and the Company believe that such a result
would be unconstitutional and would also violate Florida laws. PM Inc. and the
Company will take all appropriate steps to seek to prevent this worst case
scenario from occurring and believe these efforts should be successful.
In other developments, in August 1999, the trial judge denied a motion filed
by PM Inc. and other defendants to disqualify the judge. The motion asserted,
among other things, that the trial judge was required to disqualify himself
because he has a serious medical condition of a type that the plaintiffs claim,
and the jury has now found, is caused by smoking, making him financially
interested in the result of the case and, under plaintiffs' theory of the case,
a member of the plaintiff class. The Third District Court of Appeal denied
defendants' petition to disqualify the trial judge. The defendants filed motions
seeking reconsideration of this decision and to supplement the record with the
deposition testimony of an expert witness. The Third District Court of Appeal
denied defendants' motions. In January 2000, defendants filed
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a petition for a writ of certiorari to the United States Supreme Court
requesting that it review the issue of the trial judge's disqualification.
In February 2000, the trial court denied defendants' renewed motion to quash
or amend the gag order that the court has imposed on all parties to the
litigation. The defendants filed an appeal with the Third District Court of
Appeal seeking immediate review of the gag order and asking that review be
conducted on an expedited basis. The court granted the motion for expedited
review and oral arguments were heard on February 23, 2000. On February 24, 2000,
the court affirmed the trial court's denial of defendants' motion.
PM Inc. and the Company remain of the view that the Engle case should not
have been certified as a class action. That certification is inconsistent with
the overwhelming majority of federal and state court decisions that have held
that mass smoking and health claims are inappropriate for class treatment.
PM Inc. intends to challenge the class certification, as well as numerous other
reversible errors that it believes occurred during the trial to date, at the
earliest time that an appeal of these issues is appropriate under Florida law.
PM Inc. and the Company believe that an appeal of these issues on the merits
should prevail.
PENDING AND UPCOMING TRIAL DATES
In addition to the Engle trial, trial in an individual smoking and health
case in which PM Inc. is a defendant commenced in California in January 2000.
Additional cases against PM Inc. and, in some cases, the Company as well, are
scheduled for trial through the end of 2000. These cases include three health
care cost recovery actions that are scheduled for trial in May (New York), June
(New York) and December (Minnesota); three asbestos contribution cases
(discussed below) that are scheduled for trial in New York in April, September
and October; two cases under the California Business and Professions Code
(discussed below) that are scheduled for trial in June (California); and
approximately ten other individual smoking and health cases that are scheduled
for trial in May (New York), June (Minnesota), July (New Jersey and Florida),
August (Iowa), October (Louisiana, New Hampshire, South Carolina, Texas and West
Virginia) and November (Alabama). Cases against other tobacco companies are also
scheduled for trial during this period. Trial dates, however, are subject to
change. A schedule of smoking and health class actions, health care cost
recovery cases and certain other actions that currently are scheduled for trial
in 2000 and 2001 is annexed as Exhibit 99.3 hereto.
LITIGATION SETTLEMENTS
In November 1998, PM Inc. and certain other United States tobacco product
manufacturers entered into the Master Settlement Agreement (the "MSA") with 46
states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the
United States Virgin Islands, American Samoa and the Northern Marianas to settle
asserted and unasserted health care cost recovery and other claims. PM Inc. and
certain other United States tobacco product manufacturers had previously settled
similar claims brought by Mississippi, Florida, Texas and Minnesota (together
with the MSA, the "State Settlement Agreements") and an ETS smoking and health
class action brought on behalf of airline flight attendants. The State
Settlement Agreements and certain ancillary agreements are filed as exhibits to
various of the Company's reports filed with the Securities and Exchange
Commission, and such agreements and the ETS settlement are discussed in detail
therein.
The settlement agreements require that the domestic tobacco industry make
substantial annual payments in the following amounts (excluding future annual
payments contemplated by the agreement with tobacco growers discussed below),
subject to adjustment for several factors, including inflation, market share and
industry volume: 2000, $9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion;
2003, $10.9 billion; 2004 through 2007, $8.4 billion per year; and, thereafter,
$9.4 billion per year. In addition, the domestic tobacco industry is required to
pay settling plaintiffs' attorneys' fees, subject to an annual cap of
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$500 million, as well as additional amounts as follows: 2000, $416 million; and
2001 through 2003, $250 million per year. These payment obligations are the
several and not joint obligations of each settling defendant. For the year ended
December 31, 1998, PM Inc. recorded settlement charges of $3.1 billion, which
represented its share of up-front payments required under the settlement
agreements. For periods subsequent to December 31, 1998, PM Inc.'s portion of
ongoing adjusted payments and legal fees is based on its share of domestic
cigarette shipments in the year preceding that in which the payment is due.
Accordingly, PM Inc. records its portions of ongoing settlement payments as part
of cost of sales as product is shipped.
The State Settlement Agreements also include provisions discussed more fully
above, relating to advertising and marketing restrictions, public disclosure of
certain industry documents, limitations on challenges to certain tobacco control
and underage use laws, restrictions on lobbying activities and other provisions.
See Item 1.(c) TAXES, LEGISLATION, REGULATION AND OTHER MATTERS REGARDING
TOBACCO AND SMOKING--STATE SETTLEMENT AGREEMENTS.
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" (i.e., trial court approval and expiration of the time for
review or appeal of such approval) of the MSA by December 31, 2001, then, unless
the settling defendants and the relevant jurisdiction agree otherwise, the
agreement will be terminated with respect to such jurisdiction. As of February
2000, the MSA has received final judicial approval in 47 jurisdictions.
As part of the MSA, the settling defendants committed to work cooperatively
with the tobacco-growing states to address concerns about the potential adverse
economic impact of the MSA on tobacco growers and quota-holders. To that end,
four of the major domestic tobacco product manufacturers, including PM Inc., and
the grower states, have established a trust fund to provide aid to tobacco
growers and quota-holders. The trust will be funded by these four manufacturers
over 12 years with payments, prior to application of various adjustments,
scheduled to total $5.15 billion. PM Inc. has charged $300 million of payments
into the trust against 1998 operating companies income. Future industry payments
(in 2000, $280 million; 2001, $400 million; 2002 through 2008, $500 million per
year; 2009 and 2010, $295 million per year) are subject to adjustments for
several factors, including inflation, United States cigarette volume and certain
other contingent events, and, in general, are to be allocated based on each
manufacturer's relative market share. PM Inc. records its portion of these
payments as part of cost of sales as product is shipped.
In 1999, the State Settlement Agreements materially adversely affected the
volumes of PM Inc., and the Company believes that the State Settlement
Agreements may materially adversely affect the business, volume, results of
operations, cash flows or financial position of PM Inc. and the Company in
future periods. The degree of the adverse impact will depend, among other
things, on the rates of decline in United States cigarette sales in the premium
and discount segments, PM Inc.'s share of the domestic premium and discount
cigarette segments, and the effect of any resulting cost advantage of
manufacturers not subject to the MSA and the other State Settlement Agreements.
Manufacturers representing almost all domestic shipments in 1998 have agreed to
become subject to the terms of the MSA.
Certain litigation has arisen out of the State Settlement Agreements,
including the actions described below.
In December 1998, a putative class action was filed against PM Inc. and
certain other domestic tobacco manufacturers on behalf of a class consisting of
citizens of the United States who consume tobacco products manufactured by
defendants. One count of the complaint alleged that defendants conspired to
raise the prices of their tobacco products in order to pay the costs of the MSA
in violation of federal antitrust laws. The other two counts alleged 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 sought unspecified damages (to be trebled under the antitrust count),
injunctive and declaratory relief, costs and attorneys' fees. In April 1999, the
court granted defendants' motions for summary
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judgment, and plaintiffs have appealed. In February 2000, the United States
Court of Appeals for the Tenth Circuit affirmed summary judgment for defendants.
In February 1999, a putative class action was filed on behalf of tobacco
consumers in the United States against the States of California and Utah, other
public entity defendants, certain domestic tobacco manufacturers, including
PM Inc., and others, challenging the MSA. Plaintiffs are seeking, among other
things, an order (i) prohibiting the states from collecting any monies under the
MSA, (ii) restraining the domestic tobacco manufacturers from further collection
of price increases related to the MSA and compelling them to reimburse to
plaintiffs all monies paid by plaintiffs in the form of price increases related
to the MSA, and (iii) declaring the MSA "unfair, discriminatory,
unconstitutional and unenforceable." In January 2000, the court granted
defendants' motion to dismiss the complaint.
In April 1999, a putative class action was filed on behalf of all firms that
directly buy cigarettes in the United States from defendant tobacco
manufacturers. The complaint alleges violation of antitrust law, based in part
on the MSA. Plaintiffs seek treble damages computed as three times the
difference between current prices and the price plaintiffs would have paid for
cigarettes in the absence of an alleged conspiracy to restrain and monopolize
trade in the domestic cigarette market, together with attorneys' fees.
Plaintiffs also seek injunctive relief against certain aspects of the MSA and
against PM Inc.'s acquisition of the U.S. rights to manufacture and market three
cigarette trademarks, L&M, LARK and CHESTERFIELD.
In June 1999, a putative class action was filed on behalf of certain native
American tribes against PM Inc. and other cigarette manufacturers challenging
the MSA. The complaint alleged that defendants, by entering into the MSA,
violated certain constitutional and civil rights of the tribes. The complaint
was dismissed by the trial court, and the tribes have appealed.
In August 1999, five companies that import cigarettes or that are involved
in the re-importation of cigarettes into U.S. markets filed suit seeking to
invalidate the MSA and the 1998 Texas State Settlement Agreement on various
grounds, including violation of antitrust laws. Plaintiffs also seek monetary
relief, including treble damages in an unspecified amount and disgorgement of
profits. In January 2000, PM Inc. filed a motion to dismiss the complaint.
In August 1999, after New York obtained final judicial approval of the MSA,
four alleged smokers in New York sought leave to intervene in litigation
concerning the MSA, alleging violations of antitrust laws and seeking injunctive
relief, including invalidating the settlements. The trial court denied the
motion as untimely and the putative intervenors have appealed.
A description of the smoking and health litigation, health care cost
recovery litigation and certain other proceedings pending against the Company
and/or its subsidiaries and affiliates follows.
SMOKING AND HEALTH LITIGATION
Plaintiffs' allegations of liability in smoking and health cases are based
on various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, breach of special duty, conspiracy, concert of
action, violations of deceptive trade practice laws and consumer protection
statutes, and claims under the federal and state RICO statutes. In certain of
these cases, plaintiffs claim that cigarette smoking exacerbated the injuries
caused by their exposure to asbestos. Plaintiffs in the smoking and health
actions seek various forms of relief, including compensatory and punitive
damages, treble/multiple damages and other statutory damages and penalties,
creation of medical monitoring and smoking cessation funds, disgorgement of
profits, and injunctive and equitable relief. Defenses raised in these cases
include lack of proximate cause, assumption of the risk, comparative fault
and/or contributory negligence, statutes of limitations and preemption by the
Federal Cigarette Labeling and Advertising Act.
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In May 1996, the United States Court of Appeals for the Fifth Circuit held
in the Castano case that a class consisting of all "addicted" smokers nationwide
did not meet the standards and requirements of the federal rules governing class
actions. Since this class decertification, lawyers for plaintiffs have filed
numerous putative smoking and health class action suits in various state and
federal courts. In general, these cases purport to be brought on behalf of
residents of a particular state or states (although a few cases purport to be
nationwide in scope) and raise "addiction" claims similar to those raised in the
Castano case and, in many cases, claims of physical injury as well. As of
February 15, 2000, smoking and health putative class actions were pending in
Alabama, Arizona, California, Hawaii, Illinois, Indiana, Iowa, Louisiana,
Massachusetts, Missouri, Nevada, New Jersey, New Mexico, New York, North
Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah and
West Virginia, as well as in Australia, Brazil, Canada, Israel and Nigeria.
Class certification has been denied or reversed by courts in 20 smoking and
health class actions involving PM Inc. in Arkansas, the District of Columbia,
Illinois, Kansas, Louisiana, Michigan, Minnesota, New Jersey (6), New York (2),
Ohio, Pennsylvania, Puerto Rico, Texas, and Wisconsin, while classes remain
certified in three cases in Florida, Louisiana and Maryland. A number of the
class certification decisions are on appeal. In October 1999, the State of New
York's highest court affirmed without dissent the decertification and dismissal
of a class action suit. In May 1999, the United States Supreme Court declined to
review the decision of the United States Court of Appeals for the Third Circuit
affirming a lower court's decertification of a class. Class certification
motions are pending in a number of the putative smoking and health class
actions. As mentioned above, one ETS smoking and health class action was settled
in 1997.
HEALTH CARE COST RECOVERY LITIGATION
In certain of the pending proceedings, domestic and foreign governmental
entities and non-governmental plaintiffs, including union health and welfare
funds ("unions"), native American tribes, insurers and self-insurers such as
Blue Cross and Blue Shield Plans, taxpayers and others, are seeking
reimbursement of health care cost expenditures allegedly caused by tobacco
products and, in some cases, of future expenditures and damages as well. Certain
of these cases purport to be brought on behalf of a class of plaintiffs. 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 lack of proximate cause, remoteness of injury,
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 standing and injury, federal preemption, 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 payer 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.
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Excluding the cases covered by the MSA, as of February 15, 2000, there were
approximately 60 health care cost recovery cases pending in the United States
against PM Inc. and, in some cases, the Company, of which approximately 32 were
filed by union trust funds. As discussed above under "Federal Government's
Lawsuit," the U.S. government filed a health care cost recovery action in
September 1999 against various cigarette manufacturers and others, including the
Company and PM Inc., asserting claims under three federal statutes. Health care
cost recovery actions have also been brought in Israel, the Marshall Islands,
British Columbia, Canada and France and, in the United States, by Bolivia,
Ecuador, Guatemala (dismissed, as discussed below), Ontario (not yet served),
Panama, Nicaragua, Thailand (voluntarily dismissed), Ukraine, Venezuela and the
States of Goias, Rio de Janeiro and Sao Paulo, Brazil. The actions brought by
Bolivia, Guatemala, Nicaragua, Ukraine, Venezuela and the State of Goias,
Brazil, have been consolidated for pre-trial purposes and transferred to the
United States District Court for the District of Columbia. Other foreign
entities and others have stated that they are considering filing health care
cost recovery actions.
Five federal appeals courts have issued rulings in health care cost recovery
actions that were favorable to the tobacco industry. The United States Courts of
Appeals for the Second, Third, Fifth, Seventh and Ninth Circuits, relying
primarily on grounds that the plaintiffs' claims were too remote, have affirmed
dismissals of, or reversed trial courts that had refused to dismiss, such
actions. In addition, in January 2000, the United States Supreme Court denied
plaintiffs' petitions for writs of certiorari in the cases decided by the Court
of Appeals for the Second, Third and Ninth Circuits, effectively refusing to
consider plaintiffs' appeals.
Although there have been some decisions to the contrary, to date, most lower
courts that have decided motions in these cases have dismissed all or most of
the claims against the industry. In December 1999, in the first ruling on a
motion to dismiss a health care cost recovery case brought in the United States
by a foreign governmental plaintiff, the United States District Court for the
District of Columbia dismissed a lawsuit filed by Guatemala, ruling that the
claimed injuries were too remote. Guatemala has appealed this decision to the
United States Court of Appeals for the District of Columbia Circuit. In
March 1999, in the only union case to go to trial thus far, the jury returned a
verdict in favor of defendants on all counts. Plaintiffs' motion for a new trial
has been denied. In December 1999, the federal district court in the District of
Columbia denied defendants' motion to dismiss a suit filed by union and welfare
trust funds seeking reimbursement of health care expenditures allegedly caused
by tobacco products. Defendants are appealing this decision.
CERTAIN OTHER TOBACCO-RELATED LITIGATION
ASBESTOS CONTRIBUTION CASES--As of February 15, 2000, 12 suits had been
filed by former asbestos manufacturers, asbestos manufacturers' personal injury
settlement trusts and an insurance company against domestic tobacco
manufacturers, including PM Inc. and others. Ten of these cases are pending.
These cases seek, among other things, contribution or reimbursement for amounts
expended in connection with the defense and payment of asbestos claims that were
allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of
these cases also seek punitive damages. The aggregate amounts claimed in these
cases range into the billions of dollars. In November 1999, one of these cases
was dismissed by the federal district court in the Eastern District of New York
although the case was subsequently refiled. Trials in these cases are scheduled
to begin in New York in April, September and October 2000.
LIGHTS/ULTRA LIGHTS CASES--As of February 15, 2000, there were ten putative
class actions pending against PM Inc. and the Company, in Arizona, Florida,
Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania, Tennessee, and
Washington, D.C., on behalf of individuals who purchased and consumed various
brands of cigarettes, including MARLBORO LIGHTS, MARLBORO ULTRA LIGHTS, VIRGINIA
SLIMS LIGHTS and SUPERSLIMS, MERIT LIGHTS and CAMBRIDGE LIGHTS. These cases
allege, in connection with the use of the term "Lights" and/or "Ultra Lights,"
among other things, deceptive and unfair trade practices and unjust enrichment,
and seek injunctive and equitable relief, including restitution.
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RETAIL LEADERS CASE--Three domestic tobacco manufacturers have filed suit
against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that
became available to retailers in October 1998. The complaint alleges that this
retail merchandising program is exclusionary, creates an unreasonable restraint
of trade and constitutes unlawful monopolization. In addition to an injunction,
plaintiffs seek unspecified treble damages, attorneys' fees, costs and interest.
In June 1999, the court issued a preliminary injunction enjoining PM Inc. from
prohibiting retail outlets that participate in the program at one of the four
levels from installing competitive permanent signage in any section of the
"industry fixture" that displays or holds packages of cigarettes manufactured by
a firm other than PM Inc., and requiring those outlets to allocate a percentage
of cigarette-related permanent signage to PM Inc. greater than PM Inc.'s market
share, or prohibiting retail outlets from advertising or conducting promotional
programs of cigarette manufacturers other than PM Inc. The preliminary
injunction applies only to certain accounts and does not affect any other aspect
or level of the Retail Leaders program.
VENDING MACHINE CASE--Plaintiffs, who began their case as a purported
nationwide class of cigarette vending machine operators, allege that PM Inc. has
violated the Robinson-Patman Act in connection with its promotional and
merchandising programs available to retail stores and not available to cigarette
vending machine operators. Plaintiffs request actual damages, treble damages,
injunctive relief, attorneys' fees and costs, and other unspecified relief. In
June 1999, the court denied plaintiffs' motion for a preliminary injunction.
Plaintiffs have withdrawn their request for class action status. The claims of
ten plaintiffs are set for trial in November 2000; the claims of remaining
plaintiffs have been stayed pending disposition of those claims scheduled for
trial.
CASES UNDER THE CALIFORNIA BUSINESS AND PROFESSIONS CODE--In July 1998, two
suits were filed in California courts alleging that domestic cigarette
manufacturers, including PM Inc. and others, have violated a California statute
known as "Proposition 65" by not informing the public of the alleged risks of
ETS to non-smokers. Plaintiffs also allege violations of California's Business
and Professions Code regarding unfair and fraudulent business practices.
Plaintiffs seek statutory penalties, injunctions barring the sale of cigarettes
or requiring issuance of appropriate warnings, restitution, disgorgement of
profits and other relief. The defendants' motions to dismiss were denied in both
of these cases. In October 1999, plaintiffs' motion for a preliminary injunction
was also denied. In January 2000, defendants' motion for summary judgment was
granted in part, and plaintiffs' "Proposition 65" claims were dismissed. Trial
on the remaining claims in these cases is scheduled to begin in June 2000.
TOBACCO PRICE CASES--In February 2000, tobacco wholesalers filed three
putative class actions against the Company and other domestic tobacco
manufacturers alleging that the manufacturers conspired to fix cigarette prices
charged to wholesalers in violation of antitrust laws. Consumers in several
states filed similar suits alleging the Company and others conspired to fix the
prices of cigarettes sold in their states.
TOBACCO GROWERS' CASE--In February 2000, a lawsuit was filed on behalf of a
purported class of tobacco growers and quota-holders. The lawsuit alleges, among
other things, that, through the MSA and other related activities, tobacco
manufacturers violated antitrust and other laws by conspiring to displace the
tobacco quota and price support system administered by the federal government.
CERTAIN OTHER ACTIONS
NATIONAL CHEESE EXCHANGE CASES--Since 1996, seven putative class actions
have been filed alleging that Kraft Foods, Inc., and others engaged in a
conspiracy to fix and depress the prices of bulk cheese and milk through their
trading activity on the National Cheese Exchange. Plaintiffs seek injunctive and
equitable relief and treble damages. Two of the actions were voluntarily
dismissed by plaintiffs after class certification was denied. Two other actions
were dismissed in 1998 after Kraft's motions to dismiss were granted, and
plaintiffs appealed those dismissals. In one of those cases, in February 2000
the court reversed the trial court's decision to dismiss the case. The remaining
three cases were consolidated in state court in
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Wisconsin, and in November 1999, the court granted Kraft's motion for summary
judgment. Plaintiffs have appealed.
ITALIAN TAX 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 alleged unpaid taxes assessed
to date is the Italian lira equivalent of $2.3 billion. In addition, the Italian
lira equivalent of $3.2 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 149 of the assessments. The decisions to overturn 81 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 tax evasion and related charges to remain pending. In February 1998,
the criminal court in Naples determined that jurisdiction was not proper, and
the case file was transmitted to the public prosecutor in Milan. Further
investigation is being conducted following which a decision will be made as to
whether there should be a trial on these charges. The Company, its affiliates
and the officers and directors who are subject to the proceedings believe they
have complied with applicable Italian tax laws and are vigorously contesting the
pending assessments and proceedings.
------------------------
It is not possible to predict the outcome of the litigation pending against
the Company and its subsidiaries. Litigation is subject to many uncertainties.
Two individual smoking and health cases in which PM Inc. is a defendant have
been decided unfavorably at the trial court level and are in the process of
being appealed, and an unfavorable verdict has been returned in the first phase
of the Engle smoking and health class action trial underway in Florida. It is
possible that additional cases could be decided unfavorably and that there could
be further adverse developments in the Engle case. An unfavorable outcome or
settlement of a pending smoking and health or health care cost recovery case
could encourage the commencement of additional similar litigation. There have
also been a number of adverse legislative, regulatory, political and other
developments concerning cigarette smoking and the tobacco industry that have
received widespread media attention. These developments may negatively affect
the perception of potential triers of fact with respect to the tobacco industry,
possibly to the detriment of certain pending litigation, and may prompt the
commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of pending litigation. The
present legislative and litigation environment is substantially uncertain, and
it is possible that the Company's business, volume, results of operations, cash
flows or financial position could be materially affected by an unfavorable
outcome or settlement of certain pending litigation or by the enactment of
federal or state tobacco legislation. The Company and each of its subsidiaries
named as a defendant believe, and each has been so advised by counsel handling
the respective cases, that it has a number of valid defenses to all litigation
pending against it. All such cases are, and will continue to be, vigorously
defended. However, the Company and its subsidiaries may enter into discussions
in an attempt to settle particular cases if they believe it is in the best
interests of the Company's stockholders to do so.
Reference is made to Note 15, incorporated herein by reference to the
Company's 1999 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 2001. Copies of Note 15 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following are the executive officers of the Company as of February 25,
2000:
<TABLE>
<CAPTION>
NAME OFFICE AGE
- ---- -------------------------------------------------------- --------
<S> <C> <C>
Geoffrey C. Bible........... Chairman of the Board and Chief Executive Officer 62
John D. Bowlin.............. President and Chief Executive Officer of Miller Brewing
Company 49
Bruce S. Brown.............. Vice President, Taxes 60
Louis C. Camilleri.......... Senior Vice President and Chief Financial Officer 45
Nancy J. De Lisi............ Vice President and Treasurer 49
Roger K. Deromedi........... President and Chief Executive Officer of Kraft Foods
International, Inc. 46
Robert A. Eckert............ President and Chief Executive Officer of Kraft Foods,
Inc. 45
Paul W. Hendrys............. President and Chief Executive Officer of Philip Morris
International Inc. 52
G. Penn Holsenbeck.......... Vice President, Associate General Counsel and Corporate
Secretary 53
George R. Lewis............. President and Chief Executive Officer of Philip Morris
Capital Corporation 58
Steven C. Parrish........... Senior Vice President, Corporate Affairs 49
Timothy A. Sompolski........ Senior Vice President, Human Resources and
Administration 47
Michael E. Szymanczyk....... President and Chief Executive Officer of Philip Morris
Incorporated 51
Joseph A. Tiesi............. Vice President and Controller 41
Charles R. Wall............. Senior Vice President and General Counsel 54
William H. Webb............. Chief Operating Officer 60
</TABLE>
All of the above-mentioned officers have been employed by the Company in
various capacities during the past five years.
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 58 of
the Company's 1999 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 1995-1999 appearing under the caption
"Selected Financial Data" on pages 34 and 35 of the Company's 1999 Annual Report
and made a part hereof.
25
<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 19 to 33 of the Company's 1999
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 32 to 33 of the Company's 1999 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 1999 Annual Report as set forth under the caption "Quarterly
Financial Data (Unaudited)" on page 58 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 27, 2000, to be filed with the Securities and Exchange Commission, and is
made a part hereof.
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
--------------------
FORM 10-K 1999
ANNUAL ANNUAL
REPORT REPORT
PAGE PAGE
--------- --------
<S> <C> <C>
Data incorporated by reference to the Company's 1999 Annual
Report:
Consolidated Balance Sheets at December 31, 1999 and
1998.................................................... 36-37
Consolidated Statements of Earnings for the years ended
December 31, 1999, 1998 and 1997........................ 38
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997............ 40
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................ 38-39
Notes to Consolidated Financial Statements................ 41-58
Report of Independent Accountants......................... 59
Data submitted herewith:
Report of Independent Accountants......................... S-1
Financial Statement Schedule-Valuation and Qualifying
Accounts.................................................. S-2
</TABLE>
26
<PAGE>
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: 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 26, 2000, relating to its 1999 financial
statements.
(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>
<C> <S>
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)
</TABLE>
27
<PAGE>
<TABLE>
<C> <S>
10.15. Post-Retirement Consulting 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)
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 19-59 of the Company's 1999 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 1999 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.
27. Financial Data Schedule. (19)
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.
28
<PAGE>
(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.
(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 26, 2000.
29
<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 2, 2000
</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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GEOFFREY C. BIBLE Director, Chairman of the
------------------------------------------- Board and Chief Executive March 2, 2000
(Geoffrey C. Bible) Officer
/s/ LOUIS C. CAMILLERI
------------------------------------------- Senior Vice President and March 2, 2000
(Louis C. Camilleri) Chief Financial Officer
/s/ JOSEPH A. TIESI
------------------------------------------- Vice President and Controller March 2, 2000
(Joseph A. Tiesi)
* ELIZABETH E. BAILEY, HAROLD BROWN,
JANE EVANS, J. DUDLEY FISHBURN,
ROBERT E. R. HUNTLEY,
BILLIE JEAN KING,
RUPERT MURDOCH,
JOHN D. NICHOLS, LUCIO A. NOTO,
RICHARD D. PARSONS, JOHN S. REED,
CARLOS SLIM HELU,
STEPHEN M. WOLF Directors
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ LOUIS C. CAMILLERI
---------------------------------------
(Louis C. Camilleri March 2, 2000
Attorney-in-fact)
</TABLE>
30
<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 59 of the 1999 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 26 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 24, 2000
S-1
<PAGE>
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(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>
1999:
CONSUMER PRODUCTS:
Allowance for discounts................ $ 9 $760 $ -- $762 $ 7
Allowance for doubtful accounts........ 192 46 1 59 180
Allowance for returned goods........... 21 100 -- 113 8
---- ---- ---- ---- ----
$222 $906 $ 1 $934 $195
==== ==== ==== ==== ====
FINANCIAL SERVICES:
Allowance for losses................... $116 $ 2 $ -- $ -- $118
==== ==== ==== ==== ====
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
==== ==== ==== ==== ====
</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.
January 31, 2000
-1-
<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
-2-
<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
-3-
<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.
-4-
<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
-5-
<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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Any such committee, to the extent provided in the resolution of the Board of
Directors designating the committee, shall have and may exercise the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, except as limited by law.
ARTICLE III
Executive Committee
Section 1. How Constituted and Powers. - The Board of Directors, by
resolution adopted pursuant to Article II, Section 14 hereof, may designate, in
addition to the chairman of the Board of Directors, one or more directors to
constitute an executive committee, who shall serve during the pleasure of the
Board of Directors. The executive committee, to the extent provided in such
resolution and permitted by law, shall have and may exercise all of the
authority of the Board of Directors.
Section 2. Organization, Etc. - The executive committee may choose a
chairman and secretary. The executive committee shall keep a record of its acts
and proceedings and report the same from time to time to the Board of Directors.
Section 3. Meetings. - Meetings of the executive committee may be
called by any member of the committee. Notice of each such meeting, which need
not specify the business to be transacted thereat, shall be mailed to each
member of the committee, addressed to his or her residence or usual place of
business, at least two days before the day on which the meeting is to be held or
shall be sent to such place by telegraph, telex or telecopy or be delivered
personally or by telephone, not later than the day before the day on which the
meeting is to be held.
Section 4. Quorum and Manner of Acting. - A majority of the executive
committee shall constitute a quorum for transaction of business, and the act of
a majority of those present at a meeting at which a quorum is present shall be
the act of the executive committee. The members of the executive committee shall
act only as a committee, and the individual members shall have no powers as
such.
Section 5. Removal. - Any member of the executive committee may be
removed, with or without cause, at any time, by the Board of Directors.
Section 6. Vacancies. - Any vacancy in the executive committee shall
be filled by the Board of Directors.
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ARTICLE IV
Officers
Section 1. Number. - The officers of the Corporation shall be a
chairman of the Board of Directors, a deputy chairman of the Board of Directors
(if elected by the Board of Directors), a president (if elected by the Board of
Directors), one or more vice chairmen of the Board of Directors (if elected by
the Board of Directors), a chief operating officer (if elected by the Board of
Directors), one or more vice presidents (one or more of whom may be designated
executive vice president or senior vice president), a treasurer, a controller, a
secretary, one or more assistant treasurers, assistant controllers and assistant
secretaries and such other officers as may from time to time be chosen by the
Board of Directors. Any two or more offices may be held by the same person.
Section 2. Election, Term of Office and Qualifications. - All officers
of the Corporation shall be chosen annually by the Board of Directors, and each
officer shall hold office until a successor shall have been duly chosen and
qualified or until the officer resigns or is removed in the manner hereinafter
provided. The chairman of the Board of Directors, the deputy chairman of the
Board of Directors (if any), the president (if any) and the vice chairmen of the
Board of Directors (if any) shall be chosen from among the directors.
Section 3. Vacancies. - If any vacancy shall occur among the officers
of the Corporation, such vacancy shall be filled by the Board of Directors.
Section 4. Other Officers, Agents and Employees - Their Powers and
Duties. - The Board of Directors may from time to time appoint such other
officers as the Board of Directors may deem necessary, to hold office for such
time as may be designated by it or during its pleasure, and the Board of
Directors or the chairman of the Board of Directors may appoint, from time to
time, such agents and employees of the Corporation as may be deemed proper, and
may authorize any officers to appoint and remove agents and employees. The Board
of Directors or the chairman of the Board of Directors may from time to time
prescribe the powers and duties of such other officers, agents and employees of
the Corporation.
Section 5. Removal. - Any officer, agent or employee of the
Corporation may be removed, either with or without cause, by a vote of a
majority of the Board of Directors or, in the case of any agent or employee not
appointed by the Board of Directors, by a superior officer upon whom such power
of removal may be conferred by the Board of Directors or the chairman of the
Board of Directors.
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Section 6. Chairman of the Board of Directors and Chief Executive
Officer. - The chairman of the Board of Directors shall preside at meetings of
the stockholders and of the Board of Directors and shall be a member of the
executive committee. The chairman shall be the Chief Executive Officer of the
Corporation and shall be responsible to the Board of Directors. He or she shall
be responsible for the general management and control of the business and
affairs of the Corporation and shall see to it that all orders and resolutions
of the Board of Directors are implemented. The chairman shall from, time to
time, report to the Board of Directors on matters within his or her knowledge
which the interests of the Corporation may require be brought to its notice. The
chairman shall do and perform such other duties as from time to time the Board
of Directors may prescribe.
Section 7. Deputy Chairman of the Board of Directors. - In the absence
of the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if elected by the Board of Directors) shall preside at meetings of
the stockholders and of the Board of Directors. The deputy chairman shall be
responsible to the chairman of the Board of Directors and shall perform such
duties as shall be assigned to him or her by the chairman of the Board of
Directors. The deputy chairman shall from time to time report to the chairman of
the Board of Directors on matters within the deputy chairman's knowledge which
the interests of the Corporation may require be brought to the chairman's
notice.
Section 8. President. - In the absence of the chairman of the Board of
Directors and the deputy chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) shall
preside at meetings of the stockholders and of the Board of Directors. The
president shall be responsible to the chairman of the Board of Directors.
Subject to the authority of the chairman of the Board of Directors, the
president shall be devoted to the Corporation's business and affairs under the
basic policies set by the Board of Directors and the chairman of the Board of
Directors. He or she shall from, time to time, report to the chairman of the
Board of Directors on matters within the president's knowledge which the
interests of the Corporation may require be brought to the chairman's notice. In
the absence of the chairman of the Board of Directors and the deputy chairman of
the Board of Directors (if any), the president (if any) shall, except as
otherwise directed by the Board of Directors, have all of the powers and the
duties of the chairman of the Board of Directors. The president (if any) shall
do and perform such other duties as from time to time the Board of Directors or
the chairman of the Board of Directors may prescribe.
Section 9. Vice Chairmen of the Board of Directors. - In the absence
of the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), the vice chairman of the Board of
Directors designated for such purpose by the chairman of the Board of Directors
(if any) shall preside at meetings of the stockholders and of the Board of
Directors. Each vice chairman of the
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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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ARTICLE VI
Certificates Representing Shares
Certificates representing shares of the Corporation shall be signed by
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), or the vice chairman of the Board of Directors (if any), or
the president of the Corporation (if any) and the secretary or an assistant
secretary. Any and all signatures on such certificates, including signatures of
officers, transfer agents and registrars, may be facsimile.
ARTICLE VII
Dividends
The Board of Directors may declare dividends from funds of the
Corporation legally available therefor.
ARTICLE VIII
Seal
The Board of Directors shall provide a suitable seal or seals, which
shall be in the form of a circle, and shall bear around the circumference the
words "Philip Morris Companies Inc." and in the center the word and figures
"Virginia, 1985."
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall be the calendar year.
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ARTICLE X
Amendment
The power to alter, amend or repeal the By-Laws of the Corporation or
to adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made
by the Board of Directors may be repealed or changed by the stockholders, or new
By-Laws may be adopted by the stockholders, and the stockholders may prescribe
that any By-Laws made by them shall not be altered, amended or repealed by the
directors.
ARTICLE XI
Emergency By-laws
If a quorum of the Board of Directors cannot be readily assembled
because of some catastrophic event, and only in such event, these By-Laws shall,
without further action by the Board of Directors, be deemed to have been amended
for the duration of such emergency, as follows:
Section 1. Section 6 of Article II shall read as follows:
Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the directors present at a meeting of
the Board of Directors called in accordance with these By-Laws.
Section 2. The first sentence of Section 10 of Article II shall read
as follows:
Special meetings of the Board of Directors shall be held whenever
called by order of the chairman of the Board of Directors or a deputy
chairman (if any),or of the president (if any) or any vice chairman of
the Board of Directors (if any) or any director or of any person
having the powers and duties of the chairman of the Board of
Directors, the deputy chairman, the president or any vice chairman of
the Board of Directors.
Section 3. Section 12 of Article II shall read as follows:
The directors present at any regular or special meeting called in
accordance with these By-Laws shall constitute a quorum for the
transaction of business at such meeting, and the action of a majority
of such directors shall be the act of the Board of Directors,
provided, however, that in the event that only one director is present
at any such meeting no action except the election of directors shall
be taken until at least two additional directors have been elected and
are in attendance.
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Exhibit 10.15
AGREEMENT
AGREEMENT, effective the 30th day of April, 1999, between Philip Morris
Companies Inc., a corporation organized and existing under the laws of the
Commonwealth of Virginia, (the "Company") and Murray H. Bring (the
"Consultant").
WHEREAS, Consultant is currently employed by the Company, holds the
position of Vice Chairman, External Affairs and General Counsel and provides the
Company with general business advice and expert legal counsel;
WHEREAS, the Company wishes to retain the services of Consultant as a
consultant after his retirement from the Company on the terms herein provided;
WHEREAS, Consultant is willing to provide consulting services to the
Company on the terms herein provided;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties agree as follows:
1) During the three-year term commencing May 8, 2000 and ending May 7,
2003 (the "Consulting Term"), Consultant shall make himself available
at reasonable times to provide business consulting services to the
officers, directors and other representatives of the Company as
reasonably requested by the Chairman and Chief Executive Officer of
the Company (hereafter, the "Executive"). It is understood that this
paragraph will require Consultant to provide consultation regarding
strategic planning initiatives and other aspects of the Company's
business which may require the Company to disclose to Consultant
secret, proprietary and confidential information concerning the
Company and its business affairs. It is further understood that this
undertaking shall not, without Consultant's consent, require his
presence outside of the Metropolitan New York City area.
2) For the consulting services provided pursuant to paragraph 1, the
Company shall pay Consultant an annual retainer of $50,000, payable at
the end of each year of the Consulting Term, and provide Consultant at
Company expense the following:
a) an office in New York City, appropriate secretarial service, all
necessary office supplies, and appropriate furniture and
decorative items for such office;
b) the security arrangements currently in existence or their
equivalent at Consultant's residences in New York City and on
Long Island, New York;
<PAGE>
c) reasonable access to Company facilities, including the Dining
Rooms, Fitness Center and the Company doctor;
d) $10,000 of financial counseling for the year 2000;
e) use of a telephone calling card; and
f) a Company car, garage expenses for a Company-provided car, and
Company-paid driver or assistance in obtaining automobile or
limousine transportation when Consultant reasonably requests it.
Any cost incurred by the Company in this regard shall be limited
to and applied against the retainer provided for in this
paragraph 2. Any transportation costs in excess of the retainer
provided for in this paragraph 2 shall be borne by Consultant.
3) This Agreement and the provisions of paragraphs 1 and 2 above may be
renewed for an additional three-year term, at the election of
consultant with the concurrence of the Company. Consultant shall
inform the Senior Vice President, Human Resources and Administration,
Philip Morris Companies Inc. in writing sixty (60) days prior to the
expiration of the Consulting Term whether he wishes to renew the
Consulting Term and provide the consulting services described in
paragraph 1 above for an additional three-year term.
4) In addition to and concurrently with the business consulting services
provided pursuant to paragraph 1 above, Consultant agrees to provide
legal consulting services to the officers, directors and other
representatives of the Company as reasonably requested by the
Executive for a period of one year beginning May 8, 2000, which
one-year term may be renewed for two (2) successive one-year terms at
Consultant's sole election. Consultant shall inform the Senior Vice
President, Human Resources and Administration, Philip Morris Companies
Inc. in writing sixty (60) days prior to the expiration of each
one-year term provided for in this paragraph 4 whether he wishes to
renew the term and provide the required legal consulting services for
an additional one-year term. Consultant shall not, without his
consent, be required to be available to provide services pursuant to
this paragraph for more than 400 hours in any one-year term.
5) For the legal consulting services provided pursuant to paragraph 4,
the Company shall pay or provide, as applicable, to Consultant the
following:
a) a quarterly retainer of $50,000, payable as of the commencement
of the one-year term beginning May 8, 2000 and continuing
quarterly thereafter for each quarterly period Consultant is
obligated to provide legal consulting services pursuant to
paragraph 4, provided that (i) Consultant has provided legal
consulting services as reasonably requested in accordance with
paragraph 4 for the immediately preceding quarterly period and
(ii) with respect to the one-year term beginning May 8, 2001,
Consultant has elected to renew the initial
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<PAGE>
one-year term referenced in paragraph 4 and (iii) with respect to
the one-year term beginning May 8, 2002, Consultant has elected
to renew the second successive one-year term referenced in
paragraph 4;
b) a cellular telephone and fax machine; the cost of maintaining two
(2) cellular telephone lines and one (1) fax telephone line; and
the cost of a fax machine maintenance agreement; and
c) a Deferred Stock Award (the "Award"), to be awarded as of the
effective date of this Agreement, with respect to 75,000 shares
(the "Shares") of the Common Stock of the Company (the "Common
Stock"), subject to the following terms and conditions:
(i) The Award shall vest and the Shares shall be issued and
distributed to Consultant in accordance with the following
schedule:
<TABLE>
<CAPTION>
NUMBER OF SHARES VESTING/DISTRIBUTION DATE
<S> <C> <C>
25,000 May 7, 2001
25,000 May 7, 2002
25,000 May 7, 2003
</TABLE>
provided that (A) with respect to Shares scheduled to vest in
2001, Consultant has provided legal consulting services as
reasonably requested in accordance with paragraph 4, (B) with
respect to Shares scheduled to vest in 2002, Consultant has
elected to renew the initial one-year term referenced in
paragraph 4 and has provided legal consulting services as
reasonably requested in accordance with paragraph 4 for the
period May 8, 2001 through May 7, 2002 and (C) with respect to
Shares scheduled to vest in 2003, Consultant has elected to renew
for the second successive one-year renewal term referenced in
paragraph 4 and has provided legal consulting services as
reasonably requested in accordance with paragraph 4 for the
period May 8, 2002 through May 7, 2003.
(ii) Any unvested portion of the Award shall be forfeited to the
Company upon (A) the termination of Consultant's employment with
the Company for any reason other than due to Retirement at or
after age 65, (B) Consultant's death or Disability prior to the
one-year term beginning May 8, 2000 referenced in paragraph 4, or
(C)upon Consultant's failure to comply with his obligations under
this Agreement or the Agreements described in paragraph 14. In
the event of the termination of this Agreement due to
Consultant's death or Disability during or after the one-year
term beginning May 8, 2000 referenced in paragraph 4, any
unvested
3
<PAGE>
portion of the Award shall be forfeited on a pro-rata basis upon
Consultant's death or Disability as follows: the number of shares
to be forfeited shall be the product of 25,000 and a fraction
equal to the number of days after Consultant's death or
disability remaining in the current one-year term during which
Consultant dies or becomes disabled divided by 365.
(iii) Consultant will not have the right to receive a certificate for
the Shares or vote the Shares or receive dividends on the Shares
prior to the date such Shares vest pursuant to the terms of this
paragraph 5. However, during the Consulting Term, the Company
shall pay to Consultant cash payments in lieu of and equal to
dividends otherwise payable with respect to the 75,000 Shares, as
such dividends are declared and paid on the Company's Common
Stock. The Company's obligations to make cash payments in lieu of
dividends on the 75,000 Shares shall cease once Shares vest
pursuant to the terms of this paragraph 5 or in the event the
Shares are forfeited.
(iv) Until the Shares vest pursuant to the terms of this paragraph 5,
such Shares are non-transferable and may not be assigned, pledged
or hypothecated and shall not be subject to execution, attachment
or similar process. Any attempt to violate these restrictions
will result in the immediate forfeiture of the Award and the
Shares.
(v) Upon the vesting of the Shares pursuant to the terms of this
paragraph 5, a Certificate for such Shares will be issued to
Consultant by the Transfer Agent.
(vi) The terms and provisions of this Award (including, without
limitation, the terms and provisions relating to the number and
class of Shares subject to this Award) may be adjusted by the
Company in the event of any recapitalization, merger,
consolidation, reorganization, stock dividend, stock split,
split-up or other change in corporate structure affecting the
Common Stock.
(vii) The Award is made pursuant to the 1997 Performance Incentive
Plan (the "Plan") of the Company. To the extent any provision of
this Award is inconsistent or in conflict with any term or
provision of the Plan, the Plan shall govern. Capitalized terms
not otherwise defined herein have the same meaning set forth in
the Plan. For purposes of this Agreement, the term "Disability"
means permanent and total disability as determined under
procedures established by the Company for purposes of the Plan.
4
<PAGE>
5) The Company shall reimburse Consultant for reasonable business
expenses incurred in providing consulting services pursuant to this
Agreement.
6) In rendering services as a consultant hereunder, Consultant shall be
an independent contractor. As an independent contractor, the Company
will issue an IRS Form 1099 for payments made pursuant to this
Agreement, and Consultant will be responsible for paying all federal,
state and local income and social security taxes arising out of any
such payments. In addition, during the Consulting Term, Consultant
will not accrue further service or compensation credit or benefits for
any purpose under any of the Company's retirement, profit-sharing,
disability, survivor's income, medical, dental or other plans of the
Company, its parent or any of their affiliated companies.
7) Consultant and the Company (to the extent practicable) agree that he
and the Company will not (except as required by law) directly or
indirectly make any statements or release any information, or
encourage others to make any statement or release any information that
is designed to embarrass or criticize the other (or any of their
respective affiliates or associates), provided that it will not be a
violation of this paragraph 9 for either Consultant or the Company to
make truthful statements in a court proceeding or to a governmental
agency.
8) Consultant agrees to maintain the confidentiality of all Company trade
secrets and proprietary information. Consultant also acknowledges
that, during the course of his employment with the Company, he has
been entrusted with certain personnel, business, financial, technical
and other information and material which are the property of the
Company and which involve "confidential information" of the Company
and the Company's employees. Consultant agrees that he will not
communicate or disclose to any third party (and acknowledge that he
has not communicated or disclosed), or use (or have used) for his own
account, without written consent of the Company, any of such
confidential information or material, except in response to a lawfully
issued subpoena, court order or other lawful request by any regulatory
agency or government authority having supervisory authority over the
business of the Company, unless and until such information or material
becomes generally available to the public through no fault of
Consultant's.
9) Consultant agrees that if any confidential information is requested by
subpoena or court, governmental or regulatory order, he will notify
the Company as soon as practicable and if requested by the Company, he
will undertake his best efforts to assist the Company in obtaining a
confidentiality order from the court or governmental or regulatory
agency requesting such information.
5
<PAGE>
10) Consultant agrees that after his retirement and during the Consulting
Term, he will not accept employment or act as a consultant with a
competitor in the tobacco, food or beer businesses of the Company or
any such competitor's subsidiaries or affiliates or with any entity
whose interests would be antithetical to that of the Company or its
subsidiaries or affiliates, unless he receives advance written
permission from the Executive. Consultant also agrees that he will not
engage in the business of manufacturing, marketing and distributing
cigarettes for his own account without the express written permission
of the Executive.
11) Consultant acknowledges and agrees that after his retirement, he will
reasonably be able to earn a livelihood without violating the terms of
paragraph 11 and that employment or engagement with competitors or any
activities in violation of paragraph 11 would result in immediate and
irreparable harm to the Company and/or its affiliates or subsidiaries
or their competitive position. Consultant further acknowledges and
agrees that the Company is entitled to preliminary and permanent
injunctive relief in order to prevent or stop such violations, in
addition to damages, costs and other relief which may be appropriate.
12) Consultant agrees to consult with the Executive or his designee in the
event a situation arises in which his opinion, if expressed, or his
actions, if taken, could possibly affect the interests or reputation
of the Company. While Consultant is free at all times to express his
opinions, or take whatever actions he deems appropriate, unless
specifically authorized by the Company in writing, he agrees that any
such opinion(s) expressed or actions taken are his and not those of
the Company and, if not specifically authorized by the Company in
writing, may, at the option of the Company, result in termination of
this Agreement.
13) This Consulting Agreement is supplemental to the employment agreement
between Consultant and the Company dated October 12, 1987, which was
amended by a letter agreement dated October 5, 1993, and the Amended
and Restated Employment Agreement dated July 30, 1998 (collectively
"Agreements"), which Agreements shall continue in full force and
effect, except with respect to paragraph 5 of the October 12, 1987
employment agreement between Company and Consultant, which will be
superseded by paragraphs 11 and 12 of this Agreement effective on
Consultant's date of retirement.
14) This Agreement is not assignable, other than to a successor of the
Company pursuant to a merger of the Company or a purchase of the
Company or all or substantially all of the Company's assets.
6
<PAGE>
15) In the event that any provision or portion of this Agreement will be
determined to be invalid or unenforceable for any reason, the
remaining provisions or portions of this Agreement will be unaffected
thereby and will remain in full force and effect to the fullest extent
permitted by the law.
16) This Agreement has been entered into in New York, New York, and will
be governed by and construed, interpreted and enforced in accordance
with the laws of the State of New York without giving effect to the
principles thereof relating to the conflict of laws. Consultant and
the Company irrevocably submit to the jurisdiction of the United
States District Court for the Southern District of New York and of any
New York state court sitting in New York City for the purposes of all
legal proceedings arising out of or relating to this Agreement or the
transactions contemplated thereby, and agree that all such suits,
actions or proceedings brought by either Consultant or the Company
will be brought in such courts. Consultant and the Company also
irrevocably waive, to the fullest extent permitted by applicable law,
any objection which he or it may now have or hereafter may have to the
venue of such proceeding brought in such a court and any claim that
any such proceeding brought in such a court has been brought in an
inconvenient forum.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first mentioned above.
PHILIP MORRIS COMPANIES INC.
By: /s/ TIMOTHY A. SOMPOLSKI /s/ MURRY H. BRING
Timothy A. Sompolski Murray H. Bring
Senior Vice President,
Title: Human Resources & Administration
7
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Exhibit 13
Financial Review
Management's Discussion and
Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Contents
19 Management's Discussion and Analysis of Financial Condition and Results of
Operations
34 Selected Financial Data--Eleven-Year Review
36 Consolidated Balance Sheets
38 Consolidated Statements of Earnings and Consolidated Statements of Cash
Flow
40 Consolidated Statements of Stockholders' Equity
41 Notes to Consolidated Financial Statements
59 Report of Independent Accountants
59 Company Report on Financial Statements
60 Board of Directors and Officers
- --------------------------------------------------------------------------------
Consolidated Operating Results
(in millions)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Operating Revenues
Domestic tobacco $19,596 $15,310 $13,584
International tobacco 27,506 27,390 26,240
North American food 17,546 17,312 16,838
International food 9,251 9,999 10,852
Beer 4,342 4,105 4,201
Financial services 355 275 340
- --------------------------------------------------------------------------------
Operating revenues $78,596 $74,391 $72,055
================================================================================
(in millions)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Operating Income
Domestic tobacco $ 4,865 $ 1,489 $ 3,287
International tobacco 4,968 5,029 4,572
North American food 3,107 3,055 2,873
International food 1,146 1,127 1,326
Beer 511 451 459
Financial services 228 183 297
- --------------------------------------------------------------------------------
Operating companies income 14,825 11,334 12,814
General corporate expenses (627) (645) (479)
Minority interest (126) (128) (87)
Amortization of goodwill (582) (584) (585)
- --------------------------------------------------------------------------------
Operating income $ 13,490 $ 9,977 $ 11,663
================================================================================
Amortization of goodwill is primarily attributable to the North American food
segment.
1999 compared with 1998: Operating revenues for 1999 increased $4.2
billion (5.7%) over 1998, due primarily to settlement-related price increases
from domestic tobacco operations. The comparison of operating revenues was
also affected by incremental year 2000 related revenues of approximately $225
million, as customers purchased additional product in anticipation of
business disruptions from the century date change, as well as the divestiture
of several international food businesses. Excluding these items, operating
revenues for 1999 increased $4.1 billion (5.6%) over 1998.
Operating income for 1999 increased $3.5 billion (35.2%) over 1998, due
largely to 1998 pre-tax charges of $3.4 billion related to domestic tobacco
litigation settlements. Operating income for 1999 reflects pre-tax charges of
$183 million, principally for the cost of separation programs covering
approximately 1,500 employees at the Philip Morris Incorporated ("PM Inc.")
19
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Louisville, Kentucky, manufacturing plant (the "Louisville plant"); $157 million
related to voluntary workforce reduction programs covering approximately 1,100
employees of the Company's North American food business; $136 million in the
international tobacco segment related to the closure of a factory and the
corresponding reduction of cigarette production capacity in Brazil; and $29
million related to asset write-downs in the beer segment. In addition to the
previously mentioned 1999 charges, operating income for 1999 also includes
approximately $100 million of incremental income related to year 2000 business.
Operating income for 1998 includes pre-tax charges of $3.4 billion related to
tobacco litigation settlements, $319 million related primarily to domestic
tobacco voluntary early retirement and separation programs, $116 million related
to the settlement of shareholder litigation and $18 million for separation
programs covering approximately 100 hourly and salaried employees at the
Company's corporate headquarters. Excluding the pre-tax charges for 1999 and
1998, as well as results from operations divested since the beginning of 1998
and incremental income related to year 2000 business, operating income for 1999
increased $100 million (0.7%) from 1998, due primarily to higher operating
income from the Company's food and beer operations. On a reported basis,
operating companies income, which is defined as operating income before general
corporate expenses, minority interest and amortization of goodwill, increased
$3.5 billion (30.8%) from 1998, due primarily to the previously mentioned 1998
charges for domestic tobacco litigation settlements. Excluding the previously
mentioned pre-tax charges, as well as the results of divested operations and
incremental income related to year 2000 business, operating companies income
increased $212 million (1.4%) over 1998, largely due to higher earnings in the
Company's food and beer operations.
Currency movements decreased operating revenues by $782 million ($517
million, after excluding excise taxes) and operating companies income by $46
million during 1999. Declines in operating revenues and operating companies
income arising from the strength of the U.S. dollar against Western European and
Latin American currencies were partially mitigated by currency favorabilities
recorded against the Japanese yen and other Asian currencies. Although the
Company cannot predict future movements in currency rates, the continued
strength of the dollar against Western European and Latin American currencies,
if sustained during 2000, could have an adverse impact on operating revenues and
operating companies income. In addition, the Company's businesses in certain
Eastern European and Latin American markets have been adversely affected by
economic instability in those areas. Although the Company cannot predict future
economic developments, the Company anticipates that economic instability may
continue to adversely affect its businesses in those markets.
Interest and other debt expense, net, in 1999 decreased $95 million
(10.7%) from 1998. This decrease was due primarily to higher interest income,
lower average debt outstanding and lower average interest rates on the Company's
consumer products debt portfolio during 1999.
Net earnings of $7.7 billion in 1999 increased 42.9% from 1998, due
primarily to the previously mentioned 1998 domestic tobacco litigation
settlement charges. Diluted and basic EPS, which were $3.19 and $3.21,
respectively, for 1999, increased by 45.0% and 45.2%, respectively, over 1998.
These results include charges for the previously discussed 1999 factory closure
in Brazil, the 1999 and 1998 charges for separation programs, the 1999 charges
for asset write-downs in the beer segment, and the 1998 domestic tobacco and
other litigation settlement charges, as well as 1999 incremental income from
year 2000 business. Excluding the after-tax impact of these items, net earnings
increased 2.2% to $7.9 billion, and diluted and basic EPS increased 4.1% and
3.8% to $3.30 and $3.31, respectively.
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 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 PM Inc. 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 $319 million primarily related to
voluntary early retirement and separation programs at PM Inc., $116 million
related to the settlement of shareholder litigation and $18 million for
separation programs covering approximately 100 hourly and salaried employees at
the Company's corporate headquarters. During 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. In addition, 1997
operating income was reduced by a pre-tax charge of $630 million primarily for
facility
20
<PAGE>
write-downs and enhanced severance benefits in the international food
segment. Excluding the foregoing pre-tax gains and charges, 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. Similarly, operating companies income decreased $1.5 billion
(11.5%) from 1997 due primarily to the items noted above. Excluding these items,
operating companies income increased 8.1%.
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.
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 previously
discussed charges and divestitures. Excluding the impact of these items, net
earnings increased 9.2% to $7.8 billion, basic EPS increased 8.9% to $3.19 and
diluted EPS increased 8.9% to $3.17, from $7.1 billion, $2.93 and $2.91,
respectively, in 1997.
Year 2000: The Company and each of its operating subsidiaries
implemented a Century Date Change ("CDC") readiness program with the
objective of having all significant computer systems and other equipment with
embedded chips or processors, including those that affect facilities and
manufacturing activities, able to process accurately certain data before,
during and after the year 2000. The Company and its subsidiaries have also
taken other measures to minimize possible disruptions to their business
operations due to the CDC issue.
To date, the Company and its subsidiaries have experienced no material
disruptions to their business operations as a result of the CDC. External
information technology specialists have stated that CDC-related miscalculations
or systems failures could occur throughout the year 2000 and, in particular,
around February 29, 2000, and into 2001. The experience of the Company and its
subsidiaries thus far, however, suggests that no material disruptions to their
business operations are likely to occur.
The Company and its operating subsidiaries developed contingency plans
intended to avoid or minimize the impact of anticipated or potential CDC
problems. They included stockpiling raw, packaging and promotional materials;
increasing finished goods inventories at the operating company, wholesale and
retail levels; adjusting the timing of promotional programs; securing alternate
sources of supply, distribution and warehousing; adjusting facility shut-down
and start-up schedules; utilizing manual workarounds; procuring backup power
generators and heat supply for key plants; and other appropriate measures. The
Company estimates that increases in year-end inventories and trade receivables
contemplated by the Company's preemptive contingency plans resulted in
incremental cash outflows during 1999 of approximately $300 million, which
should be reversed in early 2000. In addition, certain operating subsidiaries of
the Company had increased shipments in the fourth quarter of 1999 as customers
purchased additional product in anticipation of potential CDC-related
disruptions, resulting in incremental operating revenues and income in 1999 of
approximately $225 million and $100 million, respectively. The Company
anticipates that there will be a reduction of a corresponding amount in reported
operating companies income in the first quarter of 2000. The incremental cost of
the Company's contingency plans implemented in advance of the year 2000 to avoid
or minimize potential CDC problems was approximately $25 million.
It is estimated that the aggregate cost of the Company's CDC readiness
efforts is approximately $525 million, not including the estimated $25 million
in incremental costs for implementing preemptive contingency plans. The costs
associated with the replacement of computerized systems, hardware or equipment
(approximately $150 million), substantially all of which have been capitalized,
are also not included in the above estimates. Other information technology
projects not related to CDC readiness efforts have not been materially affected
by the Company's year 2000 initiatives.
Euro: On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
currencies ("legacy currencies") and one common currency--the euro. At that
time, the euro began trading on currency exchanges and could be used in
financial transactions. Beginning in January 2002, new euro-denominated
currency (bills and coins) will be issued, and legacy currencies will be
withdrawn from circulation. The Company's operating subsidiaries affected by
the euro conversion have established and, where required, implemented plans
to address the systems and business issues raised by the euro currency
conversion. These issues include, among others: (1) the need to adapt
computer and other business systems and equipment to accommodate
euro-denominated transactions; and (2) the competitive impact of cross-border
price transparency, which may make it more difficult for businesses to charge
different prices for the same products on a country-by-country basis,
particularly once the euro currency is issued in 2002. The euro conversion
has not had, and the Company currently anticipates that it will not have, a
material adverse impact on its financial condition or results of operations.
21
<PAGE>
Operating Results by Business Segment
Tobacco
Business Environment
The tobacco industry, both in the United States and abroad, has faced, and
continues to face, a number of issues that may adversely affect the business,
volume, results of operations, cash flows and financial position of PM Inc.,
Philip Morris International Inc. ("PMI") and the Company.
These issues, some of which are more fully discussed below, include
legislation or other governmental action seeking to ascribe to the industry
responsibility and liability for the adverse health effects associated with both
smoking and exposure to environmental tobacco smoke ("ETS"); increased smoking
and health litigation and recent jury verdicts against PM Inc., including in
Phase One of the Engle class action trial discussed in Note 15. Contingencies,
of the Notes to Consolidated Financial Statements ("Note 15"); the filing of a
civil lawsuit by the U.S. federal government against various cigarette
manufacturers and others as discussed in Note 15; price increases in the United
States related to the settlement of certain tobacco litigation; actual and
proposed excise tax increases; an increase in diversion into the United States
market of product intended for sale outside the United States; the issuance of
final regulations by the United States Food and Drug Administration (the "FDA")
that, if upheld by the courts, would regulate cigarettes as "drugs" or "medical
devices"; governmental and grand jury investigations; actual and proposed
requirements regarding disclosure of cigarette ingredients and other proprietary
information; governmental and private bans and restrictions on smoking; actual
and proposed price controls and restrictions on imports in certain jurisdictions
outside the United States; actual and proposed restrictions affecting tobacco
manufacturing, marketing, advertising and sales outside the United States;
proposed legislation to eliminate the U.S. tax deductibility of tobacco
advertising and promotional costs; proposed legislation in the United States to
require the establishment of ignition-propensity performance standards for
cigarettes; the diminishing social acceptance of smoking and increased pressure
from anti-smoking groups and unfavorable press reports; and other tobacco
legislation that may be considered by the Congress, the states and other
jurisdictions inside and outside the United States.
Excise taxes: Cigarettes are subject to substantial federal, state and
local excise taxes in the United States and to similar taxes in most foreign
markets. The United States federal excise tax on cigarettes is currently
$0.34 per pack of 20 cigarettes and is scheduled to increase to $0.39 per
pack on January 1, 2002. In general, excise taxes and other taxes on
cigarettes have been increasing. These taxes vary considerably and, when
combined with sales taxes and the current federal excise tax, may be as high
as $1.66 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 2001
budget proposal includes an additional increase of $0.25 per pack in the
federal excise tax, as well as a special assessment related to youth smoking
rates. Increases in other cigarette-related taxes have been proposed at the
state and local level and in many jurisdictions outside the United States.
In the opinion of PM Inc. and PMI, increases in excise and similar taxes
have had an adverse impact on sales of cigarettes. Any future increases, the
extent of which cannot be predicted, could result in volume declines for the
cigarette industry, including PM Inc. and PMI, and might cause sales to shift
from the premium segment to the discount segment.
Federal Trade Commission ("FTC"): In September 1997, the FTC issued a
request for public comments on its proposed revision of its "tar" and
nicotine test methodology and reporting procedures established by a 1970
voluntary agreement among domestic cigarette manufacturers. In February 1998,
PM Inc. and three other domestic cigarette manufacturers filed comments on
the proposed revisions. In November 1998, the FTC wrote to the Department of
Health and Human Services requesting its assistance in developing specific
recommendations on the future of the FTC's program for testing the "tar,"
nicotine and carbon monoxide content of cigarettes.
FDA regulations: The FDA has promulgated regulations asserting
jurisdiction over cigarettes as "drugs" or "medical devices" under the
provisions of the Food, Drug and Cosmetic Act. These regulations include
severe restrictions on the distribution, marketing and advertising of
cigarettes, and would require the industry to comply with a wide range of
labeling, reporting, recordkeeping, manufacturing and other requirements. The
FDA's exercise of jurisdiction, if not reversed by judicial or legislative
action, could lead to more expansive FDA-imposed restrictions on cigarette
operations than those set forth in the regulations, and could materially
adversely affect the business, volume, results of operations, cash flows and
financial position of PM Inc. and the Company. In August 1998, the Fourth
Circuit Court of Appeals ruled that the FDA does not have the authority to
regulate tobacco products, and declared the FDA's regulations invalid. In
April 1999, the U.S. Supreme Court agreed to review the Fourth Circuit's
decision and in December 1999 heard oral arguments. The ultimate outcome of
this litigation cannot be predicted.
22
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Ingredient disclosure laws: The Commonwealth of Massachusetts has
enacted legislation to require cigarette manufacturers to report yearly the
flavorings and other ingredients used in each brand style of cigarettes sold
in the Commonwealth, and on a qualified, by-brand basis to provide
"nicotine-yield ratings" for their products based on standards established by
the Commonwealth. Enforcement of the ingredient disclosure provisions of the
statute could result in the public disclosure of valuable proprietary
information. In December 1997, a federal district court in Boston granted the
tobacco company plaintiffs a preliminary injunction and enjoined the
Commonwealth from enforcing the ingredient disclosure provisions of the
legislation. In November 1998, the First Circuit Court of Appeals affirmed
this ruling. In addition, both parties' cross-motions for summary judgment
are pending before the district court. The ultimate outcome of this lawsuit
cannot be predicted. Similar legislation has been enacted or proposed in
other states. Some jurisdictions outside the United States have also enacted
or proposed some form of ingredient disclosure legislation or regulation.
Health effects of smoking and exposure to ETS: Reports with respect to
the health risks of cigarette smoking have been publicized for many years,
and the sale, promotion and use of cigarettes continue to be subject to
increasing governmental regulation. Since 1964, the Surgeon General of the
United States and the Secretary of Health and Human Services have released a
number of reports linking cigarette smoking with a broad range of health
hazards, including various types of cancer, coronary heart disease and
chronic lung disease, and recommending various governmental measures to
reduce the incidence of smoking. The 1988, 1990, 1992 and 1994 reports focus
upon the addictive nature of cigarettes, the effects of smoking cessation,
the decrease in smoking in the United States, the economic and regulatory
aspects of smoking in the Western Hemisphere, and cigarette smoking by
adolescents, particularly the addictive nature of cigarette smoking in
adolescence.
Studies with respect to the health risks of ETS to nonsmokers (including
lung cancer, respiratory and coronary illnesses, and other conditions) have also
received significant publicity. In 1986, the Surgeon General of the United
States and the National Academy of Sciences reported that nonsmokers were at
increased risk of lung cancer and respiratory illness due to ETS. In 1993, the
United States Environmental Protection Agency (the "EPA") issued a report
relating to certain health effects of ETS. The report included a risk assessment
relating to the association between ETS and lung cancer in nonsmokers, and a
determination by the EPA to classify ETS as a "Group A" carcinogen. In July
1998, a federal district court vacated those sections of the report relating to
lung cancer, finding that the EPA may have reached different conclusions had it
complied with certain relevant statutory requirements. The federal government
has appealed the court's ruling. The ultimate outcome of this litigation cannot
be predicted.
In October 1997, at the request of the United States Senate Judiciary
Committee, the Company provided the Committee with a document setting forth the
Company's position on a number of issues. On the issues of the role played by
cigarette smoking in the development of lung cancer and other diseases in
smokers, and whether nicotine, as found in cigarette smoke, is addictive, the
Company stated that despite the differences that may exist between its views and
those of the public health community, it would, in order to ensure that there
will be a single, consistent public health message on these issues, refrain from
debating the issues other than as necessary to defend itself and its opinions in
the courts and other forums in which it is required to do so. The Company also
stated that in relation to these issues, and the health effects of exposure to
ETS, the Company is prepared to defer to the judgment of public health
authorities as to what health warning messages will best serve the public
interest.
In 1999, the Company launched a Web site which includes, among other
things, views of public health authorities on smoking, disease causation in
smokers and addiction. Consistent with the Company's position set forth in its
October 1997 submission to the United States Senate Judiciary Committee
(discussed above), the Web site advises smokers and potential smokers to rely on
the messages of public health authorities in making all smoking-related
decisions. The site furthers the Company's efforts to implement this position.
Other legislative initiatives: In recent years, various members of
Congress have introduced legislation, some of which has been the subject of
hearings or floor debate, that would subject cigarettes to various
regulations under the Department of Health and Human Services or regulation
under the Consumer Products Safety Act, establish anti-smoking educational
campaigns or anti-smoking programs, or provide additional funding for
governmental anti-smoking activities, further restrict the advertising of
cigarettes, including requiring additional warnings on packages and in
advertising, eliminate or reduce the tax deductibility of tobacco
advertising, provide that the Federal Cigarette Labeling and Advertising Act
and the Smoking Education Act not be used as a defense against liability
under state statutory or common law, and allow state and local governments to
restrict the sale and distribution of cigarettes. Legislative initiatives
adverse to the tobacco industry have also been considered in a number of
jurisdictions outside the United States.
-------------------------------
It is not possible to determine the outcome of the FDA regulatory initiative or
the related litigation discussed above, or to predict what, if any, other
foreign or domestic governmental legislation or regulations will be adopted
relating to the manufacturing, advertising, sale or use of cigarettes, or to the
tobacco industry generally. However, if any or all of the foregoing were to be
implemented, the business, volume, results of operations, cash flows and
financial position of PM Inc., PMI and the Company could be materially adversely
affected.
-------------------------------
23
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Governmental and grand jury investigations: PM Inc. has received
requests for information (including grand jury subpoenas) in connection with
governmental investigations, and has cooperated with respect to such
requests. Present and former employees of PM Inc. have testified in
connection with certain of these matters. The investigations include two
grand jury investigations being conducted by: the United States Attorney for
the Northern District of New York, relating to alleged contraband
transactions primarily in Canadian-brand tobacco products; and the United
States Attorney for the Western District of New York, apparently relating to
the sale of cigarettes by third parties upon which state taxes had allegedly
not been paid. PMI and its subsidiary, Philip Morris Duty Free Inc., have
also received subpoenas in connection with the investigation being conducted
by the United States Attorney for the Northern District of New York. While
the outcomes of these investigations cannot be predicted, PM Inc., PMI and
Philip Morris Duty Free Inc. believe they have acted lawfully.
In September 1999, the United States Department of Justice announced that
it had concluded its investigation of matters relating to issues raised in
testimony provided by tobacco industry executives before Congress in 1994 and
other related matters, and that the investigation is closed. In February 2000,
the United States Department of Justice Antitrust Division advised that it has
closed its investigation in the Eastern District of Pennsylvania relating to
tobacco leaf purchases.
Tobacco-related litigation: There is substantial litigation pending
related to tobacco products in the United States and certain foreign
jurisdictions, including the Engle class action trial underway in Florida in
which PM Inc. is a defendant, and a civil health care cost recovery action
filed by the United States Department of Justice in September 1999 against
domestic tobacco manufacturers and others, including the Company and PM Inc.
(See Note 15 for a discussion of such litigation.)
State settlement agreements: As discussed in Note 15, during 1997 and
1998, PM Inc. and other major domestic tobacco product manufacturers entered
into agreements with states and various U.S. jurisdictions settling asserted
and unasserted health care cost recovery and other claims. These settlements
provide for substantial annual payments. They also place numerous
restrictions on the tobacco industry's conduct of its business operations,
including restrictions on the advertising and marketing of cigarettes. Among
these are restrictions or prohibitions on the following: targeting youth; use
of cartoon characters; use of brand name sponsorships and brand name
non-tobacco products; outdoor and transit brand advertising; payments for
product placement; and free sampling. In addition, the settlement agreements
require companies to affirm corporate principles to reduce underage use of
cigarettes; impose requirements regarding lobbying activities; mandate public
disclosure of certain industry documents; limit the industry's ability to
challenge certain tobacco control and underage use laws; and provide for the
dissolution of certain tobacco-related trade associations and place
restrictions on the establishment of any replacement organizations.
Operating Results
Operating
(in millions) Operating Revenues Companies Income
- --------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------
Domestic
tobacco $19,596 $15,310 $13,584 $4,865 $1,489 $3,287
International
tobacco 27,506 27,390 26,240 4,968 5,029 4,572
- --------------------------------------------------------------------------------
Total $47,102 $42,700 $39,824 $9,833 $6,518 $7,859
================================================================================
1997 operating revenues and operating companies income for the domestic tobacco
and international tobacco operations were reclassified to reflect the transfer
of tobacco sales in certain U.S. territories from the international tobacco
business to the domestic tobacco business, consistent with the terms of PM
Inc.'s settlements of state health care cost recovery and other claims in 1998.
1999 Compared with 1998
Domestic tobacco: During 1999, PM Inc.'s operating revenues increased
$4.3 billion (28.0%) over 1998, due primarily to pricing ($5.5 billion,
largely related to tobacco litigation settlements), partially offset by lower
volume ($1.3 billion).
During 1999, PM Inc. announced plans to phase out cigarette production
capacity at its Louisville plant by August 2000. The closure of this facility
will occur in stages, as cigarette production is shifted to other PM Inc.
manufacturing facilities in the United States. As a result of this announcement,
PM Inc. recorded pre-tax charges of $183 million during 1999. These charges,
which are in marketing, administration and research costs in the consolidated
statement of earnings, included enhanced severance, pension and postretirement
benefits in accordance with the terms of the underlying plans, for approximately
1,500 hourly and salaried employees. Severance benefits, which can be paid
either as a lump sum or as income protection payments over a period of time,
commence upon termination of employment. Payments of enhanced pension and
postretirement benefits are made over the remaining lives of the former
employees in accordance with the terms of the related benefit plans. To date, in
light of the payment terms, minimal amounts have been paid. All operating costs
of the manufacturing plant, including increased depreciation, are charged to
expense as incurred during the closing period. During 1998, pre-tax charges of
$319 million were recorded principally for voluntary separation, early
retirement and severance programs. The 1998 charges were primarily for enhanced
pension and postretirement benefits for the approximately 2,100 hourly and
salaried employees at various operating locations who elected to participate in
the program. Benefit payments were made in accordance with the provisions of the
related pension and postretirement benefit plans. Operating companies income for
the domestic tobacco segment also 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.
24
<PAGE>
Operating companies income for 1999 increased $3.4 billion over 1998,
primarily reflecting the effect of 1998 pre-tax tobacco litigation settlement
charges ($3,381 million), price increases, net of cost increases ($1,359
million) and lower pre-tax charges for separation programs ($136 million),
partially offset by lower volume ($918 million) and higher marketing,
administration and research costs ($679 million, primarily for increased
marketing related to consumer promotions). Excluding the impact of the 1998
tobacco litigation settlement charges and the separation programs in each year,
PM Inc.'s operating companies income of $5,048 million for 1999 decreased 2.7%
from $5,189 million for 1998.
Domestic tobacco industry shipment volume during 1999 declined 9.0% from
1998, primarily as a result of settlement-related price increases and the
trade's decision to lower inventories at the end of the year in advance of the
January 1, 2000, increase in the federal excise tax rate. PM Inc.'s shipment
volume for 1999 was 208.2 billion units, a decrease of 8.5% from 1998; however,
PM Inc.'s shipment market share increased 0.2 share points over 1998 to 49.6%.
Excluding the effects of the trade's decisions to lower inventories, PM Inc.
estimates that its volume would have decreased by approximately 7.3% and that
its shipment market share would have increased by 0.5 share points to 50.1%.
Marlboro shipment volume declined 9.7 billion units (6.0%) from 1998 to 152.8
billion units for a 36.4% share of the total industry, an increase of 1.2 share
points over the comparable 1998 period.
Based on shipments, the premium segment accounted for approximately 73.4%
of the domestic cigarette industry volume in 1999, an increase of 0.4 share
points over 1998. In the premium segment, PM Inc.'s volume decreased 6.8% during
1999, compared with an 8.5% decrease for the industry, resulting in a premium
segment share of 59.5%, an increase of 1.1 share points over 1998.
In the discount segment, PM Inc.'s shipments decreased 19.5% to 24.9
billion units in 1999, compared with an industry decline of 10.3%, resulting in
a discount segment share of 22.4%, a decrease of 2.6 share points from 1998.
Basic shipment volume for 1999 declined 3.0 billion units (12.9%) to 20.4
billion units, for an 18.3% share of the discount segment, a decrease of 0.5
share points from 1998.
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 continue to 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 January 2000, PM Inc. announced a price increase of $6.50 per thousand
cigarettes on its domestic premium and discount brands, principally related to
increases in litigation settlement payments. This followed other price increases
of $9.00 per thousand in August 1999, $22.50 per thousand in November 1998,
$3.00 per thousand in July 1998, $2.50 per thousand in May 1998, $2.50 per
thousand in April 1998 and $1.25 per thousand in January 1998. Each $1.00 per
thousand increase by PM Inc. equates to a $0.02 increase in the price to
wholesalers of each pack of twenty cigarettes.
In December 1998, PM Inc. paid $150 million for options to purchase the
U.S. rights to manufacture and market three cigarette trademarks, L&M, Lark and
Chesterfield, the international rights to which were already owned by PMI.
During the second quarter of 1999, PM Inc. substantially completed its
acquisition of these trademarks. Including the $150 million paid in December
1998, the total acquisition price for these trademarks was approximately $300
million. L&M, Lark and Chesterfield represented less than 0.2% of domestic
cigarette industry volume in 1999 and 1998.
International tobacco: During 1999, international tobacco operating
revenues, including excise taxes, increased $116 million (0.4%) over 1998.
Excluding excise taxes, operating revenues decreased $343 million (2.4%), due
primarily to unfavorable volume/mix ($476 million) and unfavorable currency
movements ($162 million), partially offset by price increases ($217 million)
and incremental revenues from year 2000 business ($97 million).
During 1999, a subsidiary of PMI announced the closure of a cigarette
factory and the corresponding reduction of cigarette production capacity in
Brazil. Prior to the factory closure, existing employees were offered voluntary
dismissal benefits. These benefits were accepted by half of the approximately
1,000 employees at the facility. During the third quarter of 1999, the factory
was closed and the remaining employees were severed. A pre-tax charge of $136
million was recorded in marketing, administration and research costs in the
consolidated statement of earnings of the international tobacco segment to write
down the tobacco machinery and equipment no longer in use and to recognize the
cost of enhanced severance benefits. Payments of severance benefits to former
employees are in accordance with local Brazilian regulations.
Operating companies income for 1999 decreased $61 million (1.2%) from
1998, due primarily to the Brazil charge discussed above ($136 million),
unfavorable volume/mix ($141 million) and higher marketing, administration and
research costs, partially offset by price increases and favorable costs ($289
million) and incremental income from year 2000 business ($59 million). Excluding
the impact of the pre-tax charge related to Brazil and the incremental income
from year 2000 business, operating companies income of $5,045 million for 1999
increased 0.3% from $5,029 million for 1998.
25
<PAGE>
PMI's 1999 volume of 672.1 billion units, including 4.2 billion units of
incremental volume from year 2000 business, decreased 44.8 billion units (6.3%)
from 1998. Excluding incremental volume from year 2000 business (the basis of
presentation for all following PMI volume disclosures), volume decreased 49.1
billion units (6.8%) from 1998. However, volume grew a collective 4.8% in the
more profitable core markets of Western Europe and Japan. These gains were more
than offset by a 33.1% aggregate volume decline in the lower-margin markets of
Russia and the rest of Eastern Europe, reflecting difficult business conditions,
as well as lower worldwide duty-free shipments. Volume advanced in a number of
important markets, including Italy, France, Portugal, the Benelux and
Scandinavian countries, Greece, Austria, Hungary, the Slovak Republic, Romania,
Saudi Arabia, Egypt, Turkey, Japan and Mexico. In Asia, PMI recorded higher
volume in the markets of Korea, Singapore, Malaysia and Thailand. PMI recorded
market share gains in virtually all of its major markets. In Germany, volume was
essentially flat, and share was lower, reflecting intense competition.
International volume for Marlboro declined 1.9%; however, excluding Eastern
Europe and worldwide duty-free markets, Marlboro volume rose 4.1%.
During 1999, PMI increased its ownership interest in a Portuguese tobacco
company from 65% to 90% at a cost of $70 million. PMI also increased its
ownership interest in a Polish tobacco company from 75% to 96% at a cost of $104
million.
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 $3.4 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.
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 previously mentioned voluntary separation programs and severance
($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 domestic cigarette industry volume in 1998, an increase of 0.7 share points
over 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.
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,
26
<PAGE>
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 manufactured by
PMI also grew by 4.7% during 1998.
Food
Business Environment
Kraft Foods, Inc. ("Kraft"), the largest processor and marketer of retail
packaged food in the United States, and its subsidiary, Kraft Foods
International, Inc. ("KFI"), which markets coffee, confectionery and grocery
products in Europe and the Asia/Pacific region, are subject to fluctuating
commodity costs, currency movements and competitive challenges in various
product categories and markets, including a trend toward increasing
consolidation in the retail trade and changing consumer preferences.
Additionally, certain subsidiaries and affiliates of PMI that manufacture and
sell food products in Latin America are also subject to competitive
challenges in various product categories and markets. To confront these
challenges, Kraft, KFI and PMI continue to take steps to build the value of
premium brands with new product and marketing initiatives, to enhance their
food business portfolios and to reduce costs.
Fluctuations in commodity costs can cause retail price volatility,
intensify price competition and influence consumer and trade buying patterns.
The North American and international food businesses are subject to fluctuating
commodity costs, particularly dairy, coffee bean and cocoa prices. During the
second half of 1998, the cost of certain United States dairy commodities reached
record high levels. Dairy commodity costs in the United States on average have
been below the levels seen in 1998 as costs moderated during the first half of
1999, increased briefly during the beginning of the third quarter of 1999 and
then declined. Coffee bean prices were lower during 1998 and most of 1999 after
reaching a twenty-year high in May 1997. However, coffee bean prices have been
volatile late in 1999 due to drought conditions in Brazil. Cocoa prices have
declined during 1999, compared with 1998.
During the latter part of the second quarter of 1999, the Belgian
government and the European Union banned the sale of poultry, poultry-derived
products, beef, pork and their derivative products produced in Belgium,
resulting from the discovery in Belgium of dioxin contamination in animal feed.
Although none of KFI's products were contaminated, in the ensuing political,
media and consumer uncertainty, some of KFI's products in several countries were
affected by delays in production and transportation from plants to the trade.
During January 2000, Kraft announced that it has agreed to purchase the
outstanding common stock of Balance Bar Co., a maker of energy and nutrition
snack products, for approximately $268 million. In a separate transaction, Kraft
also announced that it has reached an agreement to purchase Boca Burger, Inc., a
privately held manufacturer and marketer of soy-based meat alternatives for
approximately $100 million. These transactions are both expected to close in
February 2000. Neither transaction is expected to have a material effect on
2000 operating revenues or operating companies income of Kraft or the Company.
During 1999 and 1998, the Company sold several small international food
businesses. The operating results of businesses divested were not material to
consolidated operating results in any of the periods presented. Also during
1998, Kraft entered into a licensing agreement with the Starbucks coffee chain
to market, sell and distribute Starbucks coffee to grocery customers across the
United States. In addition, Kraft entered into a licensing agreement with the
California Pizza Kitchen restaurant chain to manufacture, market and sell
California Pizza Kitchen frozen pizza to grocery customers. Neither of these
agreements had a material impact on Kraft's 1999 or 1998 operating results.
Operating Results
Operating
(in millions) Operating Revenues Companies Income
- --------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------
North
American
food $17,546 $17,312 $16,838 $3,107 $3,055 $2,873
International
food 9,251 9,999 10,852 1,146 1,127 1,326
- --------------------------------------------------------------------------------
Total $26,797 $27,311 $27,690 $ 4,253 $ 4,182 $ 4,199
================================================================================
1999 Compared with 1998
North American food: During 1999, operating revenues increased $234
million (1.4%) from 1998, due primarily to higher volume ($111 million),
incremental revenues from year 2000 business ($69 million) and favorable
pricing ($65 million), partially offset by unfavorable currency movements.
During 1999, Kraft announced that it was offering voluntary retirement
incentive or separation programs to certain eligible hourly and salaried
employees in the United States. Employees electing to terminate employment under
the terms of these programs were entitled to enhanced retirement or severance
benefits. Approximately 1,100 hourly and salaried employees accepted the
benefits offered by these programs and elected to retire or terminate. As a
result, Kraft recorded a pre-tax charge
27
<PAGE>
of $157 million during 1999. This charge was included in marketing,
administration and research costs in the consolidated statement of earnings and
in the North American food segment. Payments of pension and postretirement
benefits are made in accordance with the terms of the applicable benefit plans.
Severance benefits, which are paid over a period of time, commence upon dates of
retirement or termination that range from April 1999 to March 2000. Salary and
related benefit costs of employees prior to the retirement or termination date
are expensed as incurred.
Operating companies income for 1999 increased $52 million (1.7%) from
1998, due primarily to favorable margins ($428 million, driven by lower
manufacturing and commodity-related costs), higher volume ($66 million) and
income related to incremental year 2000 business ($26 million), partially offset
by the previously mentioned pre-tax charge for voluntary separation programs
($157 million) and higher marketing, administration and research costs ($235
million, the majority of which related to higher marketing expense).
Excluding the impact of the pre-tax charge for voluntary separation
programs and the income from incremental year 2000 business, operating companies
income of $3,238 million in 1999 increased 6.0% over $3,055 million for 1998.
Volume for 1999 increased over 1998. Volume gains were achieved by
beverages, from the strength of ready-to-drink products, powdered soft drinks
and new product introductions; frozen pizza, resulting from the continued
success of rising crust pizza and new product introductions; processed meats,
from increases in lunch combinations, bacon, hot dogs and new product
introductions; coffee, resulting from volume and share gains associated with the
continued rollout of Starbucks coffee to grocery customers; cheese, with gains
in several product lines, including natural cheese, sour cream and cottage
cheese; meals, primarily as a result of new product introductions; and desserts
and snacks, from growth in frozen toppings, mints, two-compartment snacks and
ready-to-eat refrigerated desserts. Offsetting the previously mentioned volume
gains were volume declines in enhancers, where increases in barbecue sauce were
more than offset by lower shipments of spoonable dressings; and cereals, due to
aggressive competitive activity. In Canada, volume declined due to retailers'
decisions to lower their inventories, as well as aggressive competitive
activity in cheese and cereals.
International food: Operating revenues for 1999 decreased $748 million
(7.5%) from 1998, due to lower pricing ($331 million, due to the effect of
lower coffee commodity costs), unfavorable currency movements ($323 million)
and the impact of divestitures ($152 million), partly offset by the
consolidation of previously unconsolidated subsidiaries ($68 million).
Operating companies income for 1999 increased $19 million (1.7%) from 1998,
due primarily to favorable margins ($119 million, primarily related to lower
commodity costs) and income from incremental year 2000 business ($14
million), partially offset by higher marketing, administration and research
costs ($71 million) and unfavorable currency movements.
Excluding the operating results of the international food businesses
divested in 1998 and 1999 and the income from incremental year 2000 business,
operating revenues of $9,139 million in 1999 decreased $624 million (6.4%) from
$9,763 million in 1998, driven by coffee commodity-led price decreases and
unfavorable currency, and operating companies income of $1,126 million in 1999
increased $20 million (1.8%) over $1,106 million in 1998.
KFI's coffee volume increased from 1998, led by France, Spain, Denmark,
Switzerland and several markets in Central Europe. KFI registered share gains in
roast and ground coffee in France, Sweden, Denmark and Spain. In soluble coffee,
KFI registered share gains for key brands in the United Kingdom, France and
Korea.
Confectionery volume was down due to the continued economic weakness in
Russia and other parts of Eastern Europe, as well as unusually warm summer
weather across Europe and the impact of the Belgian dioxin issue, discussed
above. However, KFI's chocolate tablet shares for key brands were up in France,
Italy, Austria and Sweden. In addition, KFI's confectionery volume benefited
from several new products and line extensions.
Volume grew in KFI's cheese and grocery business, driven by gains in
Germany, Spain, the United Kingdom, Australia and Southeast Asia. Volume
benefited from the introduction of new cheese products and line extensions in
lunch combinations in Germany; from share gains in cream cheese, cheese slices,
spoonable and pourable dressings and peanut butter, as well as new ready-to-eat
snack products in Australia; and from powdered soft drinks in China, the Middle
East, Africa and Southeast Asia, as well as expansion to Poland and Bulgaria.
In Latin America, volume declined from 1998, due primarily to lower
confectionery shipments in Brazil and lower powdered soft drink volume in
Argentina, partially offset by higher powdered soft drink volume in Brazil and
Mexico and higher mayonnaise and cheese volumes in Mexico.
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).
28
<PAGE>
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 the 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 and previously
mentioned 1997 charges for the closure of several international food
facilities and related enhanced severance benefits.
Excluding the operating results of the divested international food
businesses, the gain on the sale of the Brazilian ice cream businesses and the
charges 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 with 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.
Beer
Business Environment
During April 1999, Miller Brewing Company ("Miller") purchased four trademarks
from the Pabst Brewing Company ("Pabst") and the Stroh Brewery Company
("Stroh"). Miller also agreed to increase its contract manufacturing of Pabst
products. Miller began brewing and shipping the newly acquired brands during the
second quarter of 1999. In September 1999, Miller assumed ownership of the
former Pabst brewery in Tumwater, Washington, as part of these agreements.
Miller's license agreement for the rights to brew and sell Lowenbrau in
the United States expired on September 30, 1999. The expiration of this
agreement did not have a material impact on Miller's 1999 operating revenues or
operating companies income and is not expected to have a material impact on
future operating revenues and operating companies income.
During 1999, Miller recorded a pre-tax charge of $29 million in marketing,
administration and research costs in the consolidated statement of earnings to
write down the book value of three brewing facilities to their estimated fair
values. One of the facilities is presently closed, while the remaining two small
facilities are not expected to generate sufficient future cash flows to recover
the recorded cost of the facilities. The operating costs of these brewing
facilities are charged to expense as incurred.
1999 compared with 1998: Miller's operating revenues for 1999 increased
$237 million (5.8%) over 1998, due primarily to the previously mentioned
newly acquired brands, contract manufacturing fees and price increases.
Operating companies income for 1999 increased $60 million (13.3%) over 1998,
due primarily to favorable pricing and lower product costs and the impact of
the previously mentioned newly acquired brands and contract manufacturing
fees, partially offset by the asset write-downs recorded in 1999. Excluding
the asset write-downs, operating companies income of $540 million in 1999
increased 19.7% over $451 million in 1998.
Miller's domestic shipment volume of 43.3 million barrels for 1999
increased 3.8% from 1998, reflecting the commencement of shipments of the newly
acquired brands (Olde English 800, Hamm's, Mickey's and Henry Weinhard's).
Excluding shipments of the acquired brands, domestic shipment volume declined
0.1% from 1998, reflecting lower domestic shipments of premium brands, primarily
the Miller Genuine Draft franchise, Molson and Lowenbrau (which resulted from
the expiration of the above mentioned license), partially offset by increases
for its flagship brand Miller Lite, as well as the Icehouse franchise and
Foster's. Domestic shipments of near-premium products increased on higher
shipments of Miller High Life, while budget brand products decreased on lower
shipments across all brands. Miller's estimated market share of the U.S. malt
beverage industry (based on shipments, including exports) was 21.6%, an increase
of 0.4 share points from the prior year, due primarily
29
<PAGE>
to the acquired brands. Wholesalers' sales to retailers in 1999 decreased 0.6%
from 1998, excluding the acquired brands. This decline was due primarily to
lower sales of the Miller Genuine Draft franchise, Molson, Lowenbrau and the
Milwaukee's Best franchise, partially offset by higher sales of Miller Lite,
Icehouse, Foster's and Miller High Life.
1998 compared with 1997: Miller's operating revenues 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 of the U.S. malt beverage industry (based on shipments,
including exports) was 21.2%, a decline of 0.5 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.
Financial Services
Philip Morris Capital Corporation's ("PMCC") financial services operating
revenues and operating companies income for 1999 increased $80 million (29.1%)
and $45 million (24.6%), respectively, over 1998. These increases were due
primarily to increased leasing revenues and the continued growth of PMCC's
portfolio of finance assets.
Operating revenues and operating companies income declined from 1997 to
1998 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, from 1997 to 1998, reflecting increased leasing and structured
finance investments and the continued profitability of PMCC's portfolio of
finance assets.
Financial Review
Net cash provided by operating activities: During 1999, net cash
provided by operating activities was $11.4 billion, compared with $8.1
billion in 1998. The increase primarily reflects higher net earnings and the
collection of higher settlement-related domestic tobacco revenues prior to
the remittance of such amounts to state governments under the terms of the
various state settlements. During 1998, net cash provided by operating
activities of $8.1 billion was essentially equal to 1997.
Net cash used in investing activities: During 1999, 1998 and 1997, net
cash used in investing activities was $2.7 billion, $2.6 billion and $619
million, respectively. The increase from 1998 to 1999 primarily reflects the
cash used during 1999 for the previously mentioned domestic tobacco,
international tobacco and beer acquisitions, partially offset by cash
received in 1999 from the sale of several international food businesses. The
increase from 1997 to 1998 was primarily attributable to $2.2 billion of cash
proceeds from sales of consumer products and financial services businesses in
1997. Also affecting the comparison of 1998 to 1997 was lower cash spent in
1998 on the acquisition of businesses ($613 million), partially offset by PM
Inc.'s 1998 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. 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.
Capital expenditures for 1999 decreased 3.0%, to $1.7 billion, of which
39% related to tobacco operations and 49% 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 2000 and are currently expected to be funded
from operations.
Net cash used in financing activities: During 1999, net cash of $7.5
billion was used in financing activities, compared with $3.9 billion used in
financing activities during 1998. This difference was primarily due to an
increase of $3.0 billion of cash spent on stock repurchases and an increase
of $354 million in dividends paid during 1999, partially offset by lower net
debt issuances in 1999 ($231 million, compared with $332 million in 1998).
During 1998, the Company's net cash used in financing activities 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 million in 1998 and lower cash paid for the
repurchase of common stock in 1998 ($498 million).
30
<PAGE>
Debt and liquidity: The Company's total debt (consumer products and
financial services) was $14.5 billion, $14.7 billion and $14.1 billion at
December 31, 1999, 1998 and 1997, respectively. Total consumer products debt
was $13.5 billion, $14.0 billion and $13.3 billion at December 31, 1999, 1998
and 1997, respectively. At December 31, 1999 and 1998, the Company's ratio of
consumer products debt to total equity was 0.88 and 0.86, respectively. The
ratio of total debt to total equity was 0.95 and 0.91 at December 31, 1999
and 1998, respectively.
Fixed rate debt constituted approximately 91% of total consumer products
debt at December 31, 1999 and 1998. 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 6.9% and 7.2% at
December 31, 1999 and 1998, respectively.
The Company and its subsidiaries maintain credit facilities with a number
of lending institutions, amounting to approximately $12.1 billion at December
31, 1999. These include revolving bank credit agreements totaling $10.0 billion,
which may be used to support any commercial paper borrowings by the Company and
which are available for acquisitions and other corporate purposes. Of these
revolving bank agreements, an agreement for $8.0 billion expires in 2002 and a
second agreement for $2.0 billion will expire in September 2000. The $8.0
billion credit agreement enables the Company to reclassify short-term debt on a
long-term basis. The Company may continue to refinance long-term and short-term
debt from time to time. The nature and amount of the Company's long-term and
short-term debt and the proportionate amount of each can be expected to vary as
a result of future business requirements, market conditions and other factors.
The Company's credit ratings by Moody's at December 31, 1999 and 1998 were
"P-1" in the commercial paper market and "A2" for long-term debt obligations.
The Company's credit ratings by Standard & Poor's at December 31, 1999 and 1998
were "A-1" in the commercial paper market and "A" for long-term debt
obligations.
As discussed in Note 15, PM Inc., along with other domestic tobacco
companies, has entered into tobacco litigation settlement agreements that will
require the domestic tobacco industry to make substantial annual payments in the
following amounts (excluding future annual payments contemplated by the
agreement with tobacco growers discussed below), subject to adjustment for
several factors, including inflation, market share and industry volume: 2000,
$9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9 billion; 2004
through 2007, $8.4 billion per year; and thereafter, $9.4 billion per year. 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: 2000, $416 million; and 2001 through 2003, $250 million each
year. These payment obligations are the several and not joint obligations of
each settling defendant. For the year ended December 31, 1998, PM Inc. recorded
settlement charges of $3.1 billion, which represented its share of up-front
payments required under the settlement agreements. For periods subsequent to
December 31, 1998, PM Inc.'s portion of ongoing adjusted payments and legal fees
is based on its share of domestic cigarette shipments in the year preceding that
in which the payment is due. Accordingly, PM Inc. records its portions of
ongoing settlement payments as part of cost of sales as product is shipped.
As part of the MSA, the settling defendants committed to work
cooperatively with the tobacco-growing states to address concerns about the
potential adverse economic impact of the MSA on tobacco growers and
quota-holders. To that end, four of the major domestic tobacco product
manufacturers, including PM Inc. and the grower states, have established a trust
fund to provide aid to tobacco growers and quota-holders. The trust will be
funded by these four manufacturers over 12 years with payments, prior to
application of various adjustments, scheduled to total $5.15 billion. PM Inc.
has recorded charges of $300 million against 1998 operating companies income
for payments into the trust. Future industry payments (in 2000, $280 million;
2001, $400 million; 2002 through 2008, $500 million each year; 2009 and 2010,
$295 million each year) are subject to adjustment for several factors, including
inflation, United States cigarette volume and certain other contingent events,
and, in general, are to be allocated based on each manufacturer's relative
market share. PM Inc. records its portion of these payments as part of cost of
sales as product is shipped.
As discussed above under "Tobacco--Business Environment," the present
legislative and litigation environment is substantially uncertain and could
result in material adverse consequences for the business, financial condition,
cash flows or results of operations of the Company, PM Inc. and PMI.
Equity and dividends: During 1999 and 1998, the Company repurchased
96.6 million and 6.5 million shares of its common stock, respectively, at a
cost of $3.3 billion and $350 million, respectively. The repurchases were
made under an existing $8 billion authority that expires in November 2001.
Since inception, cumulative repurchases under the $8 billion authority have
totaled 104.4 million shares at an aggregate cost of $3.7 billion.
Dividends paid in 1999 and 1998 were $4.3 billion and $4.0 billion,
respectively, an increase of 8.9%, reflecting a higher dividend rate in 1999.
During the third quarter of 1999, the Company's Board of Directors approved a
9.1% increase in the quarterly dividend rate to $0.48 per share. As a result,
the annualized dividend rate increased to $1.92 from $1.76.
Return on average stockholders' equity increased to 48.7% in 1999 from
34.5% in 1998. The increase from 1998 primarily reflects the effect of up-front
litigation settlement charges on 1998 net earnings.
31
<PAGE>
Cash and cash equivalents: Cash and cash equivalents were $5.1 billion
and $4.1 billion at December 31, 1999 and 1998, respectively, the increase
being largely attributable to higher levels of cash from operations,
partially offset by cash used in support of the Company's share repurchase
program.
Market Risk
The Company is exposed to market risk, primarily related to foreign exchange,
commodity prices and interest rates. These exposures are actively monitored by
management. To manage the volatility relating to these exposures, the Company
enters into a variety of derivative financial instruments. The Company's
objective is to reduce, where it is deemed appropriate to do so, fluctuations in
earnings and cash flows associated with changes in interest rates, foreign
currency rates and commodity prices. It is the Company's policy and practice to
use derivative financial instruments only to the extent necessary to manage
exposures. Since the Company uses currency rate-sensitive and commodity
price-sensitive instruments to hedge a certain portion of its existing and
anticipated transactions, the Company expects that any loss in value for those
instruments generally would be offset by increases in the value of those hedged
transactions. The Company does not hold or issue derivative financial
instruments for trading or speculative purposes.
Foreign exchange rates: The Company is exposed to foreign exchange
movements, primarily in European, Japanese, other Asian and Latin American
currencies. Consequently, it enters into various contracts, which change in
value as foreign exchange rates change, to preserve the value of commitments
and anticipated transactions. The Company uses foreign currency option and
forward contracts to hedge certain anticipated foreign currency cash flows.
The Company also enters into short-term currency forward swap contracts,
primarily to hedge intercompany financing transactions denominated in foreign
currencies. At December 31, 1999 and 1998, the Company had option and forward
foreign exchange contracts, principally for the Japanese yen, British pound
and the euro, with an aggregate notional amount of $3.8 billion and $8.1
billion, respectively, for both the purchase and/or sale of foreign
currencies.
The Company also seeks to protect its foreign currency net asset exposure,
primarily the Swiss franc and the euro, through the use of foreign-currency
denominated debt or currency swap agreements. At December 31, 1999 and 1998, the
notional amounts of currency swap agreements aggregated $2.6 billion and $2.5
billion, respectively.
Commodities: The Company is exposed to price risk related to
anticipated purchases of certain commodities used as raw materials by the
Company's food businesses. Accordingly, the Company enters into commodity
future, forward and option contracts to manage fluctuations in prices of
anticipated purchases, primarily coffee, cocoa, sugar, wheat and corn. At
December 31, 1999 and 1998, the Company had net long commodity positions of
$163 million and $158 million, respectively. Unrealized gains/losses on net
commodity positions were immaterial at December 31, 1999 and 1998.
Interest rates: The Company manages its exposure to interest rate risk
through the proportion of fixed rate debt and variable rate debt in its total
debt portfolio. To manage this mix, the Company may enter into interest rate
swap agreements, in which it exchanges the periodic payments, based on a
notional amount and agreed-upon fixed and variable interest rates. At
December 31, 1999 and 1998, the Company had an interest rate swap agreement
that converted $800 million of fixed rate debt to variable rate debt. The
agreement will expire in March 2000.
-------------------------
Use of the above-mentioned derivative financial instruments has not had a
material impact on the Company's financial position at December 31, 1999 and
1998, or the Company's results of operations for the three years ended December
31, 1999, 1998 and 1997.
-------------------------
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 potential 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, 1999 and 1998, 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.
32
<PAGE>
The estimated potential one-day loss in pre-tax earnings from the
Company's commodity instruments under normal market conditions, as calculated in
the VAR model, was not material during 1999 and 1998. 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 instruments under normal
market conditions, as calculated in the VAR model, follow:
Earnings Impact
--------------------------------------
At
(in millions) 12/31/99 Average High Low
================================================================================
Instruments sensitive to:
Foreign currency rates $41 $37 $44 $22
================================================================================
Fair Value Impact
--------------------------------------
At
(in millions) 12/31/99 Average High Low
================================================================================
Instruments sensitive to:
Interest rates $33 $42 $54 $33
================================================================================
Earnings Impact
--------------------------------------
At
(in millions) 12/31/98 Average High Low
================================================================================
Instruments sensitive to:
Foreign currency rates $41 $17 $41 $ 7
================================================================================
Fair Value Impact
--------------------------------------
At
(in millions) 12/31/98 Average High Low
================================================================================
Instruments sensitive to:
Interest rates $47 $45 $60 $36
================================================================================
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 ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which had an initial adoption date by the
Company of January 1, 2000. During the second quarter of 1999, the FASB
postponed the adoption date of SFAS No. 133 until January 1, 2001. SFAS No. 133
requires that all derivative financial instruments be recorded on the
consolidated balance sheets at their fair value. Changes in the fair value of
derivatives will be recorded each period in earnings or other comprehensive
earnings, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Gains and losses on
derivative instruments reported in other comprehensive earnings will be
reclassified as earnings in the periods in which earnings are affected by the
hedged item. The Company has not yet determined the impact that adoption or
subsequent application of SFAS No. 133 will have on its financial position or
results of operations.
Contingencies
See Note 15 to the Consolidated Financial Statements for a discussion of certain
contingencies.
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or oral
forward-looking statements, including the projections contained on pages two
through six of this Report and the statements contained in the Company's filings
with the Securities and Exchange Commission and in its other reports to
stockholders. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company; any such statement is qualified by reference to the following
cautionary statements.
The tobacco industry continues to be subject to health concerns relating
to the use of tobacco products and exposure to ETS, legislation, including
actual and potential excise tax increases, increasing marketing and regulatory
restrictions, governmental regulation, privately imposed smoking restrictions,
governmental and grand jury investigations, litigation, and the effects of price
increases related to concluded tobacco litigation settlements and excise tax
increases on consumption rates. Each of the Company's consumer products
subsidiaries is subject to intense competition, changes in consumer preferences,
the effects of changing prices for its raw materials and local economic
conditions, and their results are dependent upon their continued ability to
promote brand equity successfully, to anticipate and respond to new consumer
trends, to develop new products and markets and to broaden brand portfolios, to
compete effectively with lower priced products in a consolidating environment at
the retail and manufacturing levels, and to improve productivity. In addition,
PMI, KFI and Kraft are subject to the effects of foreign economies, particularly
the timing of economic recoveries in Latin America and Eastern Europe and
related shifts in consumer preferences, currency movements and the conversion to
the euro. Developments in any of these areas, which are more fully described
above and which descriptions are incorporated into this section by reference,
could cause the Company's results to differ materially from results that have
been or may be projected by or on behalf of the Company. The Company cautions
that the foregoing list of important factors is not exclusive. The Company does
not undertake to update any forward-looking statement that may be made from time
to time by or on behalf of the Company.
33
<PAGE>
Selected Financial Data--Eleven-Year Review
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Summary of Operations:
Operating revenues $ 78,596 $ 74,391 $ 72,055 $ 69,204
United States export sales 5,046 6,005 6,705 6,476
Cost of sales 29,561 26,820 26,689 26,560
Federal excise taxes on products 3,252 3,438 3,596 3,544
Foreign excise taxes on products 13,593 13,140 12,345 11,107
- ------------------------------------------------------------------------------------------------------------------
Operating income 13,490 9,977 11,663 11,769
Interest and other debt expense, net 795 890 1,052 1,086
Earnings before income taxes and cumulative effect
of accounting changes 12,695 9,087 10,611 10,683
Pre-tax profit margin 16.2% 12.2% 14.7% 15.4%
Provision for income taxes 5,020 3,715 4,301 4,380
- ------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 7,675 5,372 6,310 6,303
Cumulative effect of accounting changes
Net earnings 7,675 5,372 6,310 6,303
Basic EPS before cumulative effect
of accounting changes 3.21 2.21 2.61 2.57
Per share cumulative effect of accounting changes
- ------------------------------------------------------------------------------------------------------------------
Basic EPS 3.21 2.21 2.61 2.57
Diluted EPS before cumulative effect
of accounting changes 3.19 2.20 2.58 2.54
Per share cumulative effect of accounting changes
Diluted EPS 3.19 2.20 2.58 2.54
Dividends declared per share 1.84 1.68 1.60 1.47
Weighted average shares (millions)--Basic 2,393 2,429 2,420 2,456
Weighted average shares (millions)--Diluted 2,403 2,446 2,442 2,482
- ------------------------------------------------------------------------------------------------------------------
Capital expenditures 1,749 1,804 1,874 1,782
Depreciation 1,120 1,106 1,044 1,037
Property, plant and equipment, net (consumer products) 12,271 12,335 11,621 11,751
Inventories (consumer products) 9,028 9,445 9,039 9,002
Total assets 61,381 59,920 55,947 54,871
Total long-term debt 12,226 12,615 12,430 12,961
Total debt--consumer products 13,522 13,953 13,258 13,933
--financial services and real estate 946 709 845 1,307
- ------------------------------------------------------------------------------------------------------------------
Total deferred income taxes 3,751 3,638 3,382 3,336
Stockholders' equity 15,305 16,197 14,920 14,218
Common dividends declared as a % of Basic EPS 57.3% 76.0% 61.3% 57.2%
Common dividends declared as a % of Diluted EPS 57.7% 76.4% 62.0% 57.9%
Book value per common share outstanding 6.54 6.66 6.15 5.85
Market price per common share--high/low 55.56-21.25 59.50-34.75 48.13-36.00 39.67-28.54
- ------------------------------------------------------------------------------------------------------------------
Closing price of common share at year end 23.00 53.50 45.25 37.67
Price/earnings ratio at year end--Basic 7 24 17 15
Price/earnings ratio at year end--Diluted 7 24 18 15
Number of common shares outstanding at
year end (millions) 2,339 2,431 2,425 2,430
Number of employees 137,000 144,000 152,000 154,000
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the consolidated financial statements regarding acquisitions and
divestitures in 1999, 1998 and 1997; tobacco and other litigation settlement
charges in 1998 and 1997; 1998 charges for early retirement and separation
programs for domestic tobacco and corporate employees; 1999 charges for
separation programs for domestic tobacco and North American food operations;
1999 charges for a cigarette factory closure and the corresponding reduction of
production capacity in the international tobacco operation; 1999 charges for
asset write-downs in the beer operation; and 1999 incremental revenues and
income from shipments in advance of the century date change.
34
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Summary of Operations:
Operating revenues $ 66,071 $ 65,125 $ 60,901 $ 59,131
United States export sales 5,920 4,942 4,105 3,797
Cost of sales 26,685 28,351 26,771 26,082
Federal excise taxes on products 3,446 3,431 3,081 2,879
Foreign excise taxes on products 9,486 7,918 7,199 6,157
- -------------------------------------------------------------------------------------------------------------------------
Operating income 10,526 9,449 7,587 10,059
Interest and other debt expense, net 1,179 1,233 1,391 1,451
Earnings before income taxes and cumulative effect
of accounting changes 9,347 8,216 6,196 8,608
Pre-tax profit margin 14.1% 12.6% 10.2% 14.6%
Provision for income taxes 3,869 3,491 2,628 3,669
- -------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 5,478 4,725 3,568 4,939
Cumulative effect of accounting changes (28) (477)
Net earnings 5,450 4,725 3,091 4,939
Basic EPS before cumulative effect
of accounting changes 2.18 1.82 1.35 1.82
Per share cumulative effect of accounting changes (0.01) (0.18)
- -------------------------------------------------------------------------------------------------------------------------
Basic EPS 2.17 1.82 1.17 1.82
Diluted EPS before cumulative effect
of accounting changes 2.16 1.81 1.35 1.80
Per share cumulative effect of accounting changes (0.01) (0.18)
Diluted EPS 2.15 1.81 1.17 1.80
Dividends declared per share 1.22 1.01 0.87 0.78
Weighted average shares (millions)--Basic 2,517 2,597 2,633 2,717
Weighted average shares (millions)--Diluted 2,538 2,610 2,645 2,741
- -------------------------------------------------------------------------------------------------------------------------
Capital expenditures 1,621 1,726 1,592 1,573
Depreciation 1,024 1,025 1,042 963
Property, plant and equipment, net (consumer products) 11,116 11,171 10,463 10,530
Inventories (consumer products) 7,862 7,987 7,358 7,785
Total assets 53,811 52,649 51,205 50,014
Total long-term debt 13,107 14,975 15,221 14,583
Total debt--consumer products 14,372 14,978 16,364 16,269
--financial services and real estate 1,454 1,494 1,792 1,934
- -------------------------------------------------------------------------------------------------------------------------
Total deferred income taxes 2,827 2,496 2,168 2,248
Stockholders' equity 13,985 12,786 11,627 12,563
Common dividends declared as a % of Basic EPS 56.2% 55.5% 74.4% 42.9%
Common dividends declared as a % of Diluted EPS 56.7% 55.8% 74.4% 43.3%
Book value per common share outstanding 5.61 5.00 4.42 4.69
Market price per common share--high/low 31.46-18.58 21.50-15.75 25.88-15.00 28.88-23.17
- -------------------------------------------------------------------------------------------------------------------------
Closing price of common share at year end 30.08 19.17 18.54 25.71
Price/earnings ratio at year end--Basic 14 11 16 14
Price/earnings ratio at year end--Diluted 14 11 16 14
Number of common shares outstanding at
year end (millions) 2,493 2,559 2,631 2,679
Number of employees 151,000 165,000 173,000 161,000
=========================================================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1991 1990 1989
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Summary of Operations:
Operating revenues $ 56,458 $ 51,169 $ 44,080
United States export sales 3,061 2,928 2,288
Cost of sales 25,612 24,430 21,868
Federal excise taxes on products 2,978 2,159 2,140
Foreign excise taxes on products 5,416 4,687 3,608
- -------------------------------------------------------------------------------------------------------
Operating income 8,622 7,946 6,789
Interest and other debt expense, net 1,651 1,635 1,731
Earnings before income taxes and cumulative effect
of accounting changes 6,971 6,311 5,058
Pre-tax profit margin 12.3% 12.3% 11.5%
Provision for income taxes 3,044 2,771 2,112
- -------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting changes 3,927 3,540 2,946
Cumulative effect of accounting changes (921)
Net earnings 3,006 3,540 2,946
Basic EPS before cumulative effect
of accounting changes 1.41 1.28 1.06
Per share cumulative effect of accounting changes (0.33)
- -------------------------------------------------------------------------------------------------------
Basic EPS 1.08 1.28 1.06
Diluted EPS before cumulative effect
of accounting changes 1.40 1.27 1.05
Per share cumulative effect of accounting changes (0.33)
Diluted EPS 1.07 1.27 1.05
Dividends declared per share 0.64 0.52 0.42
Weighted average shares (millions)--Basic 2,773 2,774 2,778
Weighted average shares (millions)--Diluted 2,798 2,792 2,797
- -------------------------------------------------------------------------------------------------------
Capital expenditures 1,562 1,355 1,246
Depreciation 938 876 755
Property, plant and equipment, net (consumer products) 9,946 9,604 8,457
Inventories (consumer products) 7,445 7,153 5,751
Total assets 47,384 46,569 38,528
Total long-term debt 14,213 16,121 14,551
Total debt--consumer products 15,289 17,182 14,887
--financial services and real estate 1,611 1,560 1,538
- -------------------------------------------------------------------------------------------------------
Total deferred income taxes 1,803 2,083 1,732
Stockholders' equity 12,512 11,947 9,571
Common dividends declared as a % of Basic EPS 59.3% 40.6% 39.6%
Common dividends declared as a % of Diluted EPS 59.8% 40.9% 40.0%
Book value per common share outstanding 4.53 4.30 3.43
Market price per common share--high/low 27.25-16.08 17.33-12.00 15.17-8.33
- -------------------------------------------------------------------------------------------------------
Closing price of common share at year end 26.75 17.25 13.88
Price/earnings ratio at year end--Basic 25 13 13
Price/earnings ratio at year end--Diluted 25 14 13
Number of common shares outstanding at
year end (millions) 2,760 2,778 2,787
Number of employees 166,000 168,000 157,000
=======================================================================================================
</TABLE>
35
<PAGE>
Consolidated Balance Sheets
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
at December 31,
- -----------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Assets
Consumer products
Cash and cash equivalents $ 5,100 $ 4,081
Receivables, net 4,313 4,691
Inventories:
Leaf tobacco 4,294 4,729
Other raw materials 1,794 1,728
Finished product 2,940 2,988
- -----------------------------------------------------------------------------------
9,028 9,445
Other current assets 2,454 2,013
- -----------------------------------------------------------------------------------
Total current assets 20,895 20,230
Property, plant and equipment, at cost:
Land and land improvements 633 655
Buildings and building equipment 5,436 5,386
Machinery and equipment 14,268 13,771
Construction in progress 1,262 1,422
- -----------------------------------------------------------------------------------
21,599 21,234
Less accumulated depreciation 9,328 8,899
- -----------------------------------------------------------------------------------
12,271 12,335
Goodwill and other intangible assets
(less accumulated amortization of $5,840 and $5,436) 16,879 17,566
Other assets 3,625 3,309
- -----------------------------------------------------------------------------------
Total consumer products assets 53,670 53,440
Financial services
Finance assets, net 7,527 6,324
Other assets 184 156
- -----------------------------------------------------------------------------------
Total financial services assets 7,711 6,480
- -----------------------------------------------------------------------------------
Total Assets $61,381 $59,920
===================================================================================
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities
Consumer products
Short-term borrowings $ 641 $ 225
Current portion of long-term debt 1,601 1,822
Accounts payable 3,351 3,359
Accrued liabilities:
Marketing 2,756 2,637
Taxes, except income taxes 1,519 1,408
Employment costs 972 968
Settlement charges 2,320 1,135
Other 2,605 2,608
Income taxes 1,124 1,144
Dividends payable 1,128 1,073
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 18,017 16,379
Long-term debt 11,280 11,906
Deferred income taxes 1,214 929
Accrued postretirement health care costs 2,606 2,543
Other liabilities 6,853 7,019
- ----------------------------------------------------------------------------------------------------------
Total consumer products liabilities 39,970 38,776
Financial services
Long-term debt 946 709
Deferred income taxes 4,466 4,151
Other liabilities 694 87
- ----------------------------------------------------------------------------------------------------------
Total financial services liabilities 6,106 4,947
- ----------------------------------------------------------------------------------------------------------
Total liabilities 46,076 43,723
Contingencies (Note 15)
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 29,556 26,261
Accumulated other comprehensive earnings
(including currency translation of $2,056 and $1,081) (2,108) (1,106)
Cost of repurchased stock (467,441,576 and 375,426,742 shares) (13,078) (9,893)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,305 16,197
- ----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 61,381 $ 59,920
==========================================================================================================
</TABLE>
37
<PAGE>
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
for the years ended December 31,
- -----------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $78,596 $74,391 $72,055
Cost of sales 29,561 26,820 26,689
Excise taxes on products 16,845 16,578 15,941
- -----------------------------------------------------------------------------------
Gross profit 32,190 30,993 29,425
Marketing, administration
and research costs 18,118 17,051 15,720
Settlement charges (Note 15) 3,381 1,457
Amortization of goodwill 582 584 585
- -----------------------------------------------------------------------------------
Operating income 13,490 9,977 11,663
Interest and other debt expense, net 795 890 1,052
- -----------------------------------------------------------------------------------
Earnings before income taxes 12,695 9,087 10,611
Provision for income taxes 5,020 3,715 4,301
- -----------------------------------------------------------------------------------
Net earnings $ 7,675 $ 5,372 $ 6,310
===================================================================================
Per share data:
Basic earnings per share $ 3.21 $ 2.21 $ 2.61
===================================================================================
Diluted earnings per share $ 3.19 $ 2.20 $ 2.58
===================================================================================
</TABLE>
Consolidated Statements of Cash Flows
(in millions of dollars)
<TABLE>
<CAPTION>
for the years ended December 31,
- -----------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided By (Used In) Operating Activities
Net earnings--Consumer products $ 7,534 $ 5,255 $ 6,152
--Financial services 141 117 158
- -----------------------------------------------------------------------------------------------------------
Net earnings 7,675 5,372 6,310
Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Depreciation and amortization 1,702 1,690 1,629
Deferred income tax (benefit) provision (156) 11 (188)
Gain on sale of Brazilian ice cream businesses (774)
Gains on sales of other businesses (62) (196)
Cash effects of changes, net of the effects from acquired and
divested companies:
Receivables, net 95 (352) (168)
Inventories (39) (192) (531)
Accounts payable 122 (150) 37
Income taxes 401 565 48
Accrued liabilities and other current assets 1,343 254 1,356
Other (17) 671 653
Financial services
Deferred income tax provision 300 265 257
Gain on sale of a business (103)
Other 11 (14) 10
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,375 8,120 8,340
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
for the years ended December 31,
- -----------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided By (Used In) Investing Activities
Consumer products
Capital expenditures $(1,749) $(1,804) $(1,874)
Purchase of businesses, net of acquired cash (522) (17) (630)
Proceeds from sales of businesses 175 16 1,784
Other 37 (154) 42
Financial services
Investments in finance assets (682) (736) (652)
Proceeds from finance assets 59 141 287
Proceeds from sale of a business 424
- -----------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,682) (2,554) (619)
- -----------------------------------------------------------------------------------------------------
Cash Provided By (Used In) Financing Activities
Consumer products
Net issuance (repayment) of short-term borrowings 435 61 (1,482)
Long-term debt proceeds 1,339 2,065 2,893
Long-term debt repaid (1,843) (1,616) (1,987)
Financial services
Net repayment of short-term borrowings (173)
Long-term debt proceeds 500 174
Long-term debt repaid (200) (178) (387)
Repurchase of common stock (3,329) (307) (805)
Dividends paid (4,338) (3,984) (3,885)
Issuance of common stock 74 265 205
Other (135) (200) (74)
- -----------------------------------------------------------------------------------------------------
Net cash used in financing activities (7,497) (3,894) (5,521)
- -----------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (177) 127 (158)
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents:
Increase 1,019 1,799 2,042
Balance at beginning of year 4,081 2,282 240
---------------------------------------------------------------------------------------------------
Balance at end of year $ 5,100 $ 4,081 $ 2,282
=====================================================================================================
Cash paid: Interest--Consumer products $ 1,086 $ 1,141 $ 1,219
=====================================================================================================
--Financial services $ 75 $ 79 $ 79
=====================================================================================================
Income taxes $ 4,308 $ 2,644 $ 3,794
=====================================================================================================
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
Consolidated Statements of Stockholders' Equity
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Earnings (Losses)
----------------------------------
Earnings Currency Cost of Total
Common Reinvested in Translation Repurchased Stockholders'
Stock the Business Adjustments Other Total Stock Equity
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 $ 935 $22,480 $ 192 $ (2) $ 190 $(9,387) $ 14,218
Comprehensive earnings:
Net earnings 6,310 6,310
Other comprehensive losses, net of
income taxes:
Currency translation
adjustments (1,301) (1,301) (1,301)
Net unrealized appreciation
on securities 2 2 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive losses (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
Comprehensive earnings:
Net earnings 7,675 7,675
Other comprehensive losses, net of
income taxes:
Currency translation
adjustments (975) (975) (975)
Additional minimum pension
liability (27) (27) (27)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive losses (1,002)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive earnings 6,673
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options and issuance
of other stock awards 13 115 128
Cash dividends declared ($1.84 per share) (4,393) (4,393)
Stock repurchased (3,300) (3,300)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 $935 $29,556 $(2,056) $(52) $(2,108) $(13,078) $15,305
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
40
<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 accounting principles generally accepted in the United States
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 of, 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 with estimated undiscounted cash flows from future
operations.
Advertising costs: Advertising costs are expensed as incurred.
Revenue recognition: The Company's consumer products businesses
recognize operating revenues upon shipment of goods to customers. For the
Company's financial services operation, income attributable to leveraged
leases is initially recorded as unearned income and subsequently recognized
as finance lease revenue over the terms of the respective leases at a
constant after-tax rate of return on the positive net investment. The income
attributable to direct finance leases is initially recorded as unearned
income and subsequently recognized as finance lease revenue over the terms of
the respective leases at a constant pre-tax rate of return on the net
investment.
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.
41
<PAGE>
The intrinsic values of options are 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 in
stockholders' equity as currency translation adjustments.
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 gain or loss 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 ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which had an initial adoption
date by the Company of January 1, 2000. During 1999, the FASB postponed the
adoption date of SFAS No. 133 until January 1, 2001. SFAS No. 133 requires that
all derivative financial instruments be recorded on the consolidated balance
sheets at their fair value. Changes in the fair value of derivatives will be
recorded each period in earnings or other comprehensive earnings, depending on
whether a derivative is designated as part of a hedge transaction and, if it
is, the type of hedge transaction. Gains and losses on derivative instruments
reported in other comprehensive earnings will be reclassified as earnings in the
periods in which earnings are affected by the hedged item. The Company has not
yet determined the impact that adoption or subsequent application of SFAS No.
133 will have on its financial position or results of operations.
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 1999, the Company sold several small international and domestic food
businesses. The aggregate proceeds received in these transactions were $175
million and the Company recorded pre-tax gains of $62 million.
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.
The operating results of the businesses sold 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 in the Company's consolidated statements of earnings.
Note 3.
Acquisitions:
During 1999, the Company's international tobacco subsidiary increased its
ownership interest in a Portuguese tobacco company from 65% to 90% at a cost
of $70 million. The Company also increased its ownership interest in a Polish
tobacco company from 75% to 96% at a cost of $104 million.
During 1999, the Company's beer subsidiary purchased four trademarks from
the Pabst Brewing Company ("Pabst") and the Stroh Brewery Company ("Stroh"). The
Company also agreed to increase its contract manufacturing of Pabst products,
including brands that Pabst acquired from Stroh in a separate agreement. In
addition, the Company assumed ownership of the Pabst brewery in Tumwater,
Washington. The total cost of the four trademarks and the brewery was $189
million.
During 1998, the Company's domestic tobacco subsidiary paid $150 million
for options to purchase the voting and
42
<PAGE>
non-voting common stock of a company (the "acquiree"), the sole assets of which
are three U.S. cigarette trademarks, L&M, Lark and Chesterfield. During 1999,
the Company substantially completed its acquisition of the acquiree. Including
the $150 million paid in December, the total acquisition price was approximately
$300 million.
During 1997, the Company increased its ownership interest in a Mexican
cigarette business from 28.8% to 50.0% at a cost of $403 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.
Inventories:
The cost of approximately 47% and 50% of inventories in 1999 and 1998,
respectively, was determined using the LIFO method. The stated LIFO values of
inventories were approximately $0.8 billion and $1.1 billion lower than the
current cost of inventories at December 31, 1999 and 1998, respectively.
Note 5.
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)
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Average Average
Amount Year-End Amount Year-End
Outstanding Rate Outstanding Rate
================================================================================
Consumer products:
Bank loans $ 676 8.8% $ 260 10.3%
Amount reclassified
as long-term debt (35) (35)
- --------------------------------------------------------------------------------
$ 641 $ 225
================================================================================
The fair values of the Company's short-term borrowings at December 31, 1999 and
1998, based upon current market interest rates, approximate the amounts
disclosed above.
The Company and its subsidiaries maintain credit facilities with a number
of lending institutions, amounting to approximately $12.1 billion at December
31, 1999. Approximately $11.4 billion of these facilities were unused at
December 31, 1999. Certain of these facilities, 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. Of these revolving bank agreements, an agreement for
$8.0 billion will expire in 2002 and a second agreement for $2.0 billion will
expire in September 2000. The $8.0 billion credit agreement enables the Company
to reclassify short-term debt on a long-term basis. Accordingly, short-term
borrowings that the Company intended to refinance were reclassified as long-term
debt.
Note 6.
Long-Term Debt:
At December 31, 1999 and 1998, the Company's long-term debt consisted of the
following:
(in millions)
- -------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------
Consumer products:
Short-term borrowings, reclassified $ 35 $ 35
Notes, 6.15% to 9.25% (average
effective rate 7.33%), due
through 2008 8,315 9,615
Debentures, 6.00% to 8.50%
(average effective rate 9.38%),
$1.6 billion face amount, due
through 2027 1,471 1,691
Foreign currency obligations:
Swiss franc, 2.05% to 5.38%
(average effective rate 4.58%),
due through 2000 208 463
German mark, 5.63% to 6.38%
(average effective rate 6.00%),
due through 2002 319 361
Euro, 4.50% to 5.63%
(average effective rate 5.07%),
due through 2008 2,103 1,205
Other foreign 70 122
Other 360 236
- -------------------------------------------------------------------------------
12,881 13,728
Less current portion of long-term debt (1,601) (1,822)
- -------------------------------------------------------------------------------
$ 11,280 $ 11,906
===============================================================================
Financial services:
Eurodollar bonds, 7.50%, due 2009 $ 497
Eurodollar note, 6.63%, due 1999 $ 200
Foreign currency obligations:
French franc, 6.88%, due 2006 158 179
German mark, 6.50% and 5.38%
(average effective rate 5.89%),
due 2003 and 2004 291 330
- -------------------------------------------------------------------------------
$ 946 $ 709
===============================================================================
Approximately $1.2 billion of consumer products debt, previously reported as
German mark debt in 1998, has been redenominated into euros, and is reflected as
euro debt above.
Aggregate maturities of long-term debt, excluding short-term borrowings
reclassified as long-term debt, are as follows:
Consumer Financial
(in millions) Products Services
================================================================================
2000 $1,601
2001 2,234
2002 1,344
2003 1,232 $132
2004 909 159
2005-2009 4,576 655
2010-2014 256
Thereafter 811
================================================================================
43
<PAGE>
The current portion of long-term debt and the aggregate maturities for the year
2000 include $800 million of debt, which may mature in March 2000 if the
ten-year United States Treasury rate exceeds a contractually determined level.
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,
1999 and 1998 was $13.5 billion and $15.4 billion, respectively.
Note 7.
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, 1997 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
Exercise of stock
options and
issuance of other
stock awards 4,614,412 4,614,412
Repurchased (96,629,246) (96,629,246)
- --------------------------------------------------------------------------------
Balances,
December 31, 1999 2,805,961,317 (467,441,576) 2,338,519,741
================================================================================
At December 31, 1999, 165,687,673 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 8.
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, reload options 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, 1999 were 64,790,605.
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.
The Company applies the intrinsic value-based methodology 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 by using the fair value at the grant date, the
Company's net earnings, basic and diluted earnings per share ("EPS") would have
been $7,582 million, $3.17 and $3.16, respectively, for the year ended December
31, 1999; $5,280 million, $2.17 and $2.16, respectively, for the year ended
December 31, 1998; and $6,218 million, $2.57 and $2.55, respectively, for the
year ended December 31, 1997. The foregoing impact of compensation cost 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
================================================================================
1999 5.81% 5 years 26.06% 4.41% $ 8.21
1998 5.52 5 23.83 4.03 7.78
1997 6.38 5 27.86 3.65 10.83
================================================================================
Option activity was as follows for the years ended December 31, 1997, 1998
and 1999:
Weighted
Shares Average
Subject Exercise Options
to Option Price Exercisable
- --------------------------------------------------------------------------------
Balance at
January 1, 1997 81,213,381 $24.81 58,949,796
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 29.13 67,827,399
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 32.21 68,864,594
Options granted 22,154,585 39.87
Options exercised (5,665,611) 20.37
Options canceled (3,386,670) 30.08
- --------------------------------------------------------------------------------
Balance at
December 31, 1999 100,305,968 34.65 78,423,023
================================================================================
44
<PAGE>
The weighted average exercise prices of options exercisable at December 31,
1999, 1998 and 1997 were $33.19, $30.21 and $25.69, respectively.
The following table summarizes the status of stock options outstanding and
exercisable as of December 31, 1999 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
================================================================================
$15.64-$21.67 10,979,653 3 years $17.80 10,979,653 $17.80
24.52- 34.90 31,448,685 5 29.14 31,444,220 29.14
35.81- 40.00 43,475,575 8 39.82 21,597,095 39.77
41.62- 58.72 14,402,055 7 43.90 14,402,055 43.90
- --------------------------------------------------------------------------------
100,305,968 78,423,023
=========== ==========
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 1999, 1998
and 1997, the Company granted 100,000, 603,650 and 692,100 shares,
respectively, of restricted stock to eligible U.S. based employees and also
issued to eligible non-U.S. employees rights to receive 125,000, 120,500 and
392,400 like shares, respectively, during 1999, 1998 and 1997. At December
31, 1999, restrictions on the stock, net of forfeitures, lapse as follows:
2000-633,500 shares; 2001-25,000 shares; 2002-1,340,900 shares; 2003-295,250
shares; and 2004 and thereafter-625,000 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 $9
million, $34 million and $29 million for the years ended December 31, 1999, 1998
and 1997, respectively. The unamortized portion, which is reported as a
reduction of earnings reinvested in the business, was $47 million and $59
million at December 31, 1999 and 1998, respectively.
Note 9.
Earnings per Share:
Basic and diluted EPS were calculated using the following for the years ended
December 31, 1999, 1998 and 1997:
(in millions)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net earnings $7,675 $5,372 $6,310
================================================================================
Weighted average shares for
basic EPS 2,393 2,429 2,420
Plus incremental shares from
conversions:
Restricted stock and stock rights 2 1 1
Stock options 8 16 21
- --------------------------------------------------------------------------------
Weighted average shares for
diluted EPS 2,403 2,446 2,442
================================================================================
In 1999, 1998 and 1997, options on 47 million, 15 million and 12 million 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 10.
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, 1999, 1998 and 1997:
(in millions)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Pre-tax earnings:
United States $ 8,495 $5,134 $ 7,515
Outside United States 4,200 3,953 3,096
- --------------------------------------------------------------------------------
Total pre-tax earnings $ 12,695 $9,087 $10,611
================================================================================
Provision for income taxes:
United States federal:
Current $ 2,810 $1,614 $ 2,027
Deferred 280 171 12
- --------------------------------------------------------------------------------
3,090 1,785 2,039
State and local 485 350 354
- --------------------------------------------------------------------------------
Total United States 3,575 2,135 2,393
- --------------------------------------------------------------------------------
Outside United States:
Current 1,581 1,475 1,851
Deferred (136) 105 57
- --------------------------------------------------------------------------------
Total outside
United States 1,445 1,580 1,908
- --------------------------------------------------------------------------------
Total provision for
income taxes $ 5,020 $3,715 $ 4,301
================================================================================
At December 31, 1999, applicable United States federal income taxes and foreign
withholding taxes have not been provided on approximately $5.8 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 $289 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 adequate tax
payments and accruals have been made and 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, 1999, 1998 and 1997:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
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 2.5 2.2
Rate differences--foreign
operations (0.3) (0.2) 3.7
Goodwill amortization 1.4 2.0 1.7
Other 0.9 1.6 (2.1)
- --------------------------------------------------------------------------------
Effective tax rate 39.5% 40.9% 40.5%
================================================================================
45
<PAGE>
The tax effects of temporary differences that gave rise to consumer products
deferred income tax assets and liabilities consisted of the following at
December 31, 1999 and 1998:
(in millions)
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Deferred income tax assets:
Accrued postretirement and
postemployment benefits $ 1,200 $ 1,195
Settlement charges 854 476
Other 959 987
- --------------------------------------------------------------------------------
Total deferred income tax assets 3,013 2,658
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment (1,851) (1,866)
Prepaid pension costs (447) (279)
- --------------------------------------------------------------------------------
Total deferred income tax liabilities (2,298) (2,145)
- --------------------------------------------------------------------------------
Net deferred income tax assets $ 715 $ 513
================================================================================
Financial services deferred income tax liabilities are primarily attributable to
temporary differences from investments in finance leases.
Note 11.
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 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 financings. 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 the related amortization are
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)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Operating revenues:
Domestic tobacco $ 19,596 $ 15,310 $ 13,584
International tobacco 27,506 27,390 26,240
North American food 17,546 17,312 16,838
International food 9,251 9,999 10,852
Beer 4,342 4,105 4,201
Financial services 355 275 340
- --------------------------------------------------------------------------------
Total operating revenues $ 78,596 $ 74,391 $ 72,055
================================================================================
Operating companies income:
Domestic tobacco $ 4,865 $ 1,489 $ 3,287
International tobacco 4,968 5,029 4,572
North American food 3,107 3,055 2,873
International food 1,146 1,127 1,326
Beer 511 451 459
Financial services 228 183 297
- --------------------------------------------------------------------------------
Total operating companies
income 14,825 11,334 12,814
Amortization of goodwill (582) (584) (585)
General corporate expenses (627) (645) (479)
Minority interest (126) (128) (87)
- --------------------------------------------------------------------------------
Total operating income 13,490 9,977 11,663
Interest and other debt
expense, net (795) (890) (1,052)
- --------------------------------------------------------------------------------
Total earnings before
income taxes $ 12,695 $ 9,087 $ 10,611
================================================================================
During 1999, Philip Morris Incorporated ("PM Inc."), the Company's domestic
tobacco operation, announced plans to phase out cigarette production capacity at
its Louisville, Kentucky manufacturing plant by August 2000. The closure of this
facility will occur in stages, as cigarette production is shifted to other PM
Inc. manufacturing facilities in the United States. As a result of this
announcement, PM Inc. recorded pre-tax charges of $183 million during 1999.
These charges, which are in marketing, administration and research costs in the
consolidated statement of earnings, included severance benefits and enhanced
pension and postretirement benefits in accordance with the terms of the
underlying plans, for approximately 1,500 hourly and salaried employees.
Severance benefits, which can either be paid in a lump sum or as income
protection payments over a period of time, commence upon termination of
employment. Payments of enhanced pension and postretirement benefits are made
over the remaining lives of the former employees in accordance with the terms of
the related benefit plans. To date, in light of the payment terms, minimal
amounts have been paid. All operating costs of the manufacturing plant,
including increased depreciation, are charged to expense as incurred during the
closing period. During 1998, pre-tax charges of $319 million were recorded
principally for voluntary separation, early retirement and severance programs.
The 1998 charges were primarily for enhanced pension and postretirement benefits
for the approximately 2,100 hourly and salaried employees at various operating
locations who elected to participate in the program. Benefit payments were made
in accordance with the
46
<PAGE>
provisions of the related pension and postretirement benefit plans. Operating
companies income for the domestic tobacco segment also 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.
During 1999, Kraft Foods North America ("Kraft") announced that it was
offering voluntary retirement incentive or separation programs to certain
eligible hourly and salaried employees in the United States. Employees electing
to terminate employment under the terms of these programs were entitled to
enhanced retirement or severance benefits. Approximately 1,100 hourly and
salaried employees accepted the benefits offered by these programs and elected
to retire or terminate. As a result, Kraft recorded a pre-tax charge of $157
million during 1999. This charge was included in marketing, administration and
research costs in the consolidated statement of earnings and in the North
American food segment. Payments of pension and post retirement benefits are made
in accordance with the terms of the applicable benefit plans. Severance
benefits, which are paid over a period of time, commence upon dates of
retirement or termination that range from April 1999 to March 2000. Salary and
related benefit costs of employees prior to the retirement or termination date
are expensed as incurred.
During 1999, a subsidiary of the Company announced the closure of a
cigarette factory and the corresponding reduction of cigarette production
capacity in Brazil. Prior to the factory closure, existing employees were
offered voluntary dismissal benefits. These benefits were accepted by half of
the approximately 1,000 employees at the facility. During the third quarter of
1999, the factory was closed and the remaining employees were severed. A pre-tax
charge of $136 million was recorded in marketing, administration and research
costs in the consolidated statement of earnings of the international tobacco
segment to write down the tobacco machinery and equipment no longer in use and
to recognize the cost of severance benefits. Payments of severance benefits to
former employees are in accordance with the local Brazilian regulations.
A pre-tax charge of $29 million was recorded in marketing, administration
and research costs in the consolidated statement of earnings of the beer segment
in 1999 to write down the book value of three brewing facilities to their
estimated fair values. One of the facilities is presently closed, while the
remaining two facilities are not expected to generate sufficient future cash
flows to recover the recorded cost of the facilities. The operating costs of
these brewing facilities are charged to expense as incurred. General corporate
expenses for the year ended December 31, 1998 included pre-tax charges of $116
million related to the settlement of shareholder litigation and $18 million for
separation programs covering approximately 100 hourly and salaried employees at
the Company's corporate headquarters.
See Notes 2 and 3 regarding divestitures and acquisitions.
For the years ended December 31,
(in millions)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Depreciation expense:
Domestic tobacco $ 212 $ 216 $ 171
International tobacco 278 267 236
North American food 281 267 268
International food 210 227 246
Beer 114 108 104
- --------------------------------------------------------------------------------
1,095 1,085 1,025
Other 25 21 19
- --------------------------------------------------------------------------------
Total depreciation expense $ 1,120 $ 1,106 $ 1,044
================================================================================
Assets:
Tobacco $16,102 $16,395 $15,012
Food 30,462 31,397 31,170
Beer 1,769 1,503 1,451
Financial services 7,711 6,480 5,886
- --------------------------------------------------------------------------------
56,044 55,775 53,519
Other 5,337 4,145 2,428
- --------------------------------------------------------------------------------
Total assets $61,381 $59,920 $55,947
================================================================================
Capital expenditures:
Domestic tobacco $ 122 $ 217 $ 483
International tobacco 561 588 455
North American food 568 534 440
International food 292 307 297
Beer 165 129 115
- --------------------------------------------------------------------------------
1,708 1,775 1,790
Other 41 29 84
- --------------------------------------------------------------------------------
Total capital expenditures $ 1,749 $ 1,804 $ 1,874
================================================================================
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 $8.9 billion, $9.2
billion and $9.5 billion for the years ended December 31, 1999, 1998 and 1997,
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)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Operating revenues:
United States--domestic $40,287 $35,432 $33,208
--export 5,046 6,005 6,705
Europe 25,103 25,169 24,796
Other 8,160 7,785 7,346
- --------------------------------------------------------------------------------
Total operating revenues $78,596 $74,391 $72,055
================================================================================
Long-lived assets:
United States $17,263 $15,616 $14,533
Europe 4,143 4,159 4,057
Other 2,201 2,349 2,128
- --------------------------------------------------------------------------------
Total long-lived assets $23,607 $22,124 $20,718
================================================================================
47
<PAGE>
Note 12.
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, 1999, 1998 and 1997:
(in millions) U.S. Plans Non-U.S. Plans
- --------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------
Service cost $ 152 $ 156 $ 137 $ 102 $ 91 $ 83
Interest cost 436 406 382 162 165 163
Expected return on
plan assets (766) (615) (564) (168) (150) (135)
Amortization:
Net gain on
adoption of
SFAS No. 87 (23) (24) (24)
Unrecognized net
loss (gain) from
experience
differences (22) 3 (4) (1)
Prior service cost 19 15 14 6 6 6
Termination,
settlement and
curtailment 22 251 (22)
- --------------------------------------------------------------------------------
Net pension cost
(income) $(182) $ 189 $ (77) $ 105 $ 108 $ 116
================================================================================
During 1999, 1998 and 1997, the Company instituted early retirement and
workforce reduction programs and, during 1997, the Company also sold
businesses. These actions resulted in additional termination benefits of $128
million, net of settlement and curtailment gains of $106 million in 1999,
additional termination benefits and curtailment losses of $279 million, net
of settlement gains of $28 million in 1998 and settlement gains of $22
million in 1997.
The changes in benefit obligations and plan assets, as well as the funded
status of the Company's pension plans at December 31, 1999 and 1998 were as
follows:
(in millions) U.S. Plans Non-U.S. Plans
- -------------------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------
Benefit obligation at
January 1 $ 6,220 $ 5,523 $ 3,201 $ 2,701
Service cost 152 156 102 91
Interest cost 436 406 162 165
Benefits paid (693) (396) (155) (129)
Termination, settlement
and curtailment 210 305
Actuarial (gains) losses (597) 238 (34) 263
Currency (272) 95
Other 67 (12) 33 15
- -------------------------------------------------------------------------------
Benefit obligation at
December 31 5,795 6,220 3,037 3,201
- -------------------------------------------------------------------------------
Fair value of plan assets at
January 1 8,703 8,085 2,248 2,189
Actual return on plan
assets 1,240 973 252 116
Contributions 309 14 88 53
Benefits paid (649) (372) (112) (93)
Currency (194) 39
Actuarial gains (losses) 18 3 90 (56)
- -------------------------------------------------------------------------------
Fair value of plan assets at
December 31 9,621 8,703 2,372 2,248
- -------------------------------------------------------------------------------
Excess (deficit) of plan
assets versus benefit
obligations at
December 31 3,826 2,483 (665) (953)
Unrecognized actuarial
(gains) losses (2,573) (1,718) (92) 171
Unrecognized prior
service cost 148 107 37 37
Unrecognized net
transition obligation (34) (58) 10 12
- -------------------------------------------------------------------------------
Net prepaid pension asset
(liability) $ 1,367 $ 814 $ (710) $ (733)
================================================================================
The combined domestic and foreign pension plans resulted in a net prepaid
pension asset of $657 million and $81 million at December 31, 1999 and 1998,
respectively. These amounts were recognized in the Company's consolidated
balance sheets at December 31, 1999 and 1998 as other assets of $2.2 billion and
$1.9 billion, respectively, for those plans in which plan assets exceeded their
accumulated benefit obligations and as other liabilities of $1.5 billion and
$1.8 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 $305 million, $242 million and $25 million,
respectively, as of December 31, 1999 and $1,484 million, $1,374 million and
$1,123 million, respectively, as of December 31, 1998. For foreign
48
<PAGE>
plans with accumulated benefit obligations in excess of plan assets, the
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets were $1,020 million, $917 million and $97 million, respectively, as
of December 31, 1999 and $1,111 million, $996 million and $155 million,
respectively, as of December 31, 1998.
The following weighted-average assumptions were used to determine the
Company's obligations under the plans:
U.S. Plans Non-U.S. Plans
- -------------------------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------
Discount rate 7.75% 7.00% 5.58% 5.37%
Expected rate of return on
plan assets 9.00 9.00 7.95 7.63
Rate of compensation
increase 4.50 4.50 3.71 3.73
================================================================================
The Company and certain of its subsidiaries sponsor deferred profit-sharing
plans covering certain salaried, non-union 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 $198 million, $201 million and $200 million in 1999, 1998 and
1997, respectively.
Postretirement Benefit Plans: Net postretirement health care costs
consisted of the following for the years ended December 31, 1999, 1998 and
1997:
(in millions)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Service cost $ 56 $ 56 $ 54
Interest cost 188 182 182
Amortization:
Unrecognized net gain from
experience differences (3) (3) (3)
Unrecognized prior service cost (12) (12) (12)
Other expense 23 30
- --------------------------------------------------------------------------------
Net postretirement health
care costs $ 252 $ 253 $ 221
================================================================================
During 1999, 1998 and 1997, the Company instituted early retirement and
workforce reduction programs. These actions resulted in curtailment losses of
$23 million in 1999 and additional postretirement health care costs of $20
million and curtailment losses of $10 million in 1998, all of which are included
in other expense above.
The Company's postretirement health care plans currently are not funded.
The changes in the benefit obligations of the plans at December 31, 1999 and
1998 were as follows:
(in millions)
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
at January 1 $ 2,771 $ 2,627
Service cost 56 56
Interest cost 188 182
Benefits paid (142) (135)
Termination, settlement and curtailment 45 107
Plan amendments (8) 1
Actuarial gains (381) (67)
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
at December 31 2,529 2,771
Unrecognized actuarial gains (losses) 159 (201)
Unrecognized prior service cost 90 96
- --------------------------------------------------------------------------------
Accrued postretirement health care costs $ 2,778 $ 2,666
================================================================================
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for U.S. plans was 7.5% in 1998, 7.0% in 1999
and 6.5% in 2000, 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 12.0% in 1998, 11.0% in 1999 and 10.0% in 2000, 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, 1999 and postretirement health care cost (service cost and interest
cost) for the year then ended by approximately 11.9% 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, 1999 and postretirement health care cost (service cost and interest
cost) for the year then ended by approximately 9.8% and 11.1%, respectively.
The accumulated postretirement benefit obligation for U.S. plans at
December 31, 1999 and 1998 was determined using assumed discount rates of 7.75%
and 7.0%, respectively. The accumulated postretirement benefit obligation at
December 31, 1999 and 1998 for Canadian plans was determined using assumed
discount rates of 7.0% and 6.50%, respectively.
Postemployment Benefit Plans: The Company and certain of its affiliates
sponsor postemployment benefit plans covering substantially all salaried and
certain hourly employees. The cost of these plans is charged to expense over
the working life of the covered employees. Net postemployment costs consisted
of the following for the years ended December 31, 1999, 1998 and 1997:
(in millions)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Service cost $ 24 $25 $ 26
Amortization of unrecognized
net loss 2 5 17
Other expense 161 30 288
- --------------------------------------------------------------------------------
Net postemployment costs $187 $60 $331
================================================================================
49
<PAGE>
The Company instituted workforce reduction programs in its tobacco and North
American food operations in 1999, in its domestic tobacco operations in 1998 and
in its international food operations in 1997. These actions resulted in
incremental postemployment costs, which are shown as other expense above.
The Company's postemployment plans are not funded. The changes in the
benefit obligations of the plans at December 31, 1999 and 1998 were as follows:
(in millions)
- --------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------
Accumulated benefit obligation
at January 1 $ 602 $ 743
Service cost 24 25
Benefits paid (149) (196)
Other expense 161 30
- --------------------------------------------------------------------------------
Accumulated benefit obligation at December 31 638 602
Unrecognized actuarial gains 5 11
- --------------------------------------------------------------------------------
Accrued postemployment costs $ 643 $ 613
================================================================================
The accumulated benefit obligation was determined using an assumed ultimate
annual turnover rate of 0.3% in 1999 and 1998, assumed compensation cost
increases of 4.5% in 1999 and 1998, and assumed benefits as defined in the
respective plans or historical experience of the plan sponsors. Postemployment
costs in excess of actuarially determined benefits are charged to expense when
incurred.
Note 13.
Additional Information:
For the years ended December 31,
(in millions)
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Research and
development expense $ 522 $ 506 $ 533
================================================================================
Advertising expense $ 2,301 $ 2,416 $ 2,530
================================================================================
Interest and other debt expense, net:
Interest expense $ 1,100 $ 1,144 $ 1,184
Interest income (305) (254) (132)
- --------------------------------------------------------------------------------
$ 795 $ 890 $ 1,052
================================================================================
Interest expense of financial
services operations included
in cost of sales $ 89 $ 77 $ 67
================================================================================
Rent expense $ 467 $ 429 $ 443
================================================================================
Note 14.
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
that 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, 1999 and 1998, the notional
principal amounts of those agreements were $3.4 billion and $3.3 billion,
respectively. Aggregate maturities at December 31, 1999 were as follows (in
millions): 2000, $1,015; 2002, $155; 2003, $129; 2004, $162; 2006, $876; and
2008, $1,054. The local currency notional amount is used to calculate interest
payments that 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 foreign 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,
1999 and 1998, the Company had option and forward foreign exchange contracts,
principally for the Japanese yen, British pound and the euro, with an aggregate
notional amount of $3.8 billion and $8.1 billion, respectively, for both the
purchase and/or sale of foreign currencies.
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, 1999.
Fair value: The aggregate fair value, based on market quotes, of the
Company's total debt at December 31, 1999 was $14.1 billion as compared to
its carrying value of $14.5 billion. The aggregate fair value 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 carrying values of the foreign currency and related interest rate swap
agreements, the forward foreign currency contracts and the currency option
contracts, which did not differ materially from their fair values, were not
material.
See Notes 5 and 6 for additional disclosures of fair value for
short-term borrowings and long-term debt.
Note 15.
Contingencies:
Legal proceedings covering a wide range of matters are pending or threatened in
various United States and foreign jurisdictions against the Company, its
subsidiaries and affiliates, including PM Inc., the Company's domestic tobacco
subsidiary, and Philip Morris International Inc. ("PMI"), the Company's
international tobacco subsidiary, and their respective indemnitees. Various
types of claims are raised in these proceedings, including product liability,
consumer protection, antitrust, tax, patent infringement, employment matters,
claims for contribution and claims of competitors and distributors.
50
<PAGE>
Overview of Tobacco-Related Litigation
Types and Number of Cases: Pending claims related to tobacco products
generally fall within the following categories: (i) smoking and health cases
alleging personal injury brought on behalf of individual plaintiffs, (ii)
smoking and health cases primarily alleging personal injury and purporting to
be brought on behalf of a class of individual plaintiffs, (iii) health care
cost recovery cases brought by governmental (both domestic and foreign) and
non-governmental plaintiffs seeking reimbursement for health care
expenditures allegedly caused by cigarette smoking and/or disgorgement of
profits, and (iv) other tobacco-related litigation, including suits by former
asbestos manufacturers seeking contribution or reimbursement for amounts
expended in connection with the defense and payment of asbestos claims that
were allegedly caused in whole or in part by cigarette smoking. Damages
claimed in some of the smoking and health class actions, health care cost
recovery cases and asbestos contribution cases range into the billions of
dollars. Plaintiffs' theories of recovery and the defenses raised in the
smoking and health and health care cost recovery cases are discussed below.
As of December 31, 1999, there were approximately 380 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 510
such cases on December 31, 1998, and approximately 375 such cases on December
31, 1997. Approximately 13 of the individual cases involve allegations of
various personal injuries allegedly related to exposure to environmental tobacco
smoke ("ETS"). In January 2000, approximately 300 additional individual cases
were filed in Florida by current and former flight attendants claiming personal
injuries allegedly related to ETS. The flight attendants were members of an ETS
smoking and health class action which was settled in 1998. The terms of the
court-approved settlement in that case allowed class members to file individual
lawsuits seeking compensatory damages, but prohibited them from seeking punitive
damages.
In addition, as of December 31, 1999, there were approximately 50 smoking
and health putative class actions pending in the United States against PM Inc.
and, in some cases, the Company (including eight that involve allegations of
various personal injuries related to exposure to ETS), compared with
approximately 60 such cases on December 31, 1998, and approximately 50 such
cases on December 31, 1997. Many of these actions purport to constitute
statewide class actions and were filed after May 1996 when the United States
Court of Appeals for the Fifth Circuit, 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, 1999, there were approximately 60 health care cost
recovery actions pending in the United States (excluding the cases covered by
the 1998 Master Settlement Agreement discussed below), compared with
approximately 95 health care cost recovery cases pending on December 31, 1998,
and 105 cases on December 31, 1997.
There are also a number of tobacco-related actions pending outside the
United States against PMI and its affiliates and subsidiaries, including
approximately 55 smoking and health cases initiated by one or more individuals
(Argentina (38), Brazil (2), Canada (1), Germany (3), Hong Kong (1), Ireland
(1), Italy (1), Japan (1), the Philippines (1), Poland (2), Scotland (1), Spain
(1) and Turkey (2)), compared with approximately 27 such cases on December 31,
1998. In addition, there are 10 smoking and health putative class actions
pending outside the United States (Australia (2), Brazil (3), Canada (3), Israel
(1) and Nigeria (1)), compared with six in December 1998. In addition, during
the past two years, health care cost recovery actions have been brought in
Israel, the Marshall Islands, British Columbia, Canada and France (by a local
agency of the French social security health insurance system) and, in the United
States, by Bolivia, Guatemala (dismissed, as discussed below), Panama,
Nicaragua, Thailand (voluntarily dismissed), Ukraine, Venezuela and the States
of Goias and Rio de Janeiro, Brazil.
Federal Government's Lawsuit: In September 1999, the U.S. government
filed a lawsuit in the U.S. District Court for the District of Columbia
against various cigarette manufacturers and others, including the Company and
PM Inc., asserting claims under three federal statutes, the Medical Care
Recovery Act, the Medicare Secondary Payer provisions of the Social Security
Act, and the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The
lawsuit seeks to recover an unspecified amount of health care costs for
tobacco-related illnesses allegedly caused by defendants' fraudulent and
tortious conduct and paid for by the government under various federal health
care programs, including Medicare, military and veterans' health benefits
programs, and the Federal Employees Health Benefits Program. The complaint
alleges that such costs total more than $20 billion annually. It also seeks
various types of equitable and declaratory relief, including disgorgement, an
injunction prohibiting certain actions by the defendants, and a declaration
that the defendants are liable for the federal government's future costs of
providing health care resulting from defendants' alleged past tortious and
wrongful conduct. In December 1999, the Company and PM Inc. filed a motion to
dismiss this lawsuit on numerous grounds, including that the statutes invoked
by the government do not provide a basis for the relief sought. The Company
and PM Inc. believe that they have a number of valid defenses to the lawsuit
and will vigorously defend it.
Industry Trial Results: There have been several jury verdicts in
tobacco-related litigation during the past three years. In July 1999, a
Louisiana jury returned a verdict in favor of defendants in an individual
smoking and health case against other cigarette manufacturers. Also in July
1999, the jury in the Engle smoking and health class action pending in
Florida returned a verdict against PM Inc. and several other tobacco
companies in "Phase
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One" of the trial, which concerned certain issues determined by the trial court
to be "common" to the causes of action of the plaintiff class. Liability and
damages in relation to any individual class member were not decided in Phase One
(see "Engle Trial," below, for a more detailed discussion of the Phase One
verdict and certain other developments in this case). In June 1999, a
Mississippi jury returned a verdict in favor of defendants, including PM Inc.,
in an action brought on behalf of an individual who died allegedly as a result
of exposure to ETS. In May 1999, a Missouri jury returned a verdict in favor of
defendant in an individual smoking and health case against another cigarette
manufacturer. Also in May 1999, a Tennessee jury returned a verdict in favor of
defendants, including PM Inc., in two of three individual smoking and health
cases consolidated for trial. In the third case (not involving PM Inc.), the
jury found liability against defendants and apportioned fault equally between
plaintiff and defendants. Under Tennessee's system of modified comparative
fault, because the jury found plaintiff's fault equal to that of defendants,
recovery was not permitted.
In March 1999, an Oregon jury awarded $800,000 in actual damages, $21,500
in medical expenses and $79.5 million in punitive damages against PM Inc. In
February 1999, a California jury awarded $1.5 million in compensatory damages
and $50 million in punitive damages against PM Inc. The punitive damage awards
in the Oregon and California actions have been reduced to $32 million and $25
million, respectively. PM Inc. is appealing the verdicts and the damage awards
in these cases.
In March 1999, a jury returned a verdict in favor of defendants, including
PM Inc., on all counts in a union health care cost recovery action brought on
behalf of approximately 114 employer-employee trust funds in Ohio.
Previously, juries had returned verdicts for defendants in three
individual smoking and health cases and in one individual ETS smoking and health
case. In January 1999, a Florida court set aside a jury award totaling
approximately $1 million in a smoking and health case against another United
States cigarette manufacturer and ordered a new trial in the case. In June 1998,
a Florida appeals court reversed a $750,000 jury verdict awarded in August 1996
against another United States cigarette manufacturer, and the Florida Supreme
Court has heard oral arguments on this ruling. In 1997, a court in Brazil
awarded plaintiffs in a smoking and health case the Brazilian currency
equivalent of $81,000, attorneys' fees and a monthly annuity for 35 years equal
to two-thirds of the deceased smoker's last monthly salary. In March 1999, an
appeals court reversed the trial court's award and dismissed the case. Neither
the Company nor its affiliates were parties to that action.
In December 1999, a French court in an action brought on behalf of a
deceased smoker, found that another cigarette manufacturer had a duty to warn
him about risks associated with smoking prior to 1976, when the French
government required warning labels on cigarette packs, and failed to do so. The
court did not determine causation or liability, which shall be considered in
future proceedings. Neither the Company nor its affiliates are parties to this
action.
Engle Trial: Trial in this Florida smoking and health class action case
began in July 1998. The plaintiff class seeks compensatory and punitive
damages, each in excess of $100 billion, as well as attorneys' fees and court
costs. The class consists of all Florida residents and citizens, and their
survivors, "who have suffered, presently suffer or have died from diseases
and medical conditions caused by their addiction to cigarettes that contain
nicotine."
On July 7, 1999, the jury returned a verdict against defendants in Phase
One of the three-phase trial plan. The Phase One verdict concerned certain
issues determined by the trial court to be "common" to the causes of action of
the plaintiff class. Among other things, the jury found that smoking cigarettes
causes 20 diseases or medical conditions, that cigarettes are addictive or
dependence-producing, defective and unreasonably dangerous, that defendants made
materially false statements with the intention of misleading smokers, that
defendants concealed or omitted material information concerning the health
effects and/or the addictive nature of smoking cigarettes and agreed to
misrepresent and conceal the health effects and/or the addictive nature of
smoking cigarettes, and that defendants were negligent and engaged in extreme
and outrageous conduct or acted with reckless disregard with the intent to
inflict emotional distress. The jury also found that defendants' conduct "rose
to a level that would permit a potential award or entitlement to punitive
damages."
Liability and damages in relation to any individual class member were not
decided in Phase One. Phase Two of the trial commenced on November 1, 1999.
During this phase, the claims of three of the named plaintiffs are being
adjudicated in a consolidated trial before the same jury that returned the
verdict in Phase One. Under the trial plan, the jury in Phase Two will determine
issues of specific causation, reliance, affirmative defenses, and other
individual-specific issues related to the claims of the named plaintiffs and
their entitlement to damages, if any.
Phase Three of the trial plan would address other class members' claims,
including issues of specific causation, reliance, affirmative defenses and other
individual-specific issues regarding entitlement to damages, in individual
trials before separate juries.
By order dated July 30, 1999, and supplemented on August 2, 1999
(together, the "order"), the trial judge amended the trial plan in respect of
the manner of determining punitive damages, if any. The order provides that the
jury in Phase Two will determine punitive damages, if any, on a dollar-amount
basis for the entire qualified class. By order of September 3, 1999, the Third
District Court of Appeal quashed the July 30, 1999 and August 2, 1999 orders of
the trial judge and stated that both compensatory and punitive damages must be
tried on an individual as opposed to class-wide basis. On September 17, 1999,
the Third District Court of Appeal, on its own motion, vacated its September 3
order, and, on October 20, 1999, ruled that defendants could not challenge the
trial plan for determining punitive damages at this stage of the proceedings;
the ruling expressly declined to address the merits of whether a class-wide
determination of punitive damages is permissible but deferred the court's review
of that issue for any appropriate subsequent appeal. Defendants sought review by
the Florida Supreme Court of the Third District Court of Appeal's ruling. In
December 1999, the Florida Supreme
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Court denied defendants' petition for review, noting that it did so without
prejudicing defendants' rights to raise the same issues in subsequent appeals.
It is unclear how the trial court's order will be implemented. The order
provides that the punitive damage amount, if any, should be standard as to each
class member and acknowledges that the actual size of the class will not be
known until the last case has withstood appeal, i.e., the punitive damage
amount, if any, determined for the entire qualified class, would be divided
equally among those plaintiffs who are ultimately successful. The order does not
address whether defendants would be required to pay the punitive damage award,
if any, prior to a determination of claims of all class members, a process that
could take years to conclude. PM Inc. and the Company do not believe that an
adverse class-wide punitive damage award in Phase Two would permit entry of a
judgment at that time that would require the posting of a bond to stay its
execution pending appeal or that any party would be entitled to execute on such
a judgment in the absence of a bond. However, in a worst case scenario, it is
possible that a judgment for punitive damages could be entered in an amount not
capable of being bonded, resulting in an execution of the judgment before it
could be set aside on appeal. PM Inc. and the Company believe that such a result
would be unconstitutional and would also violate Florida laws. PM Inc. and the
Company will take all appropriate steps to seek to prevent this worst case
scenario from occurring and believe these efforts should be successful.
In other developments, in August 1999, the trial judge denied a motion
filed by PM Inc. and other defendants to disqualify the judge. The motion
asserted, among other things, that the trial judge was required to disqualify
himself because he has a serious medical condition of a type that the plaintiffs
claim, and the jury has now found, is caused by smoking, making him financially
interested in the result of the case and, under plaintiffs' theory of the case,
a potential member of the plaintiff class. The Third District Court of Appeal
denied defendants' petition to disqualify the trial judge. The defendants filed
motions seeking reconsideration of this decision and to supplement the record
with the deposition testimony of an expert witness. The Third District Court of
Appeal denied defendants' motions.
PM Inc. and the Company remain of the view that the Engle case should not
have been certified as a class action. That certification is inconsistent with
the overwhelming majority of federal and state court decisions that have held
that mass smoking and health claims are inappropriate for class treatment. PM
Inc. intends to challenge the class certification, as well as numerous other
reversible errors that it believes occurred during the Phase One trial, at the
earliest time that an appeal of these issues is permissible under Florida law.
In any event, PM Inc. believes it would be able to raise these issues in an
appeal following any verdict in favor of an individual named or absent class
member plaintiff. PM Inc. and the Company believe that such an appeal should
prevail.
Upcoming Trial Dates: In addition to the Engle trial, trial in an
individual smoking and health case in which PM Inc. is a defendant commenced
in California in January 2000. Additional cases against PM Inc. and, in some
cases, the Company as well, are scheduled for trial through the end of 2000.
These cases include five health care cost recovery actions that are scheduled
for trial in May (New York), June (New York), October (the Marshall Islands
and California) and December (Minnesota); three asbestos contribution cases
(discussed below) that are scheduled for trial in New York in April,
September and October; two cases under the California Business and
Professions Code (discussed below) that are scheduled for trial in June
(California); and approximately 11 other individual smoking and health cases
that are scheduled for trial in March (Massachusetts), May (New York), June
(Iowa and Puerto Rico), July (New Jersey), August (Iowa), October (Iowa,
Louisiana, New Hampshire and South Carolina) and November (Alabama). Cases
against other tobacco companies are also scheduled for trial during this
period. Trial dates, however, are subject to change.
Litigation Settlements: In November 1998, PM Inc. and certain other
United States tobacco product manufacturers entered into the Master
Settlement Agreement (the "MSA") with 46 states, the District of Columbia,
the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands,
American Samoa and the Northern Marianas to settle asserted and unasserted
health care cost recovery and other claims. PM Inc. and certain other United
States tobacco product manufacturers had previously settled similar claims
brought by Mississippi, Florida, Texas and Minnesota (together with the MSA,
the "State Settlement Agreements") and an ETS smoking and health class action
brought on behalf of airline flight attendants. The State Settlement
Agreements and certain ancillary agreements are filed as exhibits to various
of the Company's reports filed with the Securities and Exchange Commission,
and such agreements and the ETS settlement are discussed in detail therein.
The settlement agreements require that the domestic tobacco industry make
substantial annual payments in the following amounts (excluding future annual
payments contemplated by the agreement with tobacco growers discussed below),
subject to adjustment for several factors, including inflation, market share and
industry volume: 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: 2000, $416 million; and 2001 through 2002,
$250 million. These payment obligations are the several and not joint
obligations of each settling defendant. For the year ended December 31, 1998, PM
Inc. recorded settlement charges of $3.081 billion, which represented its share
of up-front payments required under the settlement agreements. For periods
subsequent to December 31, 1998, PM Inc.'s portion of ongoing adjusted payments
and legal fees is based on its share of domestic cigarette shipments in the year
preceding that in which the payment is due. Accordingly, PM Inc. records its
portions of ongoing settlement payments as part of cost of sales as product is
shipped.
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The State Settlement Agreements also include provisions relating to
advertising and marketing restrictions, public disclosure of certain industry
documents, limitations on challenges to certain tobacco control and underage use
laws, restrictions on lobbying activities and other provisions.
The MSA has been initially approved by trial courts in all settling
jurisdictions. If a jurisdiction does not obtain "final judicial approval"
(i.e., trial court approval and expiration of the time for review or appeal of
such approval) of the MSA by December 31, 2001, then, unless the settling
defendants and the relevant jurisdiction agree otherwise, the agreement will be
terminated with respect to such jurisdiction. As of December 31, 1999, 46
jurisdictions had obtained final judicial approval of the MSA.
As part of the MSA, the settling defendants committed to work
cooperatively with the tobacco-growing states to address concerns about the
potential adverse economic impact of the MSA on tobacco growers and
quota-holders. To that end, four of the major domestic tobacco product
manufacturers, including PM Inc., and the grower states, have established a
trust fund to provide aid to tobacco growers and quota holders. The trust will
be funded by these four manufacturers over 12 years with payments, prior to
application of various adjustments, scheduled to total $5.15 billion. PM Inc.
has charged $300 million of payments into the trust against 1998 operating
companies income. Future industry payments (in 2000, $280 million; 2001, $400
million; 2002 through 2008, $500 million; 2009 and 2010, $295 million) are
subject to adjustments for several factors, including inflation, United States
cigarette volume and certain other contingent events, and, in general, are to be
allocated based on each manufacturer's relative market share. PM Inc. records
its portion of these payments as part of cost of sales as product is shipped.
In 1999, the State Settlement Agreements materially adversely affected the
volumes of PM Inc. and the Company believes that the State Settlement Agreements
may materially adversely affect the business, volume, results of operations,
cash flows or financial position of PM Inc. and the Company in future periods.
The degree of the adverse impact will depend, among other things, on the rates
of decline in United States cigarette sales in the premium and discount
segments, PM Inc.'s share of the domestic premium and discount cigarette
segments, and the effect of any resulting cost advantage of manufacturers not
subject to the MSA and the other State Settlement Agreements. Manufacturers
representing almost all domestic shipments in 1998 have agreed to become subject
to the terms of the MSA.
Certain litigation has arisen out of the State Settlement Agreements,
including the actions described below.
In December 1998, a putative class action was filed against PM Inc. and
certain other domestic tobacco manufacturers on behalf of a class consisting of
citizens of the United States who consume tobacco products manufactured by
defendants. One count of the complaint alleged that defendants conspired to
raise the prices of their tobacco products in order to pay the costs of the MSA
in violation of federal antitrust laws. The other two counts alleged 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 sought unspecified damages (to be trebled under the antitrust count),
injunctive and declaratory relief, costs and attorneys' fees. In April 1999, the
court granted defendants' motions for summary judgment, and plaintiffs have
appealed.
In February 1999, a putative class action was filed on behalf of tobacco
consumers in the United States against the States of California and Utah, other
public entity defendants, certain domestic tobacco manufacturers, including PM
Inc., and others, challenging the MSA. Plaintiffs are seeking, among other
things, an order (i) prohibiting the states from collecting any monies under the
MSA, (ii) restraining the domestic tobacco manufacturers from further collection
of price increases related to the MSA and compelling them to reimburse to
plaintiffs all monies paid by plaintiffs in the form of price increases related
to the MSA, and (iii) declaring the MSA "unfair, discriminatory,
unconstitutional and unenforceable." In January 2000, the court granted
defendants' motion to dismiss the complaint.
In April 1999, a putative class action was filed on behalf of all firms
that directly buy cigarettes in the United States from defendant tobacco
manufacturers. The complaint alleges violation of antitrust law, based in part
on the MSA. Plaintiffs seek treble damages computed as three times the
difference between current prices and the price plaintiffs would have paid for
cigarettes in the absence of an alleged conspiracy to restrain and monopolize
trade in the domestic cigarette market, together with attorneys' fees.
Plaintiffs also seek injunctive relief against certain aspects of the MSA and
against PM Inc.'s acquisition of the U.S. rights to manufacture and market three
cigarette trademarks, L&M, Lark and Chesterfield.
In June 1999, a putative class action was filed on behalf of certain
native American tribes against PM Inc. and other cigarette manufacturers
challenging the MSA. The complaint alleged that defendants, by entering into the
MSA, violated certain constitutional and civil rights of the tribes. The
complaint was dismissed by the trial court, and the tribes have appealed.
In August 1999, five companies that import cigarettes or that are involved
in the re-importation of cigarettes into U.S. markets filed suit seeking to
invalidate the MSA and the 1998 Texas State Settlement Agreement on various
grounds, including violation of antitrust laws. Plaintiffs also seek monetary
relief, including treble damages in an unspecified amount and disgorgement of
profits.
In August 1999, after New York obtained final judicial approval of the
MSA, four alleged smokers in New York sought leave to intervene in litigation
concerning the MSA, alleging violations of antitrust laws and seeking injunctive
relief, including invalidating the settlements. The trial court denied the
motion as untimely, and they have appealed.
A description of the smoking and health litigation, health care cost
recovery litigation and certain other proceedings pending against the Company
and/or its subsidiaries and affiliates follows.
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Smoking and Health Litigation
Plaintiffs' allegations of liability in smoking and health cases are based on
various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, breach of special duty, conspiracy, concert of
action, violations of deceptive trade practice laws and consumer protection
statutes, and claims under the federal and state RICO statutes. In certain of
these cases, plaintiffs claim that cigarette smoking exacerbated the injuries
caused by their exposure to asbestos. Plaintiffs in the smoking and health
actions seek various forms of relief, including compensatory and punitive
damages, treble/multiple damages and other statutory damages and penalties,
creation of medical monitoring and smoking cessation funds, disgorgement of
profits, and injunctive and equitable relief. Defenses raised in these cases
include lack of proximate cause, assumption of the risk, comparative fault
and/or contributory negligence, statutes of limitations and preemption by the
Federal Cigarette Labeling and Advertising Act.
In May 1996, the United States Court of Appeals for the Fifth Circuit held
in the Castano case that a class consisting of all "addicted" smokers nationwide
did not meet the standards and requirements of the federal rules governing class
actions. Since this class decertification, lawyers for plaintiffs have filed
numerous putative smoking and health class action suits in various state and
federal courts. In general, these cases purport to be brought on behalf of
residents of a particular state or states (although a few cases purport to be
nationwide in scope) and raise "addiction" claims similar to those raised in the
Castano case and, in many cases, claims of physical injury as well. As of
December 31, 1999, smoking and health putative class actions were pending in
Alabama, Arizona, California, the District of Columbia, Hawaii, Illinois,
Indiana, Iowa, Louisiana, Maryland, Massachusetts, Missouri, Nevada, New Jersey,
New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South
Carolina, Tennessee, Texas, Utah and West Virginia, as well as in Australia,
Brazil, Canada, Israel and Nigeria. Class certification has been denied or
reversed by courts in 19 smoking and health class actions involving PM Inc. in
Arkansas, the District of Columbia, Illinois, Kansas, Louisiana, Michigan,
Minnesota, New Jersey (6), New York (2), Ohio, Pennsylvania, Puerto Rico, and
Wisconsin, while classes remain certified in three cases in Florida, Louisiana
and Maryland. A number of these class certification decisions are on appeal. In
October 1999, the State of New York's highest court affirmed without dissent the
decertification and dismissal of a class action suit. In May 1999, the United
States Supreme Court declined to review the decision of the United States Court
of Appeals for the Third Circuit affirming a lower court's decertification of a
class. Class certification motions are pending in a number of the putative
smoking and health class actions. As mentioned above, one ETS smoking and health
class action was settled in 1997.
Health Care Cost Recovery Litigation
In certain of the pending proceedings, domestic and foreign governmental
entities and non-governmental plaintiffs, including union health and welfare
funds ("unions"), native American tribes, insurers and self-insurers, taxpayers
and others, are seeking reimbursement of health care cost expenditures allegedly
caused by tobacco products and, in some cases, of 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 was certified by the court. In
one health care cost recovery case, private citizens seek recovery of alleged
tobacco-related health care expenditures incurred by the federal Medicare
program. In another, Blue Cross subscribers seek reimbursement of increased
medical insurance premiums allegedly 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 lack of proximate cause, remoteness of injury,
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 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
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argue that these cases are improper because plaintiffs must proceed under
principles of subrogation and assignment. Under traditional theories of
recovery, a payor of medical costs (such as an insurer) can seek recovery of
health care costs from a third party solely by "standing in the shoes" of the
injured party. Defendants argue that plaintiffs should be required to bring any
actions as subrogees of individual health care recipients and should be subject
to all defenses available against the injured party.
Excluding the cases covered by the MSA, as of December 31, 1999, there
were approximately 60 health care cost recovery cases pending in the United
States against PM Inc. and, in some cases, the Company, of which approximately
40 were filed by union trust funds. As discussed above under "Federal
Government's Lawsuit," the U.S. government filed a health care cost recovery
action in September 1999 against various cigarette manufacturers and others,
including the Company and PM Inc., asserting claims under three federal
statutes. Health care cost recovery actions have also been brought in Israel,
the Marshall Islands, British Columbia, Canada and France and, in the United
States, by Bolivia, Guatemala, Panama, Nicaragua, Thailand (voluntarily
dismissed), Ukraine, Venezuela and the States of Goias and Rio de Janeiro,
Brazil. The actions brought by Bolivia, Guatemala, Nicaragua, Ukraine, Venezuela
and the State of Goias, Brazil, have been consolidated for pre-trial purposes
and transferred to the United States District Court for the District of
Columbia. Other foreign entities and others have stated that they are
considering filing health care cost recovery actions.
Five federal appeals courts have issued rulings in health care cost
recovery actions that were favorable to the tobacco industry. The United States
Courts of Appeals for the Second, Third, Fifth, Seventh and Ninth Circuits,
relying primarily on grounds that the plaintiffs' claims were too remote, have
affirmed dismissals of, or reversed trial courts that had refused to dismiss,
such actions. In addition, in January 2000, the United States Supreme Court
denied plaintiffs' petitions for writs of certiorari in the cases decided by the
Court of Appeals for the Second, Third and Ninth Circuits, effectively refusing
to allow plaintiffs' appeals.
Although there have been some decisions to the contrary, to date, most
lower courts that have decided motions in these cases have dismissed all or most
of the claims against the industry. In December 1999, in the first ruling on a
motion to dismiss a health care cost recovery case brought in the United States
by a foreign governmental plaintiff, the United States District Court for the
District of Columbia dismissed a lawsuit filed by Guatemala, ruling that the
claimed injuries were too remote. In March 1999, in the only union case to go to
trial thus far, the jury returned a verdict in favor of defendants on all
counts. Plaintiffs' motion for a new trial has been denied. In December 1999,
the federal district court in the District of Columbia denied defendants' motion
to dismiss a suit filed by union and welfare trust funds seeking reimbursement
of health care expenditures allegedly caused by tobacco products. Defendants are
seeking to appeal this decision.
Certain Other Tobacco-Related Litigation
Asbestos Contribution Cases: As of December 31, 1999, 11 suits had been
filed by former asbestos manufacturers, asbestos manufacturers' personal
injury settlement trusts and an insurance company against domestic tobacco
manufacturers, including PM Inc. and others. Nine of these cases are pending.
These cases seek, among other things, contribution or reimbursement for
amounts expended in connection with the defense and payment of asbestos
claims that were allegedly caused in whole or in part by cigarette smoking.
Plaintiffs in most of these cases also seek punitive damages. The aggregate
amounts claimed in these cases range into the billions of dollars. On
November 2, 1999, one of these cases was dismissed by the federal district
court in the Eastern District of New York although the case was subsequently
refiled. Trials in these cases are scheduled to begin in New York in April,
September and October 2000.
Marlboro Light/Ultra Light and Virginia Slims Light Cases: As of
December 31, 1999, there were nine putative class actions pending against PM
Inc. and the Company, in Arizona, Florida, Massachusetts, New Jersey, Ohio,
Pennsylvania, Tennessee, and Washington, D.C., on behalf of individuals who
purchased and consumed Marlboro Lights and, in one case, Marlboro Ultra
Lights, and, in another case, Virginia Slims Lights, as well. These cases
allege, in connection with the use of the term "Lights" and/or "Ultra
Lights," among other things, deceptive and unfair trade practices and unjust
enrichment, and seek injunctive and equitable relief, including restitution.
Retail Leaders Case: Three domestic tobacco manufacturers have filed
suit against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program
that became available to retailers in October 1998. The complaint alleges
that this retail merchandising program is exclusionary, creates an
unreasonable restraint of trade and constitutes unlawful monopolization. In
addition to an injunction, plaintiffs seek unspecified treble damages,
attorneys' fees, costs and interest. In June 1999, the court issued a
preliminary injunction enjoining PM Inc. from prohibiting retail outlets that
participate in the program at one of the four levels from installing
competitive permanent signage in any section of the "industry fixture" that
displays or holds packages of cigarettes manufactured by a firm other than PM
Inc., and requiring those outlets to allocate a percentage of
cigarette-related permanent signage to PM Inc. greater than PM Inc.'s market
share, or prohibiting retail outlets from advertising or conducting
promotional programs of cigarette manufacturers other than PM Inc. The
preliminary injunction applies only to certain accounts and does not affect
any other aspect or level of the Retail Leaders program.
56
<PAGE>
Vending Machine Case: Plaintiffs, who began their case as a purported
nationwide class of cigarette vending machine operators, allege that PM Inc.
has violated the Robinson-Patman Act in connection with its promotional and
merchandising programs available to retail stores and not available to
cigarette vending machine operators. Plaintiffs request actual damages,
treble damages, injunctive relief, attorneys' fees and costs, and other
unspecified relief. In June 1999, the court denied plaintiffs' motion for a
preliminary injunction. Plaintiffs have withdrawn their request for class
action status. The claims of ten plaintiffs are set for trial in November
2000; the claims of remaining plaintiffs have been stayed pending disposition
of those claims scheduled for trial.
Cases Under the California Business and Professions Code: In July 1998,
two suits were filed in California courts alleging that domestic cigarette
manufacturers, including PM Inc. and others, have violated a California
statute known as "Proposition 65" by not informing the public of the alleged
risks of ETS to non-smokers. Plaintiffs also allege violations of
California's Business and Professions Code regarding unfair and fraudulent
business practices. Plaintiffs seek statutory penalties, injunctions barring
the sale of cigarettes or requiring issuance of appropriate warnings,
restitution, disgorgement of profits and other relief. The defendants'
motions to dismiss were denied in both of these cases. In October 1999,
plaintiffs' motion for a preliminary injunction was also denied. In January
2000, defendants' motion for summary judgment was granted in part, and
plaintiffs' "Proposition 65" claim was dismissed. Trial on the remaining
claims in these cases is scheduled to begin in June 2000.
Certain Other Actions
National Cheese Exchange Cases: Since 1996, seven putative class
actions have been filed alleging that Kraft Foods, Inc., and others engaged
in a conspiracy to fix and depress the prices of bulk cheese and milk through
their trading activity on the National Cheese Exchange. Plaintiffs seek
injunctive and equitable relief and treble damages. Two of the actions were
voluntarily dismissed by plaintiffs after class certification was denied. Two
other actions were dismissed in 1998 after Kraft's motions to dismiss were
granted, and plaintiffs are appealing those dismissals. The remaining three
cases were consolidated in state court in Wisconsin, and in November 1999,
the court granted Kraft's motion for summary judgment. Plaintiffs have
appealed.
Italian Tax 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 alleged unpaid
taxes assessed to date is the Italian lira equivalent of $2.4 billion. In
addition, the Italian lira equivalent of $3.4 billion in interest and
penalties has been assessed. The 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 149 of the assessments. The
decisions to overturn 73 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 is investigating the matter and will determine
whether to bring charges, in which case a preliminary investigations judge
will make a new finding as to whether there should be a trial on these
charges. The Company, its affiliates and the officers and directors who are
subject to the proceedings believe they have complied with applicable Italian
tax laws and are vigorously contesting the pending assessments and
proceedings.
===========================
It is not possible to predict the outcome of the litigation pending
against the Company and its subsidiaries. Litigation is subject to many
uncertainties. Two individual smoking and health cases in which PM Inc. is a
defendant have been decided unfavorably at the trial court level and are in the
process of being appealed, and an unfavorable verdict has been returned in the
first phase of the Engle smoking and health class action trial underway in
Florida. It is possible that additional cases could be decided unfavorably and
that there could be further adverse developments in the Engle case. An
unfavorable outcome or settlement of a pending smoking and health or health care
cost recovery case could encourage the commencement of additional similar
litigation. There have also been a number of adverse legislative, regulatory,
political and other developments concerning cigarette smoking and the tobacco
industry that have received widespread media attention. These developments may
negatively affect the perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending litigation, and
may prompt the commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of pending litigation. The
present legislative and litigation environment is substantially uncertain, and
it is possible that the Company's business, volume, results of operations, cash
flows or financial position could be materially affected by an unfavorable
outcome or settlement of certain pending litigation or by the enactment of
federal or state tobacco legislation. The Company and each of its subsidiaries
named as a defendant believe, and each has been so advised by counsel handling
the respective cases, that it has a number of valid defenses to all litigation
pending against it. All such cases are, and will continue to be, vigorously
defended. However, the Company and its subsidiaries may enter into discussions
in an attempt to settle particular cases if they believe it is in the best
interests of the Company's stockholders to do so.
57
<PAGE>
Note 16.
Quarterly Financial Data (Unaudited):
(in millions, except per share data) 1999 Quarters
- --------------------------------------------------------------------------------
1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
Operating revenues $ 19,497 $ 19,810 $ 19,878 $ 19,411
================================================================================
Gross profit $ 7,874 $ 8,080 $ 8,041 $ 8,195
================================================================================
Net earnings $ 1,787 $ 2,030 $ 2,001 $ 1,857
================================================================================
Per share data:
Basic EPS $ 0.74 $ 0.84 $ 0.84 $ 0.79
================================================================================
Diluted EPS $ 0.73 $ 0.84 $ 0.84 $ 0.79
================================================================================
Dividends declared $ 0.44 $ 0.44 $ 0.48 $ 0.48
================================================================================
Market price--high $ 55.56 $ 43.00 $ 41.19 $ 35.50
--low $ 34.00 $ 33.13 $ 33.81 $ 21.25
================================================================================
Basic and diluted EPS are computed independently for each of the periods
presented. Accordingly, the sum of the quarterly earnings per share amounts may
not agree to the total for the year.
During 1999, the Company recorded pre-tax charges primarily for voluntary
early retirement and separation programs ("VERS"), a factory closure and related
capacity reduction in Brazil and asset impairments in the beer segment.
(in millions) 1999 Quarters
- --------------------------------------------------------------------------------
1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
VERS $287 $ 45 $ 8
Brazil factory closure 136
Beer asset impairments $29
- --------------------------------------------------------------------------------
$287 $ 45 $144 $29
================================================================================
<TABLE>
<CAPTION>
1998 Quarters
----------------------------------------------------
(in millions, except per share data) 1st 2nd 3rd 4th
===============================================================================================
<S> <C> <C> <C> <C>
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
===============================================================================================
</TABLE>
During 1998, the Company recorded pre-tax charges for tobacco and
shareholder litigation settlements, VERS and severance.
1998 Quarters
- --------------------------------------------------------------------------------
(in millions) 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
================================================================================
=======================
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, 2000, there were approximately 139,700 holders of record of the
Company's common stock.
58
<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, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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.
PricewaterhouseCoopers LLP
New York, New York
January 24, 2000
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.
59
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Certain active subsidiaries of the Company and their subsidiaries as of
December 31, 1999, are listed below. The names of certain subsidiaries, which
considered in the aggregate would not constitute a significant subsidiary, have
been omitted.
<TABLE>
<CAPTION>
STATE OR
COUNTRY OF
NAME ORGANIZATION
---- ------------
<S> <C>
A/S Freia ............................................................................ Norway
A/S Maarud ........................................................................... Norway
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
AO Kharkiv Tobacco Factory ........................................................... Ukraine
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 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
f6 Cigarettenfabrik Dresden GmbH...................................................... Germany
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
General Foods Credit Corporation ..................................................... Delaware
General Foods Credit Investors No. 1 Corporation ..................................... Delaware
General Foods Credit Investors No. 2 Corporation ..................................... Delaware
General Foods Credit Investors No. 3 Corporation ..................................... Delaware
General Foods Foreign Sales Corporation .............................................. Virgin Islands (U.S.)
Gevaliarosteriet AB .................................................................. Sweden
Godfrey Phillips (Malaysia) Sdn. Bhd.................................................. Malaysia
Grant Holdings, Inc. ................................................................. Pennsylvania
Grant Transit Co. .................................................................... Delaware
Grundstucksgemeinschaft Kraft Jacobs Suchard GbR ..................................... Germany
HAG GF AG ............................................................................ Germany
HAG-Coffex ........................................................................... France
HNB Investment Corp. ................................................................. Delaware
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OR
COUNTRY OF
NAME ORGANIZATION
---- ------------
<S> <C>
Jacob Leinenkugel Brewing Company, Inc. .............................................. Wisconsin
Jacobs Suchard Alimentos do Brasil Ltda. ............................................. Brazil
Jacobs Suchard Figaro A.S. ........................................................... Slovak Republic
Jacobs Suchard Pavlides SA ........................................................... Greece
KJS Limited .......................................................................... Hong Kong
KJS Namur SA ......................................................................... Belgium
Kraft Canada Inc. .................................................................... Canada
Kraft Food Ingredients Corp. ......................................................... Delaware
Kraft Foods (Australia) Limited ...................................................... Australia
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 Foods AS ....................................................................... Norway
Kraft Foods de Mexico S.A. de C.V. ................................................... Mexico
Kraft Foods Egypt LLC ................................................................ Egypt
Kraft Foods Holding (Europa) GmbH..................................................... Switzerland
Kraft Foods Holdings, Inc. ........................................................... Delaware
Kraft Foods International Services, Inc. ............................................. Delaware
Kraft Foods International, Inc. ...................................................... Delaware
Kraft Foods Limited .................................................................. Australia
Kraft Foods Limited (Asia) ........................................................... Hong Kong
Kraft Foods Manufacturing Corporation ................................................ Delaware
Kraft Foods Taiwan Limited............................................................ Taiwan
Kraft Foods, Inc. .................................................................... Delaware
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 (Australia) Pty. Ltd. ........................................... Australia
Kraft Jacobs Suchard (Schweiz) AG .................................................... Switzerland
Kraft Jacobs Suchard AG .............................................................. Switzerland
Kraft Jacobs Suchard Bulgaria AD ..................................................... Bulgaria
Kraft Jacobs Suchard BV .............................................................. Netherlands
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 Hors Domicile.................................................... France
Kraft Jacobs Suchard Hungaria KFT .................................................... Hungary
Kraft Jacobs Suchard Iberia, S.A. .................................................... Spain
Kraft Jacobs Suchard Ireland Ltd. .................................................... Ireland
Kraft Jacobs Suchard Laverune ........................................................ France
Kraft Jacobs Suchard Limited ......................................................... United Kingdom
Kraft Jacobs Suchard Management & Consulting AG ...................................... Switzerland
Kraft Jacobs Suchard Manufacturing GmbH & Co KG ...................................... Germany
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
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
STATE OR
COUNTRY OF
NAME ORGANIZATION
---- ------------
<S> <C>
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 S.p.A. .......................................................... Italy
Kraft Jacobs Suchard Service AG (Switzerland) ........................................ Switzerland
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 Suchard Uruguay, S.A............................................................ Uruguay
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
Marsa Kraft Jacobs Suchard Sabanci Gida Sanayi ve Ticaret A.S. ....................... Turkey
Martlet Importing Co. Inc. ........................................................... New York
Massalin Particulares S.A. ........................................................... Argentina
MBC Holdings, Inc. ................................................................... Wisconsin
Michigan Investment Corp. ............................................................ Delaware
Miller Brewing 1855, Inc. ............................................................ Delaware
Miller Brewing Company ............................................................... Wisconsin
Miller Brewing do Brasil, Ltda. ...................................................... Brazil
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
OAO Krasnodortabakprom ............................................................... Russia
OJSS Philip Morris Kazakhstan ........................................................ Kazakhstan
Oy Estrella AB ....................................................................... Finland
Oy Kraft Freia Marabou Finland AB .................................................... Finland
P.M. Beverage Holdings, Inc. ......................................................... Delaware
P.T. Kraft Ultrajaya Indonesia ....................................................... Indonesia
Phenix Leasing Corporation ........................................................... Delaware
Phenix Management Corporation ........................................................ Delaware
Philip Morris (Malaysia) Sdn. Bhd. ................................................... Malaysia
Philip Morris (Thailand) Ltd.......................................................... Delaware
Philip Morris Asia Limited ........................................................... Hong Kong
Philip Morris Belgium S.A. ........................................................... Belgium
Philip Morris Brasil S.A. ............................................................ Delaware
Philip Morris Capital (Ireland) Limited .............................................. Ireland
Philip Morris Capital Corporation .................................................... Delaware
Philip Morris Corporate Services Inc. ................................................ Delaware
Philip Morris Duty Free Inc........................................................... Delaware
Philip Morris Europe S.A. ............................................................ Switzerland
Philip Morris Finance Europe B.V. .................................................... Netherlands
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
STATE OR
COUNTRY OF
NAME ORGANIZATION
---- ------------
<S> <C>
Philip Morris France S.A.............................................................. France
Philip Morris G.m.b.H. ............................................................... Germany
Philip Morris Hellas A.E.B.E.......................................................... Greece
Philip Morris Holland B.V. ........................................................... Netherlands
Philip Morris Hungary Ltd............................................................. Hungary
Philip Morris Incorporated ........................................................... Virginia
Philip Morris International Finance Corporation ...................................... Delaware
Philip Morris International Inc. ..................................................... Delaware
Philip Morris Kabushiki Kaisha ....................................................... Japan
Philip Morris Korea C.H. ............................................................. Korea
Philip Morris Latin America Inc. ..................................................... Delaware
Philip Morris Limited ................................................................ Australia
Philip Morris Ljubljana d.o.o. ....................................................... Slovenia
Philip Morris Management Corp. ....................................................... New York
Philip Morris Mexico S.A. de C.V. .................................................... Mexico
Philip Morris Philippines Inc. ....................................................... Philippines
Philip Morris Polska S.A. ............................................................ Poland
Philip Morris Products Inc. .......................................................... Virginia
Philip Morris Romania S.R.L. ......................................................... Romania
Philip Morris SA, Philip Morris Sabanci Pazarlama ve Satis A.S. ...................... Turkey
Philip Morris Sales & Marketing Ltd................................................... Russia
Philip Morris Sdn. Bhd. .............................................................. Brunei
Philip Morris Services India Inc...................................................... Delaware
Philip Morris Singapore Pte. Ltd. .................................................... Singapore
Philip Morris Spain S.A. ............................................................. Spain
Philip Morris World Trade S.A. ....................................................... Switzerland
PHILSA Philip Morris Sabanci Sigara ve Tutunculuk Sanayi ve Ticaret A.S. ............. Turkey
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
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
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
Tabak s.r.o. ......................................................................... Slovakia
Tabaqueira, S.A. ..................................................................... Portugal
Taloca AG ............................................................................ Switzerland
Taloca Ltda. ......................................................................... Brazil
The Kenco Coffee Company Limited ..................................................... United Kingdom
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
STATE OR
COUNTRY OF
NAME ORGANIZATION
---- ------------
<S> <C>
Trademarks LLC........................................................................ Delaware
UAB Philip Morris Lietuva ............................................................ Lithuania
Vict. Th. Engwall & Co., Inc. ........................................................ Delaware
Votesor BV ........................................................................... Netherlands
Wolverine Investment Corp. ........................................................... Delaware
ZAO Philip Morris Izhora ............................................................. Russia
ZAO Philip Morris Neva ............................................................... Russia
</TABLE>
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 24, 2000, on our audits of the
consolidated financial statements and financial statement schedule of the
Company as of December 31, 1999 and 1998 and for each of the three years in the
period ended December 31, 1999, which reports are included or incorporated by
reference in this Annual Report on Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
March 2, 2000
<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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 26th day of January, 2000.
/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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 26th day of January, 2000.
/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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 26th day of January, 2000.
/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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 23rd day of February, 2000.
/s/ J. DUDLEY FISHBURN
----------------------------
J. Dudley Fishburn
<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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 26th day of January, 2000.
/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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 26th day of January, 2000.
/s/ BILLIE JEAN KING
----------------------------
Billie Jean King
<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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 26th day of January, 2000.
/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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 23rd day of February, 2000.
/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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 23rd day of February, 2000.
/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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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, 2000.
/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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 26th day of January, 2000.
/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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 29th day of February, 2000.
/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, Louis C.
Camilleri and Charles R. Wall, 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, 1999
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 26th day of January, 2000.
/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 15 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
the following categories: (i) smoking and health cases alleging personal injury
brought on behalf of individual plaintiffs, (ii) smoking and health cases
alleging personal injury and purporting to be brought on behalf of a class of
individual plaintiffs, (iii) health care cost recovery cases brought by
governmental and non-governmental plaintiffs seeking reimbursement for health
care expenditures allegedly caused by cigarette smoking and/or disgorgement of
profits, and (iv) other tobacco-related litigation, including suits by former
asbestos manufacturers seeking contribution or reimbursement for amounts
expended in connection with the defense and payment of asbestos claims that were
allegedly caused in whole or in part by cigarette smoking. Governmental
plaintiffs in the health care cost recovery actions include the federal
government, various cities and counties in the United States and certain foreign
governmental entities. Non-governmental plaintiffs in these cases include union
health and welfare trust funds ("unions"), native American tribes, insurers and
self-insurers, taxpayers and others.
The following lists certain of the pending claims included in the latter three
of these categories and certain other pending claims. Certain developments in
these cases since November 1, 1999, 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 PMI, as of February 15, 2000, and describes certain developments in
these cases since November 1, 1999.
DOMESTIC CLASS ACTIONS
ENGLE, ET AL. V. R.J. REYNOLDS TOBACCO CO., ET AL., CIRCUIT COURT, DADE COUNTY,
FLORIDA, FILED MAY 5, 1994. See Item 3. LEGAL PROCEEDINGS, for a more detailed
discussion of this case.
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. Trial has been scheduled for January
2001.
REED, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, DISTRICT OF
COLUMBIA, FILED JUNE 21, 1996. In July 1999, the court denied plaintiffs' second
motion for class certification.
LYONS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT, ALABAMA, FILED AUGUST 8, 1996.
THOMPSON, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES
DISTRICT COURT, MINNESOTA, FILED SEPTEMBER 4, 1996. In November 1999, the court
denied plaintiffs' motion for class certification.
1
<PAGE>
PERRY/CHAMPION, ET AL. V. AMERICAN TOBACCO CO., INC., ET AL., CIRCUIT COURT,
COFFEE COUNTY, MANCHESTER, TENNESSEE, FILED SEPTEMBER 6, 1996.
CONNOR, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., SECOND JUDICIAL DISTRICT
COURT, BERNALILLO COUNTY, NEW MEXICO, FILED OCTOBER 10, 1996.
HANSEN, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, ARKANSAS, FILED NOVEMBER 4, 1996. In July 1999, the
court denied plaintiffs' motion for class certification. The United States Court
of Appeals for the Eighth Circuit has declined review of the trial court's
ruling.
IN RE TOBACCO (MEDICAL MONITORING )(FORMERLY MCCUNE), ET AL. V. THE AMERICAN
TOBACCO COMPANY, ET AL., CIRCUIT COURT OF KANAWHA COUNTY, WEST VIRGINIA, FILED
JANUARY 31, 1997. Trial has been scheduled for October 2000.
MUNCY (formerly INGLE and formerly WOODS), ET AL. V. PHILIP MORRIS INCORPORATED,
ET AL., CIRCUIT COURT, MCDOWELL COUNTY, WEST VIRGINIA, FILED FEBRUARY 4, 1997.
PETERSON, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT, FIRST
CIRCUIT, HAWAII, FILED FEBRUARY 6, 1997.
WALLS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NORTHERN DISTRICT, OKLAHOMA, FILED FEBRUARY 6, 1997.
SELCER, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NEVADA, FILED MARCH 3, 1997.
GEIGER, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPREME COURT, QUEENS
COUNTY, NEW YORK, FILED APRIL 30, 1997. In October 1999, plaintiffs appealed the
trial court's refusal to certify the class.
COLE, ET AL. V. THE TOBACCO INSTITUTE, INC., ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, TEXARKANA DIVISION, TEXAS, FILED MAY 5, 1997.
COSENTINO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT,
MIDDLESEX COUNTY, NEW JERSEY, FILED MAY 21, 1997. In July 1999, the New Jersey
Supreme Court denied plaintiffs' motion for leave to appeal the trial court's
decision denying class certification.
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. In January 2000, 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. In November 1999, the court
granted defendants' motion to dismiss the complaint.
BRAMMER, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, SOUTHERN DISTRICT, IOWA, FILED JUNE 20, 1997.
DENBERG (FORMERLY DALEY), ET AL. V. AMERICAN BRANDS, INC., ET AL., UNITED STATES
DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED JULY 7, 1997.
2
<PAGE>
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.
YOUNG, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIVIL DISTRICT COURT,
ORLEANS PARISH, LOUISIANA, FILED NOVEMBER 12, 1997.
AKSAMIT, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES
DISTRICT COURT, SOUTH CAROLINA, FILED NOVEMBER 20, 1997.
JACKSON, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT
COURT, CENTRAL DISTRICT, UTAH, FILED FEBRUARY 13, 1998.
PARSONS, ET AL. V. A C & S, INC., ET AL., CIRCUIT COURT, KANAWHA COUNTY, WEST
VIRGINIA, FILED FEBRUARY 27, 1998.
BASIK (formerly MENDYS), ET AL. V. LORILLARD TOBACCO COMPANY, ET AL., CIRCUIT
COURT, 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, NEW JERSEY, FILED APRIL 23, 1998.
CLEARY, ET AL. V. PM INC., ET AL., CIRCUIT COURT, COOK COUNTY, COUNTY LAW
DEPARTMENT, LAW DIVISION, ILLINOIS, FILED JUNE 3, 1998.
CREEKMORE, ET AL. V. BROWN & WILLIAMSON, ET AL., SUPERIOR COURT, 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.
SWEENEY, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., COURT OF COMMON PLEAS,
ALLEGHENY COUNTY, PENNSYLVANIA, FILED OCTOBER 15, 1998.
BROWN, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT,
EASTERN DISTRICT, PENNSYLVANIA, FILED OCTOBER 16, 1998. Plaintiffs allege that
tobacco companies' "discriminatory targeting of menthol tobacco product sales to
Black Americans" violates federal civil rights statutes. In September 1999, the
court granted defendants' motion to dismiss the case. In October 1999,
plaintiffs filed a notice of appeal to the United States Court of Appeals for
the Third Circuit.
GATLIN, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, MISSOURI, FILED DECEMBER 21, 1998. In February 2000,
plaintiffs voluntarily dismissed the case without prejudice.
3
<PAGE>
JONES, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT,
JACKSON COUNTY, MISSOURI, FILED DECEMBER 22, 1998.
TOBACCO CONSUMERS' GROUP NUMBER 3 V. R. J. REYNOLDS TOBACCO COMPANY, ET AL.,
UNITED STATES DISTRICT COURT, MASSACHUSETTS, FILED MARCH 24, 1999.
SIMON, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, NEW YORK, FILED APRIL 9, 1999.
JULIAN, ET AL., V. PHILIP MORRIS COMPANIES INC., CIRCUIT COURT FOR MONTGOMERY
COUNTY, ALABAMA, FILED APRIL 14, 1999.
SHORTINO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, LAW
DIVISION, MIDDLESEX COUNTY, NEW JERSEY, FILED AUGUST 30, 1999. This putative
class action is brought on behalf of New Jersey consumers who purchased and
smoked cigarettes manufactured by Philip Morris and are asymptomatic of
tobacco-related disease. The case was removed to the United States District
Court for the District of New Jersey on October 28, 1999.
INTERNATIONAL CASES
CAPUTO (formerly LETOURNEAU) V. IMPERIAL TOBACCO LIMITED, ET AL., ONTARIO COURT
OF JUSTICE, TORONTO, CANADA, FILED JANUARY 13, 1995.
THE SMOKER HEALTH DEFENSE ASSOCIATION, ET AL. V. SOUZA CRUZ, S.A. AND
PHILIP MORRIS MARKETING, S.A., 19TH LOWER CIVIL COURT OF THE CENTRAL
COURTS OF THE JUDICIARY DISTRICT OF SAO PAULO, BRAZIL, FILED JULY 25, 1995.
DASILVA, ET AL. V. NIGERIAN TOBACCO COMPANY, ET AL., HIGH COURT OF LAGOS
STATE, NIGERIA, FILED SEPTEMBER 8, 1997. In February 2000, this action
was dismissed due to improper service.
NATIONAL ASSOCIATION FOR ASSISTANCE TO CONSUMERS AND WORKERS V. SOUZA CRUZ
S.A. AND PHILIP MORRIS BRASIL S.A., THE FIFTH COURT OF BANKRUPTCIES AND
REORGANIZATIONS OF THE CAPITAL DISTRICT OF THE STATE OF RIO DE JANEIRO,
BRAZIL, FILED MARCH 16, 1998.
FORTIN, ET AL. V. IMPERIAL TOBACCO LTD., ET AL., QUEBEC SUPERIOR COURT,
CANADA, FILED ON OR ABOUT SEPTEMBER 11, 1998.
CONSEIL QUEBECOIS SUR LE TABAC V. RJR-MACDONALD INC., ET AL., QUEBEC SUPERIOR
COURT, CANADA, FILED NOVEMBER 20, 1998.
ASSOCIACAO CEARENSE' DE DEFESA DA SAUDE DO FUMANTE E EX-FUMANTE (ACEDESFE) V.
PHILIP MORRIS BRAZIL, S.A., ET AL., THIRD CIVIL COURT OF THE STATE OF CEARA,
FORTELEZA, BRAZIL, FILED APRIL 12, 1999.
NIXON V. PHILIP MORRIS (AUSTRALIA) LIMITED, ET AL., FEDERAL COURT, NEW
SOUTH WALES REGISTRY, FILED APRIL 16, 1999.
YABIN GALIDI, ET AL. V. DUBEK LTD., ET AL., TEL AVIV-YAFFO REGION COURT,
ISRAEL, FILED (BUT NOT OFFICIALLY SERVED) JULY 12, 1999.
HEALTH CARE COST RECOVERY LITIGATION
The following lists the health care cost recovery actions pending against PM
Inc. and, in some cases, the Company and/or its other subsidiaries and
affiliates as of February 15, 2000, and describes certain developments in these
cases since November 1, 1999. As discussed in Item 3. LEGAL PROCEEDINGS, in 1998
PM Inc. and certain other United States tobacco product manufacturers entered
into a Master Settlement Agreement (the "MSA") settling the health care cost
recovery claims of 46 states, the District of Columbia, the
4
<PAGE>
Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American
Samoa and the Northern Marianas. Settlement agreements settling similar claims
had previously been entered into with the states of Mississippi, Florida, Texas
and Minnesota. Exhibit 99.2 hereto sets forth the status of judicial approval of
the MSA in each of the respective settling jurisdictions. The Company believes
that the claims in the city/county, taxpayer and certain of the other health
care cost recovery actions listed below are released in whole or in part by the
MSA or that recovery in any such actions should be subject to the offset
provisions of the MSA.
CITY/COUNTY CASES
CITY AND COUNTY OF SAN FRANCISCO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL.,
UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED JUNE 6, 1996.
In February 2000, plaintiffs voluntarily dismissed their case with prejudice.
CITY OF NEW YORK, ET AL. V. THE TOBACCO INSTITUTE, ET AL., SUPREME COURT, NEW
YORK COUNTY, NEW YORK, FILED OCTOBER 17, 1996. Pursuant to the MSA, plaintiffs,
New York City and the Health and Hospitals Corporation, have agreed to execute a
release against all defendants and others, including PM Inc., and to sign a
stipulation dismissing this action with prejudice.
COUNTY OF ERIE V. THE TOBACCO INSTITUTE, INC., ET AL., SUPREME COURT, ERIE
COUNTY, NEW YORK, FILED JANUARY 14, 1997. Pursuant to the MSA, plaintiff, Erie
County, has agreed to execute a release against all defendants and others,
including PM Inc., and in December 1999, plaintiff signed a stipulation
dismissing this action with prejudice.
COUNTY OF COOK V. PHILIP MORRIS, INCORPORATED, ET AL., CIRCUIT COURT, COOK
COUNTY, ILLINOIS, FILED APRIL 18, 1997. In September 1999, the judge granted in
part and denied in part defendants' motion to dismiss the complaint. Dismissed
were plaintiff's claims for intentional/ negligent breach of special and general
duty, performance of another's duty to the public, public nuisance and unjust
enrichment/ restitution. The counts remaining are for various violations of the
Illinois Consumer Fraud Act, violations of the Illinois Antitrust Act,
negligence per se and conspiracy. On Februry 16, 2000, the court denied
defendants' motion for summary judgment on the remaining claims.
CITY OF BIRMINGHAM, ALABAMA AND THE GREENE COUNTY RACING COMMISSION V. THE
AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, NORTHERN
DISTRICT, ALABAMA, FILED MAY 28, 1997. In October 1999, plaintiffs
dismissed their appeal with prejudice.
CITY OF ST. LOUIS V. AMERICAN TOBACCO, ET AL., CIRCUIT COURT FOR THE CITY
OF ST. LOUIS, FILED NOVEMBER 23, 1998. This action has been stayed by
agreement of the parties until September 2000.
COUNTY OF ST. LOUIS V. AMERICAN TOBACCO, ET AL., UNITED STATES DISTRICT
COURT, EASTERN DISTRICT, MISSOURI, FILED DECEMBER 3, 1998. This action
has been stayed by agreement of the parties until September 2000.
CRAIG J. WEDDE V. VALLEY WAREHOUSING, INC., ET AL., CIRCUIT COURT FOND DU
LAC COUNTY, WISCONSIN, FILED APRIL 7, 1999.
DEPARTMENT OF JUSTICE CASE
THE UNITED STATES OF AMERICA V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, WASHINGTON, D.C., FILED SEPTEMBER 22, 1999. See Item 3.
LEGAL PROCEEDINGS, for a discussion of this case.
INTERNATIONAL CASES
REPUBLIC OF THE MARSHALL ISLANDS V. THE AMERICAN TOBACCO COMPANY, ET AL., HIGH
COURT, REPUBLIC OF THE MARSHALL ISLANDS, FILED OCTOBER 20, 1997. In July 1999,
the court denied defendants' motion to dismiss. Trial of this case is scheduled
to begin in January 2001.
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THE REPUBLIC OF PANAMA V. THE AMERICAN TOBACCO COMPANY, INC., ET AL.,
DISTRICT COURT OF ORLEANS PARISH, LOUISIANA, FILED SEPTEMBER 11, 1998.
KUPAT HOLIM CLALIT V. PHILIP MORRIS, INC., ET AL., JERUSALEM DISTRICT
COURT, ISRAEL, FILED SEPTEMBER 28, 1998.
HER MAJESTY THE QUEEN IN RIGHT OF BRITISH COLUMBIA V. IMPERIAL TOBACCO LIMITED,
ET AL., SUPREME COURT, BRITISH COLUMBIA, VANCOUVER REGISTRY, CANADA, FILED
NOVEMBER 12, 1998. This lawsuit relies heavily upon recently enacted legislation
in British Columbia which is being challenged. An agreement with the government
in British Columbia provided that these separate constitutional challenges would
be litigated prior to the health care cost recovery action. These constitutional
challenges were heard by the British Columbia court in October 1999. On February
21, 2000, the court dismissed the action, finding the statute upon which British
Columia's claim was based was inconsistent with the Constitution of Canada.
THE CAISSE PRIMAIRE D'ASSURANCE MALADIE OF SAINT-NAZAIRES V. SEITA, ET AL.,
CIVIL COURT OF SAINT-NAZAIRES, FRANCE, FILED JUNE 1999.
THE STATE OF RIO DE JANEIRO OF THE FEDERAL REPUBLIC OF BRAZIL V. PHILIP
MORRIS COMPANIES INC., ET AL., DISTRICT COURT, ANGELINA COUNTY, TEXAS,
FILED JULY 12, 1999.
IN RE TOBACCO/GOVERNMENTAL HEALTH CARE COSTS LITIGATION (MDL NO. 1279), UNITED
STATES DISTRICT COURT, DISTRICT OF COLUMBIA, CONSOLIDATED JUNE 1999. The cases
previously filed by the Ukraine, the Republics of Guatemala, Nicaragua, Bolivia,
the State of Goias, Brazil and Venezuela have been consolidated into this
action. In December 1999, the court granted defendants' motion to dismiss the
complaint filed by the Republic of Guatemala only.
THE REPUBLIC OF ECUADOR V. PHILIP MORRIS COMPANIES, INC., ET AL., CIRCUIT
COURT, ELEVENTH JUDICIAL CIRCUIT, DADE COUNTY, FLORIDA, FILED JANUARY 21,
2000.
THE STATE OF SAO PAULO OF THE FEDERAL REPUBLIC OF BRAZIL V. PHILIP MORRIS
COMPANIES, INC., ET AL., CIVIL DISTRICT COURT, PARISH OF ORLEANS,
LOUISIANA, FILED FEBRUARY 9, 2000.
UNION CASES
STATIONARY ENGINEERS LOCAL 39 HEALTH AND WELFARE TRUST FUND V. PHILIP MORRIS,
INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED
APRIL 25, 1997. In August 1999, the court dismissed the action without
prejudice. Plaintiff has appealed the dismissal and several interlocutory orders
of the court to the United States Court of Appeals for the Ninth Circuit.
NORTHWEST LABORERS-EMPLOYERS HEALTH AND SECURITY TRUST FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT,
WASHINGTON, FILED MAY 21, 1997. In July 1999, the court entered judgment for
defendants. Plaintiffs appealed the judgment of dismissal to the United States
Court of Appeals for the Ninth Circuit, and requested that the issues on appeal
be certified to the Washington Supreme Court. On February 1, 2000, the court
entered an order granting final approval of the parties' agreement to dismiss
all claims with prejudice and without costs. On February 10, 2000, the Ninth
Circuit dismissed the appeal with prejudice and without costs.
CENTRAL LABORERS WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL.,
CIRCUIT COURT, THIRD JUDICIAL CIRCUIT, MADISON COUNTY, ILLINOIS, FILED MAY
30, 1997.
MASSACHUSETTS LABORERS HEALTH AND WELFARE FUND V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, MASSACHUSETTS, FILED JUNE 2, 1997. In August 1999,
the court granted defendants' motion to dismiss as to all counts except one,
ruling that plaintiffs can only proceed on that claim on the basis of
subrogation.
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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.
Plaintiff has appealed the court's dismissal of its action to the United States
Court of Appeals for the Ninth Circuit.
LABORERS LOCAL 17 HEALTH AND BENEFIT FUND, ET AL. V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED JUNE 19,
1997/UNITED FEDERATION OF TEACHERS WELFARE FUND, ET AL. V. PHILIP MORRIS, INC.,
ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED JUNE
25, 1997. This case has been consolidated with the LABORERS LOCAL 17 AND BENEFIT
FUND case referred to above. In 1999, the United States Court of
Appeals for the Second Circuit reversed the district court's order denying
defendants' motion to dismiss on remoteness grounds. The Court of Appeals
remanded the case to the district court with instructions to dismiss the
complaint. In August 1999, the Court of Appeals denied plaintiffs' request for
rehearing en banc. In November 1999, plaintiffs filed a petition for a writ of
certiorari to the United States Supreme Court. In January 2000, the United
States Supreme Court denied the plaintiffs' petition, letting dismissal of the
case stand.
ARK-LA-MISS LABORERS WELFARE FUND, ET AL. V. PHILIP MORRIS, INC. ET AL.,
UNITED STATES DISTRICT COURT, EASTERN DISTRICT, LOUISIANA, FILED JUNE 20,
1997.
KENTUCKY LABORERS DISTRICT COUNCIL HEALTH AND WELFARE TRUST FUND, ET AL. V. HILL
& KNOWLTON, INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT,
LOUISVILLE DIVISION, KENTUCKY, FILED JUNE 20, 1997. In October 1999, the
plaintiff voluntarily dismissed the case without prejudice.
OREGON LABORERS EMPLOYERS HEALTH AND WELFARE TRUST FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, OREGON, FILED JUNE 20, 1997.
In July 1999, the United States Court of Appeals for the Ninth Circuit affirmed
the trial court's dismissal of this suit. Plaintiff filed a petition for a writ
of certiorari to the United States Supreme Court. In January 2000, the United
States Supreme Court denied the plaintiffs' petition, letting the dismissal of
the case stand.
LABORERS AND OPERATING ENGINEERS UTILITY AGREEMENT HEALTH AND WELFARE TRUST FUND
FOR ARIZONA V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT,
ARIZONA, FILED JULY 7, 1997. Plaintiffs have appealed the court's decision to
grant defendants' motion to dismiss to the United States Court of Appeals for
the Ninth Circuit. In November 1999, the Ninth Circuit denied plaintiffs'
request for a stay of proceedings.
RHODE ISLAND LABORERS HEALTH AND WELFARE FUND V. PHILIP MORRIS INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT, RHODE ISLAND, FILED JULY 20, 1997. In August
1999, the Magistrate issued a report and recommendation dismissing the entire
complaint, citing grounds of remoteness with respect to the injunctive claims
and lack of standing with respect to the RICO and antitrust claims.
EASTERN STATES HEALTH AND WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL.,
SUPREME COURT, NEW YORK COUNTY, STATE 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. The United States Court of Appeals for the Third Circuit affirmed the
trial court's dismissal of this suit and plaintiffs filed a petition for a writ
of certiorari to the United States Supreme Court. In January 2000, the United
States Supreme Court denied the plaintiffs' petition, letting the dismissal of
the case stand.
CONSTRUCTION LABORERS OF GREATER ST. LOUIS WELFARE FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., CIRCUIT COURT, CITY OF ST. LOUIS, MISSOURI, FILED
SEPTEMBER 2, 1997. In January 2000, plaintiffs voluntarily dismissed the case.
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THE ARKANSAS CARPENTERS HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, ARKANSAS, FILED SEPTEMBER
4, 1997. In September 1999, the court granted defendants' motion to dismiss,
ruling that plaintiff "is too far removed from the challenged harmful conduct to
succeed on any of the several claims." Plaintiffs have appealed to the United
States Court of Appeals for the Eighth Circuit. In November 1999, the court
granted plaintiffs' motion for voluntary dismissal of the appeal.
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, ST. JOSEPH COUNTY, INDIANA, FILED SEPTEMBER 12, 1997.
OPERATING ENGINEERS LOCAL 12 HEALTH AND WELFARE TRUST FUND, ET AL. V.
AMERICAN TOBACCO, INC., ET AL., SUPERIOR COURT, SAN DIEGO COUNTY, CALIFORNIA,
FILED SEPTEMBER 17, 1997. Trial is scheduled for January 2001. See IN RE
TOBACCO CASES II.
PUERTO RICAN ILGWU HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS INC., ET AL.,
SUPREME COURT, COUNTY OF NEW YORK, NEW YORK, FILED SEPTEMBER 17, 1997.
NEW MEXICO AND WEST TEXAS MULTI-CRAFT HEALTH AND WELFARE TRUST FUND, ET AL. V.
PHILIP MORRIS, INC., ET AL., SECOND JUDICIAL DISTRICT COURT, BERNALILLO COUNTY,
NEW MEXICO, FILED OCTOBER 10, 1997. The court granted defendants' motion to
dismiss in December 1998. Plaintiffs have appealed dismissal of only their
antitrust and state law consumer protection claims to the New Mexico Court of
Appeals.
CENTRAL STATES JOINT BOARD V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED OCTOBER 20, 1997. Plaintiffs
appealed the dismissal of the case to the United States Court of Appeals for the
Seventh Circuit. In November 1999, the Seventh Circuit affirmed the order
granting dismissal of plaintiffs' complaint in this case.
INTERNATIONAL BROTHERHOOD OF TEAMSTERS, LOCAL 734 V. PHILIP MORRIS, INC., ET
AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED OCTOBER
20, 1997. Plaintiffs appealed the court's decision to grant defendants' motion
to dismiss to the United States Court of Appeals for the Seventh Circuit. In
November 1999, the Seventh Circuit affirmed the order granting dismissal of
plaintiffs' complaint in this case.
TEXAS CARPENTERS HEALTH BENEFIT FUND, ET AL. V. PHILIP MORRIS, INC., ET AL.,
UNITED STATES DISTRICT COURT, EASTERN DISTRICT, BEAUMONT DIVISION, TEXAS, FILED
OCTOBER 31, 1997. The trial court granted defendants' motion to dismiss and
plaintiffs appealed. In January 2000, the United States Court of Appeals for the
Fifth Circuit affirmed the trial court's dismissal of the suit.
UNITED FOOD AND COMMERCIAL WORKERS UNIONS AND EMPLOYERS HEALTH AND WELFARE FUND
V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT,
ALABAMA, FILED NOVEMBER 13, 1997. In August 1999, the court granted defendants'
motion to dismiss. Plaintiff has appealed to the United States Court of Appeals
for the Eleventh Circuit.
IBEW LOCAL 25 HEALTH AND BENEFIT FUND V. PHILIP MORRIS, INC., ET AL., SUPREME
COURT, NEW YORK COUNTY, NEW YORK, FILED NOVEMBER 25, 1997.
IBEW LOCAL 363 WELFARE FUND V. PHILIP MORRIS, INC., ET AL., SUPREME COURT, NEW
YORK COUNTY, 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, NEW YORK COUNTY, NEW YORK, FILED
NOVEMBER 25, 1997.
LOCAL 840, INTERNATIONAL BROTHERHOOD OF TEAMSTERS HEALTH AND INSURANCE FUND V.
PHILIP MORRIS, INC., ET AL., SUPREME COURT, NEW YORK COUNTY, STATE OF NEW YORK,
FILED NOVEMBER 25, 1997.
LONG ISLAND REGIONAL COUNCIL OF CARPENTERS WELFARE FUND V. PHILIP MORRIS, INC.,
SUPREME COURT, NEW YORK COUNTY, NEW YORK, FILED NOVEMBER 25, 1997.
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DAY CARE COUNCIL - LOCAL 205 D.C. 1707 WELFARE FUND V. PHILIP MORRIS, INC., ET
AL., SUPREME COURT, NEW YORK COUNTY, NEW YORK, FILED DECEMBER 8, 1997.
LOCAL 1199 HOME CARE INDUSTRY BENEFIT FUND V. PHILIP MORRIS, INC., ET AL.,
SUPREME COURT, NEW YORK COUNTY, NEW YORK, FILED DECEMBER 8, 1997.
LOCAL 1199 NATIONAL BENEFIT FUND FOR HEALTH AND HUMAN SERVICES EMPLOYEES V.
PHILIP MORRIS, INC., ET AL., SUPREME COURT, NEW YORK COUNTY, NEW YORK, FILED
DECEMBER 8, 1997.
OPERATING ENGINEERS LOCAL 324 HEALTH CARE FUND, ET AL. V. PHILIP MORRIS, INC.,
ET AL., CIRCUIT COURT, WAYNE COUNTY, MICHIGAN, FILED DECEMBER 30, 1997.
Plaintiffs appealed the court's February 1999 decision to grant defendants'
motion to dismiss to the Michigan Court of Appeals.
ROBERT LYONS, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES
DISTRICT COURT, MINNESOTA, FILED DECEMBER 31, 1997. In April 1999, the court
granted defendants' motion to dismiss the case on the grounds that plaintiffs'
alleged injuries were "too derivative and remote" to be cognizable under federal
antitrust and RICO law. Plaintiffs have appealed to the United States Court of
Appeals for the Eighth Circuit.
STEAMFITTERS LOCAL UNION NO. 614 HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS,
INC., ET AL., CIRCUIT COURT, THIRTEENTH JUDICIAL DISTRICT, TENNESSEE, FILED
JANUARY 7, 1998.
NATIONAL ASBESTOS WORKERS MEDICAL FUND, ET AL. V. PHILIP MORRIS INCORPORATED, ET
AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, NEW YORK, FILED FEBRUARY
27, 1998. In July 1999, the District Court denied a motion to intervene filed by
another union health and welfare fund. In August 1999, the court denied
defendants' motion to dismiss the amended complaint. In October 1999, the United
States Court of Appeals for the Second Circuit denied defendants' appeal and
mandamus petition, which sought review of the District Court's denial of
defendants' motion to dismiss the amended complaint. In November 1999,
defendants filed a petition for rehearing en banc from the previous order in
October declining to review defendants' petition for writ of mandamus. In
January 2000, defendants filed a petition for a writ of mandamus with the Second
Circuit seeking to require that the class certification issue be resolved prior
to trial. On February 8, 2000, the Second Circuit ordered further briefing on
the petition. Trial is scheduled for June 2000.
MILWAUKEE CARPENTERS, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED
STATES DISTRICT COURT, EASTERN DISTRICT, WISCONSIN, FILED MARCH 4, 1998. In
September 1999, the judge denied plaintiffs' motion to remand the case to state
court. In January 2000, the court dismissed the case with prejudice pursuant to
a stipulation by the parties.
SERVICE EMPLOYEES INTERNATIONAL UNION HEALTH & WELFARE FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, DISTRICT OF COLUMBIA, FILED
MARCH 19, 1998. In July 1999, the court denied without prejudice the motion of
two health and welfare trust funds to intervene in this lawsuit. In December
1999, the court granted in part and denied in part defendants' motion to
dismiss. The court has allowed an interlocutory appeal to the United States
Court of Appeal for the District of Columbia Circuit, where a petition for
review is pending.
UTAH LABORERS' HEALTH AND WELFARE TRUST FUND, ET AL. V. PHILIP MORRIS
INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, UTAH, FILED JUNE 13, 1998.
In October 1999, the District Court certified its denial of the motion to
dismiss to the United States Court of Appeals for the Tenth Circuit. In November
1999, the Tenth Circuit granted the petition to review the District Court's
denial of the motion to dismiss.
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. In December
1999, the court granted in part and denied in part defendants' motion to
dismiss. The court has allowed an interlocutory appeal to the United States
Court of Appeal for the District of Columbia Circuit, where a petition for
review is pending.
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MICHAEL H. HOLLAND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, DISTRICT OF COLUMBIA, FILED JULY 9, 1998. In December 1999, the
court granted in part and denied in part defendants' motion to dismiss. The
court has allowed an interlocutory appeal to the United States Court of Appeal
for the District of Columbia Circuit, where a petition for review is pending.
SHEET METAL WORKERS TRUST FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED
STATES DISTRICT COURT, DISTRICT OF COLUMBIA, FILED AUGUST 31, 1999. In December
1999, the court granted in part and denied in part defendants' motion to
dismiss. The court has allowed an interlocutory appeal to the United States
Court of Appeal for the District of Columbia Circuit, where a petition for
review is pending.
DAVID B. BERGERON, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES
DISTRICT COURT, EASTERN DISTRICT, NEW YORK, FILED SEPTEMBER 29, 1999.
NATIVE AMERICAN CASES
THE MUSCOGEE (CREEK) NATION, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL.,
DISTRICT COURT, OKMULGEE DISTRICT, MUSCOGEE (CREEK) NATION, FILED JUNE 20, 1997.
In December 1999, plaintiffs voluntarily dismissed the case.
CROW CREEK SIOUX TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL COURT,
CROW CREEK SIOUX TRIBE, FILED SEPTEMBER 14, 1997. On January 25, 2000, the court
entered a stay of proceedings until July 2001.
LOWER BRULE SIOUX TRIBE V. AMERICAN TOBACCO COMPANY, ET AL., TRIBAL COURT OF THE
LOWER BRULE SIOUX TRIBE, LOWER BRULE, SOUTH DAKOTA, FILED DECEMBER 4, 1997.
SISSETON-WAHPETON SIOUX TRIBE V. PHILIP MORRIS INCORPORATED, ET AL., TRIBAL
COURT OF THE SISSETON-WAHPETON SIOUX TRIBE, FILED MAY 8, 1998. On December 1,
1999, the court granted defendants petition for intermediate appeal from the
trial court's order, which granted in part and denied in part defendants' motion
to dismiss the complaint. The trial and appellate courts have stayed proceedings
until July 2000.
STANDING ROCK SIOUX TRIBE V. PHILIP MORRIS INCORPORATED, ET AL., TRIBAL COURT OF
THE STANDING ROCK SIOUX INDIAN RESERVATION, FILED MAY 8, 1998.
YUKON-KUSHOKWIM HEALTH CORPORATION V. PHILIP MORRIS INCORPORATED, ET AL.,
SUPERIOR COURT, FOURTH JUDICIAL DISTRICT, BETHEL, ALASKA, FILED APRIL 5, 1999.
In August 1999, the court granted plaintiff's motion to voluntarily dismiss the
case.
ACOMA PUEBLO, ET AL. V. AMERICAN TOBACCO CO., ET AL., NEW MEXICO, FIRST JUDICIAL
DISTRICT COURT, SANTA FE COUNTY, NEW MEXICO, FILED JUNE 16, 1999. On November
18, 1999, the court entered a stay of proceedings until July 2000.
NAVAHO NATION V. PHILIP MORRIS INCORPORATED, ET AL., DISTRICT COURT, WINDOW
ROCK, ARIZONA, FILED AUGUST 12, 1999.
INSURER AND SELF-INSURER CASES
GROUP HEALTH PLAN, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT
COURT, MINNESOTA, FILED MARCH 11, 1998. In April 1999, the court dismissed all
claims except the state antitrust and conspiracy claims. On January 25, 2000,
the court granted in part defendants' motion to dismiss and certified issues
regarding plaintiffs' consumer protection claims to the Minnesota Supreme Court.
HEALTH CARE SERVICES CORPORATION (formerly ARKANSAS BLUE CROSS AND BLUE
SHIELD), ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT
COURT, NORTHERN DISTRICT, ILLINOIS, FILED APRIL 29, 1998. In August 1999, the
court denied defendants' motion to reconsider its earlier denial of
defendants' motion to dismiss and granted certification of the order for
interlocutory appeal to the United States Court of Appeals for the Seventh
Circuit. In November 1999, the Seventh Circuit reversed the trial court's
refusal to dismiss the case and instructed the trial court to dismiss it.
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In December 1999, the Court of Appeals denied plaintiffs' petitions for
rehearing and rehearing en banc. The trial court dismissed the case in January
2000. Plaintiffs have filed an appeal with the United States Court of Appeals
for the Seventh Circuit.
BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC., ET AL. V. PHILIP MORRIS,
INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, NEW YORK,
FILED APRIL 29, 1998. In August 1999, the court denied defendants' motion to
dismiss the amended complaint. In October 1999, the United States Court of
Appeals for the Second Circuit denied defendants' appeals and mandamus petition,
which sought review of the District Court's denial of defendants' motion to
dismiss the amended complaint. In October 1999, five of the plaintiffs agreed to
dismiss their claims without prejudice. In November 1999, defendants filed a
petition for rehearing and a petition for rehearing en banc from the previous
order in October declining to review defendants' petition for writ of mandamus.
In December 1999, the Second Circuit denied the petition for rehearing.
REGENCE BLUESHIELD, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, WESTERN DISTRICT, WASHINGTON, FILED APRIL 29, 1998. Plaintiffs
have appealed the trial court's dismissal of their action to the United States
Court of Appeals for the Ninth Circuit.
TAXPAYER CASES
COYNE, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., COURT OF COMMON PLEAS,
CUYAHOGA COUNTY, OHIO, FILED SEPTEMBER 17, 1996. In July 1999, the United States
Court of Appeals for the Sixth Circuit affirmed the trial court's ruling that
plaintiffs lacked standing to pursue the action. As a result, the case was
remanded to state court for additional proceedings since there was no federal
subject matter jurisdiction.
STATE OF TENNESSEE, ET AL., EX. REL. BECKOM, ET AL. V. THE AMERICAN TOBACCO
COMPANY, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, TENNESSEE,
FILED MAY 8, 1997. Plaintiffs have appealed the trial court's dismissal of their
action to the United States Court of Appeals for the Sixth Circuit.
WOODS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, MIDDLE DISTRICT, NORTH CAROLINA, FILED FEBRUARY 13, 1998.
WYNN V. PHILIP MORRIS INC., ET AL., CIRCUIT COURT, BIRMINGHAM, ALABAMA, FILED
MAY 27, 1998. In September 1999, the court dismissed the case with prejudice and
plaintiff has filed a motion for reconsideration. In November 1999, the court
denied plaintiff's motion for reconsideration of its prior order granting
defendants' motion to dismiss.
OTHER CASES
PERRY, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT, COFFEE
COUNTY, TENNESSEE, FILED SEPTEMBER 30, 1996.
UNIVERSITY OF SOUTH ALABAMA V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED
STATES DISTRICT COURT, SOUTHERN DISTRICT, ALABAMA, FILED MAY 19, 1997. In
January 2000, the court entered an order dismissing this case with prejudice
subject to the stipulation of the parties.
MASON, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT
COURT, NORTHERN DISTRICT, TEXAS, FILED DECEMBER 23, 1997. In May 1999, the
United States Justice Department advised the court that the Federal Government
does not plan to intervene in this suit.
IN RE TOBACCO CASES II, SUPERIOR COURT FOR THE STATE OF CALIFORNIA, JUDICIAL
COUNCIL COORDINATION PROCEEDING NO. 4042. The court in this case has
consolidated 30 previously filed cases, including 26 health care cost recovery
actions filed by unions (25 of which were recently voluntarily dismissed by
plaintiffs without prejudice) and one by native Americans, two "Proposition
65" cases, and two putative smoking and health class actions. In a July 1999
telephonic ruling, the court in the native American case denied defendants'
motion to dismiss except with respect to claims for violation of the California
Business and Professions Code. In January 2000, the court granted in part and
denied in part defendants' motion for summary judgment in the "Proposition
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65" cases and dismissed plaintiffs' "Proposition 65" claims. Trial on the
remaining claims in these two cases, alleging violations of California's
Business and Professions Code, is scheduled to begin in June 2000. The union
case has been set for trial in January 2001.
ALLEGHENY GENERAL HOSPITAL, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES
DISTRICT COURT, WESTERN DISTRICT, PENNSYLVANIA, FILED DECEMBER 10, 1998. In
November 1999, the court granted defendants' motion to dismiss. Plaintiffs are
appealing this decision.
ASSOCIATION OF WASHINGTON PUBLIC HOSPITAL DISTRICTS, ET AL. V. PHILIP MORRIS
INCORPORATED, UNITED STATES DISTRICT COURT, WESTERN DISTRICT, WASHINGTON, FILED
MARCH 17, 1999. In December 1999, the court granted defendants' motion to
dismiss and plaintiffs are appealing this decision.
CERTAIN OTHER TOBACCO-RELATED ACTIONS
The following lists certain other tobacco-related litigation pending against the
Company and/or various subsidiaries and others as of February 15, 2000, and
describes certain developments since November 1, 1999.
ASBESTOS CONTRIBUTION CASES
RAYMARK INDUSTRIES, INC. V. R. J. REYNOLDS TOBACCO COMPANY, ET AL., CIRCUIT
COURT, FOURTH JUDICIAL CIRCUIT, DUVAL COUNTY, FLORIDA, FILED SEPTEMBER 15, 1997.
RAYMARK INDUSTRIES, INC. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL.,
UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, ATLANTA DIVISION, GEORGIA,
FILED SEPTEMBER 15, 1997.
FIBREBOARD CORPORATION AND OWENS CORNING V. THE AMERICAN TOBACCO COMPANY, ET
AL., SUPERIOR COURT, ALAMEDA COUNTY, CALIFORNIA, FILED DECEMBER 11, 1997.
KEENE CREDITORS TRUST V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., SUPREME
COURT, NEW YORK COUNTY, NEW YORK, FILED DECEMBER 19, 1997.
ROBERT A. FALISE, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES
DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED DECEMBER 31, 1997. In
November 1999, the court granted defendant's motion to dismiss, finding no
subject matter jurisdiction. Plaintiffs refiled their complaint in November
1999, alleging violations of RICO. Trial is currently scheduled for April 2000.
H. K. PORTER COMPANY, INC. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED
STATES DISTRICT COURT, EASTERN DISTRICT, NEW YORK, FILED DECEMBER 31, 1997. In
November 1999, defendants filed a petition for mandamus with the United States
Court of Appeals for the Second Circuit, seeking review of the trial court's
denial of defendants' motion to dismiss the new complaint. Trial is scheduled
for September 2000.
RAYMARK INDUSTRIES, INC. V. R. J. REYNOLDS TOBACCO COMPANY, ET AL., CIRCUIT
COURT, FOURTH JUDICIAL CIRCUIT, DUVAL COUNTY, FLORIDA, FILED DECEMBER 31, 1997.
RAYMARK INDUSTRIES, INC. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES
DISTRICT COURT, EASTERN DISTRICT, NEW YORK, FILED JANUARY 30, 1998. Trial is
scheduled for October 2000.
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,
JEFFERSON COUNTY, MISSISSIPPI, FILED AUGUST 30, 1998.
OWENS CORNING V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., CIRCUIT COURT, JEFFERSON
COUNTY, MISSISSIPPI, FILED AUGUST 30, 1998. Trial is scheduled for February
2001.
12
<PAGE>
UNR ASBESTOS-DISEASE CLAIMS TRUST V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET
AL., SUPREME COURT, NEW YORK COUNTY, NEW YORK, FILED MARCH 15, 1999.
LIGHTS/ULTRA LIGHTS CASES
HOGUE, ET AL. V. PHILIP MORRIS COMPANIES, INC. AND PHILIP MORRIS, INC., CIRCUIT
COURT FOR THE 13TH JUDICIAL CIRCUIT, HILLSBOROUGH COUNTY, FLORIDA, FILED JUNE
30, 1998.
GESSER (FORMERLY CUMMIS), ET AL. V. PHILIP MORRIS COMPANIES, INC. AND PHILIP
MORRIS, INC., SUPERIOR COURT, MIDDLESEX COUNTY, NEW JERSEY, FILED JULY 9, 1998.
MCNAMARA, ET AL. V. PHILIP MORRIS COMPANIES, INC. AND PHILIP MORRIS, INC., COURT
OF COMMON PLEAS, MONTGOMERY COUNTY, PENNSYLVANIA, FILED JULY 16, 1998.
ASPINALL, ET AL. V. PHILIP MORRIS COMPANIES, INC. AND PHILIP MORRIS
INCORPORATED, SUPERIOR COURT, SUFFOLK COUNTY, MASSACHUSETTS, FILED NOVEMBER 24,
1998.
RUSSELL, ET AL. V. PHILIP MORRIS INCORPORATED AND PHILIP MORRIS COMPANIES, INC.,
UNITED STATES DISTRICT COURT, EASTERN DISTRICT, TENNESSEE, FILED NOVEMBER 24,
1998. In April 1999, plaintiffs voluntarily dismissed this case.
MCCLURE, ET AL. V. PHILIP MORRIS COMPANIES INC. AND PHILIP MORRIS INCORPORATED,
CIRCUIT COURT, DAVIDSON COUNTY, TENNESSEE, FILED FEBRUARY 19, 1999.
COCCA, ET AL. V. PHILIP MORRIS INCORPORATED, UNITED STATES DISTRICT COURT,
ARIZONA, FILED MAY 13, 1999.
POPA, ET AL. V. PHILIP MORRIS COMPANIES INC., ET AL., COURT OF COMMON PLEAS,
STARK COUNTY, OHIO, FILED JUNE 30, 1999.
ENGLE, ET AL. V. PHILIP MORRIS COMPANIES, INC. AND PHILIP MORRIS INC.,
UNITED STATES DISTRICT COURT, ARIZONA, FILED JULY 16, 1999.
CATHERINE MARRONE, ET AL. V. PHILIP MORRIS COMPANIES INC. AND PHILIP
MORRIS INCORPORATED, COURT OF COMMON PLEAS, MEDINA COUNTY, OHIO, FILED
NOVEMBER 8, 1999. This putative class action is brought on behalf of all
residents of Ohio who purchased and consumed VIRGINIA SLIMS LIGHTS
cigarettes and who do not have a claim for personal injury resulting from
the purchase or consumption of cigarettes.
SARAH DAHLGREN V. PHILIP MORRIS COMPANIES INC. AND PHILIP MORRIS INC., ET
AL., SUPERIOR COURT, WASHINGTON, D.C., FILED NOVEMBER 18, 1999. This
putative class action, brought on behalf of all residents of Washington,
D.C. who smoke MARLBORO LIGHTS cigarettes, alleges deceptive and unfair
trade practices.
MILES, ET AL. V. PHILIP MORRIS COMPANIES, INC., ET AL., CIRCUIT COURT,
MADISON COUNTY, ILLINOIS, FILED FEBRUARY 10, 2000.
RETAIL LEADERS CASE
13
<PAGE>
R.J. REYNOLDS TOBACCO COMPANY, ET AL. V. PHILIP MORRIS INCORPORATED,
UNITED STATES DISTRICT COURT, MIDDLE DISTRICT, NORTH CAROLINA, FILED MARCH
12, 1999.
VENDING MACHINE CASE
LEWIS D/B/A B&H VENDORS V. PHILIP MORRIS INC., UNITED STATES DISTRICT
COURT, MIDDLE DISTRICT, TENNESSEE, FILED FEBRUARY 3, 1999.
CALIFORNIA BUSINESS AND PROFESSIONS CODE CASES
The Company believes that these cases which were based in part on "Proposition
65", are released in whole or in part by the MSA or that recovery in any such
action should be subject to the offset provisions of the MSA. In January 2000,
the trial court granted in part and denied in part defendants' motion for
summary judgment in the "Proposition 65" cases and dismissed plaintiffs'
"Proposition 65" claims. Trial on the remaining claims, alleging violations of
California's Business and Professions Code regarding unfair and fraudulent
business practices, is scheduled to begin in June 2000.
THE PEOPLE OF THE STATE OF CALIFORNIA, ET AL. V. PHILIP MORRIS INCORPORATED, ET
AL., SUPERIOR COURT, LOS ANGELES COUNTY, CALIFORNIA, FILED JULY 14, 1998. This
case has been coordinated with IN RE TOBACCO CASES II discussed above.
THE PEOPLE OF THE STATE OF CALIFORNIA, ET AL. V. BROWN & WILLIAMSON TOBACCO
CORPORATION, ET AL., SUPERIOR COURT, SAN FRANCISCO COUNTY, CALIFORNIA, FILED
JULY 28, 1998. This case has been coordinated with IN RE TOBACCO CASES II
discussed above.
MSA-RELATED CASES
HISE, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED DISTRICT COURT,
NORTHERN DISTRICT, OKLAHOMA, FILED DECEMBER 15, 1998. Plaintiffs have appealed
the trial court's dismissal of their action to the United States Court of
Appeals for the Tenth Circuit. In February 2000, the Tenth Circuit affirmed
summary judgment for defendants.
FORCES ACTION PROJECT, LLC, ET AL. V. THE STATE OF CALIFORNIA, ET. AL., UNITED
STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED JANUARY 23, 1999. In
January 2000, the court granted defendants' motion to dismiss the complaint.
A.D. BEDELL WHOLESALE CO. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES
DISTRICT COURT, WESTERN DISTRICT, PENNSYLVANIA, FILED APRIL 12, 1999. In October
1999, plaintiff filed a separate lawsuit against Philip Morris, A.D. BEDELL
COMPANY, INC. V. PHILIP MORRIS INCORPORATED, SUPREME COURT, CATTARAUGUS COUNTY,
NEW YORK, FILED OCTOBER 18, 1999. This lawsuit alleges claims arising out of
Philip Morris' decision to suspend sales to plaintiff. In November 1999, the
court denied a motion to dismiss the complaint and denied a motion to vacate the
temporary restraining order enjoining Philip Morris from refusing to sell
products to plaintiff.
TABLE BLUFF RESERVATION (WIYOT TRIBE), ET AL. V. PHILIP MORRIS, INC., ET
AL., NO. C99-02621-NHP, UNITED STATES DISTRICT COURT, NORTHERN DISTRICT,
CALIFORNIA, FILED JUNE 2, 1999. On November 12, 1999, the court dismissed
the lawsuit in its entirety. Plaintiffs filed a notice of appeal on
November 18, 1999.
TURNER BRANCH, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED
STATES DISTRICT COURT, NEW MEXICO, FILED AUGUST 3, 1999. In October 1999, the
court granted defendants' motion to stay the case pending arbitration pursuant
to the MSA. The arbitration is scheduled for April 2000.
PTI, INC. ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES
DISTRICT COURT, CENTRAL DISTRICT, CALIFORNIA, FILED AUGUST 13, 1999.
14
<PAGE>
STATE OF NEW YORK, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPREME COURT,
NEW YORK COUNTY, NEW YORK, INTERVENTION MOTION FILED AUGUST 19, 1999. The
intervention motion was denied, and is presently on appeal to the Appellate
Division, First Department.
HEREK, ET AL. V. STATE OF WISCONSIN, ET AL., CIRCUIT COURT, DANE COUNTY,
WISCONSIN, FILED NOVEMBER 5, 1999. This lawsuit alleges that plaintiffs
have a right to a portion of the proceeds Wisconsin receives pursuant to
the MSA.
TOBACCO PRICE CASES
WHOLESALERS AND OTHER DIRECT PURCHASERS - The following are putative class
actions filed by tobacco wholesalers and direct purchasers of cigarettes
alleging defendants conspired to fix cigarette prices in violation of antitrust
laws.
BUFFALO TOBACCO PRODUCTS, ET AL. V. PHILIP MORRIS COMPANIES INC., ET AL.,
UNITED STATES DISTRICT COURT, DISTRICT OF COLUMBIA, FILED FEBRUARY 8,
2000.
ROG-GLO, LTD. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES
DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED FEBRUARY 18, 2000.
WILLIAMSON OIL COMPANY, INC. V. PHILIP MORRIS COMPANIES, ET AL., UNITED
STATES DISTRICT COURT, NORTHERN DISTRICT, GEORGIA, FILED FEBRUARY 28,
2000.
TOBACCO GROWERS' CASE
DELOACH, ET AL. V. PHILIP MORRIS COMPANIES INC., ET AL., UNITED STATES DISTRICT
COURT, DISTRICT OF COLUMBIA, FILED FEBRUARY 16, 2000. This purported class
action alleges that, through the MSA and related activities, defendants
conspired to displace the tobacco quota and price support system administered by
the federal government, that they misled plaintiffs into support their positions
on legislation and settlements, and that they violated a fiduciary obligation to
represent plaintiffs' interests.
CERTAIN OTHER ACTIONS
The following lists certain other actions pending against subsidiaries of the
Company and others as of February 15, 2000.
NATIONAL CHEESE EXCHANGE CASES
Consolidated Action: (SERVAIS, ET AL. V. KRAFT FOODS, INC. AND THE
NATIONAL CHEESE EXCHANGE, INC., CIRCUIT COURT, DANE COUNTY, WISCONSIN,
FILED MAY 5, 1997; DODSON, ET AL. V. KRAFT FOODS, INC., ET AL., CIRCUIT
COURT, DANE COUNTY, WISCONSIN, FILED JULY 1, 1997; NOLL, ET AL. V. KRAFT
FOODS, INC., ET AL., CIRCUIT COURT, DANE COUNTY, WISCONSIN, FILED JULY 11,
1997.) As discussed in Item 3. LEGAL PROCEEDINGS, in October 1999 the
Court granted Kraft's motion for summary judgment.
VINCENT, ET AL. V. KRAFT FOODS, INC., CIRCUIT COURT, COOK COUNTY,
ILLINOIS, FILED OCTOBER 27, 1997. In February 2000, the appeals court
reversed the trial court's dimissal.
KNEVELBOARD DAIRIES, ET AL. V. KRAFT FOODS, INC., ET AL., UNITED STATES
DISTRICT COURT, CENTRAL DISTRICT, CALIFORNIA, FILED APRIL 14, 1998.
Plaintiff has appealed the court's dismissal of this action.
ENVIRONMENTAL MATTERS
In June 1999, the Missouri Department of Natural Resources (the "DNR") issued a
notice of violation to Kraft alleging that it had violated state solid waste and
water laws by arranging for the reuse of spent hot dog casings
15
<PAGE>
at a farmsite. In October 1999, the DNR proposed to settle the matter for a
civil penalty of $254,000 in lieu of a formal enforcement action. Kraft is
currently evaluating this matter.
--------------
16
<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 47 of those jurisdictions. Interventions and/or
challenges to the MSA (or appeals thereof) are pending in 6 jurisdictions. In
addition, as described in Item 3. LEGAL PROCEEDINGS, above, under the heading
"Litigation Settlements," there are a number of other suits pending related to
the MSA.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
INTERVENTION
FINAL AND/OR
JUDICIAL CHALLENGE
JURISDICTION TRIAL COURT APPROVAL APPROVAL PENDING
- -------------------------------------------------------------------------
<S> <C> <C> <C>
AMERICAN SAMOA X X
- -------------------------------------------------------------------------
ALABAMA X X
- -------------------------------------------------------------------------
ALASKA X X
- -------------------------------------------------------------------------
ARIZONA X X
- -------------------------------------------------------------------------
ARKANSAS X X
- -------------------------------------------------------------------------
CALIFORNIA X X
- -------------------------------------------------------------------------
COLORADO X X
- -------------------------------------------------------------------------
CONNECTICUT X X
- -------------------------------------------------------------------------
DISTRICT OF COLUMBIA X X
- -------------------------------------------------------------------------
DELAWARE X X
- -------------------------------------------------------------------------
GEORGIA X X
- -------------------------------------------------------------------------
GUAM X X
- -------------------------------------------------------------------------
HAWAII X X
- -------------------------------------------------------------------------
IDAHO X X
- -------------------------------------------------------------------------
ILLINOIS X X
- -------------------------------------------------------------------------
INDIANA X X
- -------------------------------------------------------------------------
IOWA X X
- -------------------------------------------------------------------------
KANSAS X X
- -------------------------------------------------------------------------
KENTUCKY X X
- -------------------------------------------------------------------------
LOUISIANA X X
- -------------------------------------------------------------------------
MAINE X X
- -------------------------------------------------------------------------
MARYLAND X X
- -------------------------------------------------------------------------
MASSACHUSETTS X X
- -------------------------------------------------------------------------
MICHIGAN X X
- -------------------------------------------------------------------------
MISSOURI X X
- -------------------------------------------------------------------------
MONTANA X X
- -------------------------------------------------------------------------
NEBRASKA X X
- -------------------------------------------------------------------------
NEVADA X X
- -------------------------------------------------------------------------
NEW HAMPSHIRE X X
- -------------------------------------------------------------------------
NEW JERSEY X X
- -------------------------------------------------------------------------
NEW MEXICO X X
- -------------------------------------------------------------------------
NEW YORK X X X
- -------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
INTERVENTION
FINAL AND/OR
JUDICIAL CHALLENGE
JURISDICTION TRIAL COURT APPROVAL APPROVAL PENDING
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
NORTH CAROLINA X X
- ---------------------------------------------------------------------------
NORTH DAKOTA X X
- ---------------------------------------------------------------------------
NORTHERN MARIANAS X X
- ---------------------------------------------------------------------------
OHIO X X
- ---------------------------------------------------------------------------
OKLAHOMA X X
- ---------------------------------------------------------------------------
OREGON X X
- ---------------------------------------------------------------------------
PENNSYLVANIA X X
- ---------------------------------------------------------------------------
PUERTO RICO X X
- ---------------------------------------------------------------------------
RHODE ISLAND X X
- ---------------------------------------------------------------------------
SOUTH CAROLINA X X
- ---------------------------------------------------------------------------
SOUTH DAKOTA X X
- ---------------------------------------------------------------------------
TENNESSEE X X
- ---------------------------------------------------------------------------
UTAH X X
- ---------------------------------------------------------------------------
VERMONT X X
- ---------------------------------------------------------------------------
VIRGIN ISLANDS X X
- ---------------------------------------------------------------------------
VIRGINIA X X
- ---------------------------------------------------------------------------
WASHINGTON X X
- ---------------------------------------------------------------------------
WEST VIRGINIA X X
- ---------------------------------------------------------------------------
WISCONSIN X X
- ---------------------------------------------------------------------------
WYOMING X X
- ---------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 99.3
TRIAL SCHEDULE FOR CERTAIN CASES
Set forth below is a list of smoking and health class actions, health care cost
recovery actions, cases under the California Business and Professions Code and
asbestos contribution actions currently scheduled for trial through 2001 against
PM Inc. and, in some cases, the Company. Trial dates, however, are subject to
change.
<TABLE>
<CAPTION>
CASE (JURISDICTION) TYPE OF ACTION TRIAL DATE
<S> <C> <C>
Robert A. Falise, et al. Asbestos Contribution Action April 19, 2000
v. The American Tobacco
Company, et al.
(New York)
Blue Cross and Blue Shield of Health Care Cost Recovery Action May 22, 2000
New Jersey, Inc., et al. v. Philip
Morris, Incorporated, et al.
(New York)
The People of the State of California Business June 2, 2000
California, et al. v. Philip and Professions Code Case
Morris, Inc., et al. (California)
National Asbestos Workers Health Care Cost Recovery Action June 19, 2000
Medical Fund, et al. v. Philip
Morris Incorporated, et al.
(New York)
H.K. Porter v. The American Asbestos Contribution Action September 11, 2000
Tobacco Company, et al.
(New York)
Raymark Industries v. The Asbestos Contribution Action October 2, 2000
American Tobacco Company, et al.
(New York)
In Re Tobacco (West Virginia) Medical Monitoring Action October 2, 2000
Group Health Plan, et al. v. Health Care Cost Recovery Action December 1, 2000
Philip Morris, Inc., et al.
(Minnesota)
Republic of the Marshall Health Care Cost Recovery Action January 15, 2001
Islands v. The American
Tobacco Company, et al.
(Marshall Islands)
Scott, et al. v. The American Smoking and Health Class Action January 15, 2001
Tobacco Company, et al.
(Louisiana)
Operating Engineers Local 12 Health Care Cost Recovery Action January 16, 2001
Health and Welfare Trust Fund, et al.
v. American Tobacco, Inc., et al.
(California)
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
CASE (JURISDICTION) TYPE OF ACTION TRIAL DATE
<S> <C> <C>
Owens Corning v. R.J. Reynolds Asbestos Contribution Action February 2001
Tobacco Company
(Mississippi)
</TABLE>
Below is a schedule setting forth by month the number of individual smoking and
health cases against PM Inc. and, in some cases, the Company that are currently
scheduled for trial through the end of the year 2001.
<TABLE>
<CAPTION>
2000 2001
- ---- ----
<S> <C>
May (1) January (2)
June (1) March (2)
July (2) May (2)
August (1) June (1)
October (4) July (1)
November (1) November (1)
</TABLE>
-2-
