-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JOmroqnuqy3V04l5vxslJfI7MVdTF0vXtfOtKvR6/wfst9bggxquMkv7FFZ3FPNK Tv8ejL7Z9DslJqRtbfJBtA== 0000912057-00-009516.txt : 20000307 0000912057-00-009516.hdr.sgml : 20000307 ACCESSION NUMBER: 0000912057-00-009516 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILIP MORRIS COMPANIES INC CENTRAL INDEX KEY: 0000764180 STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000] IRS NUMBER: 133260245 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08940 FILM NUMBER: 560121 BUSINESS ADDRESS: STREET 1: 120 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 9176635000 MAIL ADDRESS: STREET 1: 120 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 10-K405 1 FORM 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 1-8940 ------------------------ PHILIP MORRIS COMPANIES INC. (Exact name of registrant as specified in its charter) ------------------------------ VIRGINIA 13-3260245 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 120 PARK AVENUE, NEW YORK, N.Y. 10017 (Address of principal executive offices) (Zip Code)
------------------------ REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 917-663-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock, $0.33 1/3 par value New York Stock Exchange
------------------------ 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/ ------------------------ 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. ------------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 - ------------------------ * 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. 1 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:
YEARS ENDED PM INC. DECEMBER 31 INDUSTRY* PM INC. SHARE OF INDUSTRY - ----------- ---------- --------- ----------------- (IN BILLIONS OF UNITS) (%) 1999........................................... 419.3 208.2 49.6 1998........................................... 460.8 227.6 49.4 1997........................................... 482.9 235.2 48.7
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. - ------------------------ * Source: Management Science Associates. 2 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 3 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 4 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 5 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. 6 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 7 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 8 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 9 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. 10 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:
YEARS ENDED MILLER'S DECEMBER 31 INDUSTRY MILLER SHARE OF INDUSTRY - ----------- -------- -------- ----------------- (IN THOUSANDS OF (%) BARRELS) 1999........................................... 204,200 44,175 21.6 1998........................................... 201,751 42,674 21.2 1997........................................... 201,246 43,675 21.7
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. 11 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 12 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. 13 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. 14 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 15 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 16 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 17 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 18 $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 19 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. 20 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. 21 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. 22 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 23 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. 24 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:
NAME OFFICE AGE - ---- -------------------------------------------------------- -------- 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
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 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
REFERENCE -------------------- FORM 10-K 1999 ANNUAL ANNUAL REPORT REPORT PAGE PAGE --------- -------- 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
26 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): 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)
27 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.
- ------------------------ (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 (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 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. PHILIP MORRIS COMPANIES INC. By: /s/ GEOFFREY C. BIBLE ----------------------------------------- (Geoffrey C. Bible, Chairman of the Board and Chief Executive Officer) Date: March 2, 2000
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
SIGNATURE TITLE DATE --------- ----- ---- /s/ GEOFFREY C. BIBLE Director, Chairman of the ------------------------------------------- Board and Chief 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
*By: /s/ LOUIS C. CAMILLERI --------------------------------------- (Louis C. Camilleri March 2, 2000 Attorney-in-fact)
30 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 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN MILLIONS)
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) 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 ==== ==== ==== ==== ====
- ------------------------ 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 EX-3.2 2 EXHIBIT 3.2 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- 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- 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- 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- 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- 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. -6- 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. -7- 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. -8- 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. -9- 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 -10- 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. -11- 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. -12- 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. -13- 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. -14- 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. -15- EX-10.15 3 EXHIBIT 10.15 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; 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 2 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:
NUMBER OF SHARES VESTING/DISTRIBUTION DATE 25,000 May 7, 2001 25,000 May 7, 2002 25,000 May 7, 2003
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 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 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 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 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 EX-13 4 EXHIBIT 13 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 Selected Financial Data--Eleven-Year Review (in millions of dollars, except per share data)
- ------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------- 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 ========================================================================================================================= - ------------------------------------------------------------------------------------------------------- 1991 1990 1989 - ------------------------------------------------------------------------------------------------------- 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 =======================================================================================================
35 Consolidated Balance Sheets (in millions of dollars, except per share data)
at December 31, - ----------------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------------- 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 ===================================================================================
See notes to consolidated financial statements. 36
- ---------------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------- 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 ==========================================================================================================
37 Consolidated Statements of Earnings (in millions of dollars, except per share data)
for the years ended December 31, - ----------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------- 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 ===================================================================================
Consolidated Statements of Cash Flows (in millions of dollars)
for the years ended December 31, - ----------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 38 Consolidated Statements of Cash Flows (continued)
for the years ended December 31, - ----------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------- 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 =====================================================================================================
See notes to consolidated financial statements. 39 Consolidated Statements of Stockholders' Equity (in millions of dollars, except per share data)
Accumulated Other Comprehensive Earnings (Losses) ---------------------------------- Earnings Currency Cost of Total Common Reinvested in Translation Repurchased Stockholders' Stock the Business Adjustments Other Total Stock Equity ==================================================================================================================================== 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 ====================================================================================================================================
See notes to consolidated financial statements. 40 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 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 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 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 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 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 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 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 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 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 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 51 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 52 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. 53 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. 54 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 55 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 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 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 ================================================================================
1998 Quarters ---------------------------------------------------- (in millions, except per share data) 1st 2nd 3rd 4th =============================================================================================== Operating revenues $ 18,383 $ 18,978 $ 18,587 $ 18,443 =============================================================================================== Gross profit $ 7,449 $ 7,903 $ 7,842 $ 7,799 =============================================================================================== Net earnings $ 1,382 $ 1,736 $ 1,980 $ 274 =============================================================================================== Per share data: Basic EPS $ 0.57 $ 0.72 $ 0.81 $ 0.11 =============================================================================================== Diluted EPS $ 0.57 $ 0.71 $ 0.81 $ 0.11 =============================================================================================== Dividends declared $ 0.40 $ 0.40 $ 0.44 $ 0.44 =============================================================================================== Market price--high $ 47.88 $ 41.56 $ 48.13 $ 59.50 --low $ 39.06 $ 34.75 $ 38.06 $ 45.00 ===============================================================================================
During 1998, the Company recorded 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 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 EX-21 5 EXHIBIT 21 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.
STATE OR COUNTRY OF NAME ORGANIZATION ---- ------------ 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
STATE OR COUNTRY OF NAME ORGANIZATION ---- ------------ 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
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STATE OR COUNTRY OF NAME ORGANIZATION ---- ------------ 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
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STATE OR COUNTRY OF NAME ORGANIZATION ---- ------------ 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
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STATE OR COUNTRY OF NAME ORGANIZATION ---- ------------ 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
5 EX-23 6 EXHIBIT 23 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 EX-24 7 EXHIBIT 24 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 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 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 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 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 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 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 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 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 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 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 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 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 EX-99.1 8 EXHIBIT 99.1 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 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 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 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 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. 5 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. 6 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. 7 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. 8 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. 9 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. 10 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 11 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 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 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 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 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 EX-99.2 9 EXHIBIT 99.2 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.
- ------------------------------------------------------------------------------- INTERVENTION FINAL AND/OR JUDICIAL CHALLENGE JURISDICTION TRIAL COURT APPROVAL APPROVAL PENDING - ------------------------------------------------------------------------- AMERICAN SAMOA X X - ------------------------------------------------------------------------- ALABAMA X X - ------------------------------------------------------------------------- ALASKA X X - ------------------------------------------------------------------------- ARIZONA X X - ------------------------------------------------------------------------- ARKANSAS X X - ------------------------------------------------------------------------- CALIFORNIA X X - ------------------------------------------------------------------------- COLORADO X X - ------------------------------------------------------------------------- CONNECTICUT X X - ------------------------------------------------------------------------- DISTRICT OF COLUMBIA X X - ------------------------------------------------------------------------- DELAWARE X X - ------------------------------------------------------------------------- GEORGIA X X - ------------------------------------------------------------------------- GUAM X X - ------------------------------------------------------------------------- HAWAII X X - ------------------------------------------------------------------------- IDAHO X X - ------------------------------------------------------------------------- ILLINOIS X X - ------------------------------------------------------------------------- INDIANA X X - ------------------------------------------------------------------------- IOWA X X - ------------------------------------------------------------------------- KANSAS X X - ------------------------------------------------------------------------- KENTUCKY X X - ------------------------------------------------------------------------- LOUISIANA X X - ------------------------------------------------------------------------- MAINE X X - ------------------------------------------------------------------------- MARYLAND X X - ------------------------------------------------------------------------- MASSACHUSETTS X X - ------------------------------------------------------------------------- MICHIGAN X X - ------------------------------------------------------------------------- MISSOURI X X - ------------------------------------------------------------------------- MONTANA X X - ------------------------------------------------------------------------- NEBRASKA X X - ------------------------------------------------------------------------- NEVADA X X - ------------------------------------------------------------------------- NEW HAMPSHIRE X X - ------------------------------------------------------------------------- NEW JERSEY X X - ------------------------------------------------------------------------- NEW MEXICO X X - ------------------------------------------------------------------------- NEW YORK X X X - -------------------------------------------------------------------------
- ------------------------------------------------------------------------------- INTERVENTION FINAL AND/OR JUDICIAL CHALLENGE JURISDICTION TRIAL COURT APPROVAL APPROVAL PENDING - --------------------------------------------------------------------------- NORTH CAROLINA X X - --------------------------------------------------------------------------- NORTH DAKOTA X X - --------------------------------------------------------------------------- NORTHERN MARIANAS X X - --------------------------------------------------------------------------- OHIO X X - --------------------------------------------------------------------------- OKLAHOMA X X - --------------------------------------------------------------------------- OREGON X X - --------------------------------------------------------------------------- PENNSYLVANIA X X - --------------------------------------------------------------------------- PUERTO RICO X X - --------------------------------------------------------------------------- RHODE ISLAND X X - --------------------------------------------------------------------------- SOUTH CAROLINA X X - --------------------------------------------------------------------------- SOUTH DAKOTA X X - --------------------------------------------------------------------------- TENNESSEE X X - --------------------------------------------------------------------------- UTAH X X - --------------------------------------------------------------------------- VERMONT X X - --------------------------------------------------------------------------- VIRGIN ISLANDS X X - --------------------------------------------------------------------------- VIRGINIA X X - --------------------------------------------------------------------------- WASHINGTON X X - --------------------------------------------------------------------------- WEST VIRGINIA X X - --------------------------------------------------------------------------- WISCONSIN X X - --------------------------------------------------------------------------- WYOMING X X - ---------------------------------------------------------------------------
EX-99.3 10 EXHIBIT 99.3 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.
CASE (JURISDICTION) TYPE OF ACTION TRIAL DATE 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)
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CASE (JURISDICTION) TYPE OF ACTION TRIAL DATE Owens Corning v. R.J. Reynolds Asbestos Contribution Action February 2001 Tobacco Company (Mississippi)
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.
2000 2001 - ---- ---- May (1) January (2) June (1) March (2) July (2) May (2) August (1) June (1) October (4) July (1) November (1) November (1)
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