SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8940
Philip Morris Companies Inc.
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(Exact name of registrant as specified in its charter)
Virginia 13-3260245
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Park Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (917) 663-5000
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
At April 28, 2000, there were 2,286,689,182 shares outstanding of the
registrant's common stock, par value $0.33 1/3 per share.
PHILIP MORRIS COMPANIES INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets at
March 31, 2000 and December 31, 1999 3 - 4
Condensed Consolidated Statements of Earnings for the
Three Months Ended March 31, 2000 and 1999 5
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 1999 and the
Three Months Ended March 31, 2000 6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 7 - 8
Notes to Condensed Consolidated Financial Statements 9 - 23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 24 - 38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 39
Item 4. Submission of Matters to a Vote of Security Holders. 39 - 40
Item 6. Exhibits and Reports on Form 8-K. 40
Signature 41
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
March 31, December 31,
2000 1999
-------- ------------
ASSETS
Consumer products
Cash and cash equivalents $ 4,226 $ 5,100
Receivables, net 4,621 4,313
Inventories:
Leaf tobacco 4,121 4,294
Other raw materials 1,742 1,794
Finished product 2,823 2,940
------- -------
8,686 9,028
Other current assets 2,470 2,454
------- -------
Total current assets 20,003 20,895
Property, plant and equipment, at cost 21,793 21,599
Less accumulated depreciation 9,412 9,328
------- -------
12,381 12,271
Goodwill and other intangible assets
(less accumulated amortization of
$5,933 and $5,840) 16,910 16,879
Other assets 3,620 3,625
------- -------
Total consumer products assets 52,914 53,670
Financial services
Finance assets, net 7,563 7,527
Other assets 170 184
------- -------
Total financial services assets 7,733 7,711
------- -------
TOTAL ASSETS $60,647 $61,381
======= =======
See notes to condensed consolidated financial statements.
Continued
-3-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars)
(Unaudited)
March 31, December 31,
2000 1999
-------- ------------
LIABILITIES
Consumer products
Short-term borrowings $ 248 $ 641
Current portion of long-term debt 637 1,601
Accounts payable 2,493 3,351
Accrued marketing 2,755 2,756
Accrued taxes, except income taxes 1,514 1,519
Accrued settlement charges 3,446 2,320
Other accrued liabilities 3,287 3,577
Income taxes 1,952 1,124
Dividends payable 1,108 1,128
-------- --------
Total current liabilities 17,440 18,017
Long-term debt 10,828 11,280
Deferred income taxes 1,284 1,214
Accrued postretirement health care costs 2,673 2,606
Other liabilities 6,772 6,853
-------- --------
Total consumer products liabilities 38,997 39,970
Financial services
Short-term borrowings 452
Long-term debt 929 946
Deferred income taxes 4,446 4,466
Other liabilities 708 694
-------- --------
Total financial services liabilities 6,535 6,106
-------- --------
Total liabilities 45,532 46,076
Contingencies (Note 4)
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 30,378 29,556
Accumulated other comprehensive losses (including
currency translation of $2,250 and $2,056) (2,302) (2,108)
-------- --------
29,011 28,383
Less cost of repurchased stock
(508,992,947 and 467,441,576 shares) (13,896) (13,078)
-------- --------
Total stockholders' equity 15,115 15,305
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,647 $ 61,381
======== ========
See notes to condensed consolidated financial statements.
-4-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
2000 1999
------- -------
Operating revenues $20,040 $19,497
Cost of sales 7,303 7,260
Excise taxes on products 4,450 4,363
------- -------
Gross profit 8,287 7,874
Marketing, administration and research costs 4,663 4,566
Amortization of goodwill 146 147
------- -------
Operating income 3,478 3,161
Interest and other debt expense, net 185 206
------- -------
Earnings before income taxes 3,293 2,955
Provision for income taxes 1,284 1,168
------- -------
Net earnings $ 2,009 $ 1,787
======= =======
Per share data:
Basic earnings per share $ 0.87 $ 0.74
======= =======
Diluted earnings per share $ 0.87 $ 0.73
======= =======
Dividends declared $ 0.48 $ 0.44
======= =======
See notes to condensed consolidated financial statements.
-5-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1999 and
the Three Months Ended March 31, 2000
(in millions of dollars, except per share data)
(Unaudited)
Accumulated Other
Comprehensive Losses
Earnings ----------------------------------- Total
Reinvested Currency Cost of Stock-
Common in the Translation Repurchased holders'
Stock Business Adjustments Other Total Stock Equity
-------- ---------- ----------- -------- -------- ----------- --------
Balances, January 1, 1999 $ 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
Comprehensive earnings:
Net earnings 2,009 2,009
Other comprehensive losses,
net of income taxes:
Currency translation adjustments (194) (194) (194)
--------
Total other comprehensive losses (194)
--------
Total comprehensive earnings 1,815
--------
Exercise of stock options and
issuance of other stock awards (82) 103 21
Cash dividends
declared ($0.48 per share) (1,105) (1,105)
Stock repurchased (921) (921)
-------- -------- -------- -------- -------- -------- --------
Balances, March 31, 2000 $ 935 $ 30,378 $ (2,250) $ (52) $ (2,302) $(13,896) $ 15,115
======== ======== ======== ======== ======== ======== ========
Total comprehensive earnings were $1,312 million in the first quarter of 1999,
which represents net earnings, partially offset by currency translation
adjustments.
See notes to condensed consolidated financial statements.
-6-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
2000 1999
------- -------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $ 1,972 $ 1,756
- Financial services 37 31
------- -------
Net earnings 2,009 1,787
Adjustments to reconcile net earnings to
operating cash flows:
Consumer products
Depreciation and amortization 428 403
Deferred income tax provision 27 79
Gain on sale of a business (28)
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (399) (407)
Inventories 281 (332)
Accounts payable (841) (803)
Income taxes 845 607
Accrued liabilities and other current assets 866 432
Other 40 110
Financial services
Deferred income tax benefit (20) (26)
Other 135 103
------- -------
Net cash provided by operating activities 3,343 1,953
------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures (305) (323)
Purchases of businesses, net of acquired cash (358) (52)
Proceeds from sale of a business 32 2
Other 15 37
Financial services
Investments in finance assets (142) (99)
Proceeds from finance assets 7 10
------- -------
Net cash used in investing activities (751) (425)
------- -------
See notes to condensed consolidated financial statements.
Continued
-7-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------
2000 1999
------- -------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net (repayment) issuance of short-term borrowings $ (461) $ 31
Long-term debt proceeds 12 15
Long-term debt repaid (1,332) (776)
Financial services
Net issuance of short-term borrowings 452
Repurchase of common stock (916) (613)
Dividends paid (1,125) (1,070)
Issuance of common stock 5 38
Other 7 12
------- -------
Net cash used in financing activities (3,358) (2,363)
------- -------
Effect of exchange rate changes on cash and
cash equivalents (108) (52)
------- -------
Cash and cash equivalents:
Decrease (874) (887)
Balance at beginning of period 5,100 4,081
------- -------
Balance at end of period $ 4,226 $ 3,194
======= =======
See notes to condensed consolidated financial statements.
-8-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies:
The interim condensed consolidated financial statements of Philip Morris
Companies Inc. (the "Company") are unaudited. It is the opinion of the Company's
management that all adjustments necessary for a fair statement of the interim
results presented have been reflected therein. All such adjustments were of a
normal recurring nature. For interim reporting purposes, certain expenses are
charged to results of operations as a percentage of sales. Operating revenues
and net earnings for any interim period are not necessarily indicative of
results that may be expected for the entire year.
These statements should be read in conjunction with the consolidated financial
statements and related notes which appear in the Company's Annual Report to
Stockholders and which are incorporated by reference into the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 (the "1999 Form 10-K").
Balance sheet accounts are segregated by two broad types of business. Consumer
products assets and liabilities are classified as either current or non-current,
whereas financial services assets and liabilities are unclassified, in
accordance with respective industry practices.
Note 2. Earnings Per Share:
Basic and diluted earnings per share ("EPS") were calculated using the
following:
For the Three Months Ended
March 31,
--------------------------
2000 1999
------- -------
(in millions)
Net earnings $2,009 $1,787
====== ======
Weighted average shares for
basic EPS 2,315 2,424
Plus incremental shares from conversions:
Restricted stock and stock rights 2 2
Stock options 1 13
------ ------
Weighted average shares for
diluted EPS 2,318 2,439
====== ======
For the first quarter of 2000, options on 119.4 million shares of common stock
were excluded from the calculation of weighted average shares for diluted EPS
because their effects were antidilutive. The number of shares excluded from the
1999 calculation was not material.
Note 3. Segment Reporting:
The Company's products include cigarettes, food (consisting principally of
coffee, cheese, chocolate confections, processed meat products and various
packaged grocery products) and beer. A subsidiary of the Company, Philip Morris
Capital Corporation, invests in leveraged and direct finance leases, other
tax-oriented financing transactions and third-party 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.
-9-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company's management reviews operating companies income to evaluate segment
performance and allocate resources. Operating companies income for the
reportable segments excludes general corporate expenses, minority interest and
amortization of goodwill. Interest and other debt expense, net (consumer
products) and provision for income taxes are centrally managed at the corporate
level and accordingly, such items are not presented by segment since they are
excluded from the measure of segment profitability reviewed by the Company's
management. Goodwill and amortization of goodwill are principally attributable
to the North American food segment.
Reportable segment data were as follows:
For the Three Months Ended
March 31,
--------------------------
2000 1999
-------- --------
Operating revenues: (in millions)
Domestic tobacco $ 5,446 $ 4,460
International tobacco 6,998 7,340
North American food 4,455 4,396
International food 2,005 2,242
Beer 1,044 986
Financial services 92 73
-------- --------
Total operating revenues $ 20,040 $ 19,497
======== ========
Operating companies income:
Domestic tobacco $ 1,116 $ 918
International tobacco 1,431 1,431
North American food 867 685
International food 246 246
Beer 153 136
Financial services 58 50
-------- --------
Total operating companies income 3,871 3,466
Amortization of goodwill (146) (147)
General corporate expenses (215) (124)
Minority interest (32) (34)
-------- --------
Total operating income 3,478 3,161
Interest and other debt expense, net (185) (206)
-------- --------
Total earnings before income taxes $ 3,293 $ 2,955
======== ========
General corporate expenses of $215 million for the first quarter of 2000
increased $91 million (73.4%) over the comparable period of 1999, due primarily
to increased spending for the Company's corporate image campaign.
During the first quarter of 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 "Louisville Closure"). The Louisville Closure is occurring in stages,
as cigarette production is shifted to other PM Inc. manufacturing facilities in
the United States. As a result, PM Inc. recorded pre-tax charges of $130 million
during the first quarter of 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
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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. All operating costs of the
manufacturing plant, including increased depreciation, are charged to expense as
incurred during the closing period.
During the first quarter of 1999, Kraft Foods, Inc. ("Kraft") announced that it
was offering voluntary retirement incentive or separation programs to certain
eligible hourly and salaried employees in the United States (the "Kraft
Separation Programs"). Employees electing to terminate employment under the
terms of the Kraft Separation 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 the first quarter
of 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, commenced upon dates of termination that ranged from
April 1999 to March 2000. Salary and related benefit costs of employees prior to
the retirement or termination date were expensed as incurred.
Note 4. 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., and Philip Morris International
Inc. ("PMI"), the Company's international tobacco subsidiary, and their
respective indemnitees. Various types of claims are raised in these proceedings,
including product liability, consumer protection, antitrust, tax, patent
infringement, employment matters, claims for contribution and claims of
competitors and distributors.
Overview of Tobacco-Related Litigation
Types and Number of Cases
Pending claims related to tobacco products generally fall within 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 May 1, 2000, and
discusses certain developments in such cases since February 15, 2000.
As of May 1, 2000, there were approximately 390 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 485 such cases
on May 1, 1999, and approximately 410 such cases on May 1, 1998. Approximately
11 of the individual cases involve allegations of various personal injuries
allegedly related to exposure to environmental tobacco smoke ("ETS"). In
addition, approximately 625 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 1997. The terms of the
court-approved settlement in that case allow class members to file individual
lawsuits seeking compensatory damages, but prohibit them from seeking punitive
damages.
As of May 1, 2000, there were approximately 40 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 May 1,
1999, and approximately 55 such cases on May 1, 1998. 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
-11-
certification of a purported nationwide class action on behalf of persons who
were allegedly "addicted" to tobacco products.
As of May 1, 2000, there were approximately 50 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 100 health
care cost recovery cases pending on May 1, 1999, and 120 cases on May 1, 1998.
There are also a number of tobacco-related actions pending outside the United
States against PMI and its affiliates and subsidiaries, including approximately
50 smoking and health cases initiated by one or more individuals (Argentina
(38), Brazil (4), Canada (1), Germany (3), Hong Kong (1), Ireland (1), Japan
(1), the Philippines (1), Poland (1), and Spain (1)), compared with
approximately 35 such cases on May 1, 1999. 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 seven on
May 1, 1999. 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, Guatemala
(dismissed, as discussed below), Nicaragua (dismissed, as discussed below),
Province of Ontario, Canada, Panama, Thailand (voluntarily dismissed), Ukraine
(dismissed), as discussed below, Venezuela and the States of Espirito Santo,
Goias, Rio de Janeiro and Sao Paulo, 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. The Company and PM Inc. have 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. Oral argument on the
motion to dismiss is scheduled for June 2000. The Company and PM Inc. believe
that they have a number of valid defenses to the lawsuit and will vigorously
defend it.
Industry Trial Results
There have been several jury verdicts in tobacco-related litigation during the
past three years. On April 7, 2000, the jury in the Engle smoking and health
class action pending in Florida against PM Inc. and several other cigarette
manufacturers awarded a total of $12.7 million in compensatory damages to the
three named plaintiffs. PM Inc. has requested that the court dismiss the award
to one of the plaintiffs because of the jury's findings on a statute of
limitations question. The same jury, in July 1999, returned a verdict against PM
Inc. and the other defendants in an earlier phase 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 (see "Engle Trial,"
-12-
below, for a more detailed discussion of these verdicts and certain other
developments in this case).
In March 2000, a jury in California awarded a former smoker with lung cancer
$1.72 million in compensatory damages against PM Inc. and another cigarette
manufacturer and $10 million in punitive damages against PM Inc. as well as an
additional $10 million against the other defendant. PM Inc. has filed post-trial
motions with the trial court to challenge the verdict and damage awards. In July
1999, a Louisiana jury returned a verdict in favor of defendants in an
individual smoking and health case against other cigarette manufacturers. 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 the estate of a deceased smoker $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 a former
smoker $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 an individual 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, in an action brought on
behalf of a deceased smoker, a court in Brazil awarded 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.
-13-
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 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 were adjudicated
in a consolidated trial before the same jury that returned the verdict in Phase
One. On April 7, 2000, the jury awarded $12.7 million in compensatory damages to
the three named plaintiffs, although PM Inc. has requested that the court
dismiss the award to one of the plaintiffs because of the jury's findings on a
statute of limitations question. That plaintiff had been awarded approximately
$5.8 million of the total $12.7 million in compensatory damages. As discussed
below, the trial plan provides that the same jury next determine punitive
damages, if any, on a lump sum basis for the entire class. This punitive damages
portion of the trial is currently scheduled to begin May 15, 2000.
Following the completion of Phase Two, Phase Three of the trial plan will
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
-14-
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.
In March 2000, at the request of the Florida legislature, the Attorney General
of Florida issued an advisory legal opinion No. AGO 2000-21 stating that,
"Florida law is clear that compensatory damages must be determined prior to any
award of punitive damages" in cases such as Engle.
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.
On May 5, 2000, the Florida legislature passed legislation that limits the size
of a bond that must be posted in order to stay execution of a judgment for
punitive damages in a certified class action to the lower of (1) the amount of
punitive damages plus twice the statutory rate of interest or (2) ten percent of
the defendant's net worth, provided that in no case shall the amount of the
required bond exceed $100 million, regardless of the amount of punitive damages.
The legislation has been signed by the Governor of Florida and takes effect as
the law of Florida immediately. Although the legislation is intended to apply to
the Engle case, PM Inc. cannot predict the outcome of any possible challenges to
its application.
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 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.
-15-
On April 6, 2000, in an action filed by several media organizations, a federal
court judge in Florida declared unconstitutional a gag order that the Engle
trial judge had imposed and enjoined enforcement of the order.
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 Trials
In addition to the Engle trial, trial in an individual smoking and health case
in which PM Inc. is a defendant commenced in New York in May 2000. As set forth
in Exhibit 99.3, additional cases against PM Inc. and, in some cases, the
Company as well, are scheduled for trial through the end of 2001, including
three health care cost recovery actions; four asbestos contribution cases, one
of which is scheduled to begin in New York in July 2000; two purported smoking
and health class actions; two cases under the California Business and
Professions Code, currently scheduled to begin in July 2000; and approximately
15 other individual smoking and health cases (one of which is scheduled to begin
in July 2000). Cases against other tobacco companies are also scheduled for
trial during this period. Trial dates, however, are subject to change.
On April 18, 2000 the federal judge in the Eastern District of New York that is
handling the asbestos contribution case scheduled for trial in July 2000 issued
an order that consolidates, for settlement purposes only, seven pending cases
involving PM Inc. as well as other industry defendants. These cases include
three asbestos contribution cases, three health care cost recovery cases and a
purported smoking and health class action. The judge's order directed the
parties to select a mediator or special master in order to facilitate settlement
discussions and also invited the federal government to join in the settlement
discussions. The order also stated that "preliminary discussions may include
consideration of whether (the putative class) should be structured to broaden
the class and provide possible subclasses so that tobacco litigation may be
resolved in a comprehensive fashion." PM Inc. advised the court that it believed
that the impediments to such a resolution make such discussions futile and,
therefore, such discussions could not lead to the ultimate resolution of the
litigation. Nevertheless, the judge ordered the parties to meet with the court
to discuss the matter further, but subsequently adjourned the meeting without
setting a date.
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 each year; and, thereafter,
$9.4 billion each 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. 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
-16-
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 below in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, relating to advertising and marketing restrictions, public
disclosure of certain industry documents, limitations on challenges to certain
tobacco control and underage use laws, restrictions on lobbying activities and
other provisions.
As set forth in Exhibit 99.2, the MSA has been initially approved by trial
courts in all settling jurisdictions. If a jurisdiction does not obtain "final
judicial approval" (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 May 2000,
the MSA has received final judicial approval in 49 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. 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.
The State Settlement Agreements have materially adversely affected the volumes
of PM Inc. and the Company; the Company believes that they 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, that is described in Exhibit 99.1, has arisen challenging
the validity of the MSA and alleging violation of the antitrust laws.
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
-17-
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 May 1,
2000, smoking and health putative class actions were pending in Alabama, 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 22 smoking and health class actions involving PM Inc. in Arkansas,
California (2), 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 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 in Overview of Tobacco-Related Litigation, 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, hospitals, 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
-18-
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.
Excluding the cases covered by the MSA, as of May 1, 2000, there were
approximately 50 health care cost recovery cases pending in the United States
against PM Inc. and, in some cases, the Company, of which approximately 20 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, Nicaragua, Province of Ontario, Canada, Panama, Thailand
(voluntarily dismissed), Ukraine, Venezuela and the States of Espirito Santo,
Goias, Rio de Janeiro and Sao Paulo, Brazil. The actions brought by Bolivia,
Guatemala, Nicaragua, Ontario, Ukraine, Venezuela and the State of Goias,
Brazil, were consolidated for pre-trial purposes and transferred to the United
States District Court for the District of Columbia and, as described below, the
court has dismissed the claims of Guatemala, Nicaragua and Ukraine. 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.
-19-
Subsequently, in March 2000, the court also dismissed the claims of Nicaragua
and Ukraine. Guatemala, Nicaragua and Ukraine each have appealed these decisions
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 May 1, 2000, 13 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. 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 four of these cases are
scheduled to begin in New York in July 2000 and January and March 2001, and in
Mississippi in February 2001.
Lights/Ultra Lights Cases: As of May 1, 2000, there were twelve putative class
actions pending against PM Inc. and the Company, in Arizona, Florida, Illinois,
Massachusetts, Missouri, 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.
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 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., or requiring those outlets to allocate a percentage of
cigarette-related permanent signage to PM Inc. greater than PM Inc.'s market
share. The court also enjoined PM Inc. from prohibiting retail outlets
participating in the program from advertising or conducting promotional programs
of cigarette manufacturers other than PM Inc. The preliminary injunction does
not affect any other aspect 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
-20-
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 July 2000.
Tobacco Price Cases: As of May 1, 2000, tobacco wholesalers and consumers filed
approximately 35 putative class actions against the Company and other domestic
tobacco manufacturers alleging that, through the MSA and other activities, the
manufacturers conspired to fix cigarette prices in violation of antitrust laws.
The cases are listed in Exhibit 99.1.
Tobacco Growers' Case: In February 2000, a lawsuit was filed on behalf of a
purported class of tobacco growers and quota-holders. The complaint, which was
amended in May 2000, alleges that tobacco manufacturers violated antitrust laws
by bid-rigging, conspiring to displace the tobacco quota and price support
system administered by the federal government and entering into the growers'
trust fund described in Litigation Settlements, above.
Certain Other Actions
National Cheese Exchange Cases: Since 1996, seven putative class actions have
been filed alleging that Kraft, and others engaged in a conspiracy to fix and
depress the prices of bulk cheese and milk through their trading activity on the
National Cheese Exchange. Plaintiffs seek injunctive and equitable relief and
treble damages. 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 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 $2.2 billion. In addition, the Italian
lira equivalent of $3.1 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
-21-
overturned 153 of the assessments. The decisions to overturn 107 assessments
have been appealed by the tax authorities to the regional appellate court in
Milan. To date, the regional appellate court has rejected 31 of the appeals
filed by the tax authorities. The tax authorities may appeal the decisions of
the regional appellate court to the Italian Supreme Court. 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. Three
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. An unfavorable verdict awarding compensatory damages has been returned
in the Engle smoking and health class action trial underway in Florida and the
jury will now consider the award of lump sum punitive damages, if any, for the
entire class. 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.
-22-
Note 5. Recently Issued Accounting Pronouncements:
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which 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.
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
For the Three Months Ended March 31,
Operating Revenues
---------------------------
(in millions)
2000 1999
------- -------
Domestic tobacco $ 5,446 $ 4,460
International tobacco 6,998 7,340
North American food 4,455 4,396
International food 2,005 2,242
Beer 1,044 986
Financial services 92 73
------- -------
Operating revenues $20,040 $19,497
======= =======
Operating Income
---------------------------
(in millions)
2000 1999
------- -------
Domestic tobacco $ 1,116 $ 918
International tobacco 1,431 1,431
North American food 867 685
International food 246 246
Beer 153 136
Financial services 58 50
------- -------
Operating companies income 3,871 3,466
Amortization of goodwill (146) (147)
General corporate expenses (215) (124)
Minority interest (32) (34)
------- -------
Operating income $ 3,478 $ 3,161
======= =======
Amortization of goodwill is primarily attributable to the North American food
segment.
Results of Operations
Operating revenues for the first quarter of 2000 increased $543 million (2.8%)
over the first quarter of 1999, due primarily to an increase in revenues from
domestic tobacco operations. Despite this increase, the comparison of first
quarter operating revenues was adversely affected by approximately $225 million
of incremental sales made during the fourth quarter of 1999, as the Company's
customers planned for potential business failures related to the Century Date
Change ("CDC"). The incremental CDC sales would have normally been made during
the first quarter of 2000. Including the incremental CDC revenues in the first
quarter of 2000, and excluding the revenues of several small international food
businesses divested since the beginning of 1999, operating revenues for the
first quarter of 2000 increased $820 million (4.2%) over the first quarter of
1999.
Operating income for the first quarter of 2000 increased $317 million (10.0%)
over the comparable 1999 period. The operating income comparison was affected by
the following unusual items:
o Louisville Factory Closure - During the first quarter of 1999, Philip
Morris Incorporated ("PM Inc.") announced plans to phase out cigarette
production capacity at its Louisville, Kentucky manufacturing plant by
August 2000 (the "Louisville Closure"). The closure of this facility is
occurring in stages, as cigarette production is shifted to
-24-
other PM Inc. manufacturing facilities in the United States. As a result
of this announcement, PM Inc. recorded pre-tax charges of $130 million
during the first quarter of 1999. These charges, which are in the domestic
tobacco segment's 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. All operating
costs of the manufacturing plant, including increased depreciation, are
charged to expense as incurred during the closing period.
o Kraft Separation Programs - During the first quarter of 1999, Kraft Foods,
Inc. ("Kraft") announced that it was offering voluntary retirement
incentive or separation programs to certain eligible hourly and salaried
employees in the United States (the "Kraft Separation Programs").
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 the first quarter
of 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, commenced upon
dates of termination that ranged from April 1999 to March 2000. Salary and
related benefit costs of employees prior to the retirement or termination
date were expensed as incurred.
The operating income comparison was adversely affected by approximately $100
million of operating income from the previously mentioned incremental CDC sales.
Including the incremental CDC income and excluding the pre-tax charges for the
Louisville Closure and the Kraft Separation Programs, as well as the results
from operations divested since the beginning of 1999, operating income for 2000
increased $131 million (3.8%) over the first quarter of 1999, due primarily to
higher operating results from all segments, partially offset by higher general
corporate expenses. The $91 million increase in general corporate expenses over
the first quarter of 1999 is due primarily to higher spending on the Company's
corporate image campaign.
Operating companies income, which is defined as operating income before general
corporate expenses, minority interest and amortization of goodwill, increased
$405 million (11.7%) over the first quarter of 1999, due primarily to the
previously discussed 1999 pre-tax charges for the Louisville Closure and the
Kraft Separation Programs, partially offset by the incremental CDC income.
Including the impact of the incremental CDC income and excluding the 1999
pre-tax charges, as well as the results from operations divested since the
beginning of 1999, operating companies income increased 5.8% on higher earnings
from all segments.
Currency movements have decreased operating revenues by $673 million ($362
million, after excluding the impact of currency movements on excise taxes), and
operating companies income by $93 million from the first quarter of 1999.
Declines in operating revenues and operating companies income arising from the
strength of the U.S. dollar against the Euro and certain Central and Eastern
European currencies have been partially offset by the weakness of the U.S.
dollar against the Japanese yen. Although the Company cannot predict future
movements in currency rates, strengthening of the dollar, primarily against the
Euro, if sustained during the remainder of 2000, could continue to have an
unfavorable impact on operating revenues and operating companies income
comparisons with 1999. In addition, the Company's businesses in certain Eastern
European markets have been adversely affected by continued economic instability.
Although the Company cannot predict future economic developments, the Company
anticipates that economic instability may continue to adversely affect its
businesses in those markets during 2000.
-25-
Interest and other debt expense, net, decreased $21 million (10.2%) in the first
quarter of 2000 from the comparable 1999 period. This decrease was due primarily
to higher interest income and lower average debt outstanding during the first
quarter of 2000.
Diluted and basic EPS, which were each $0.87 for the first quarter of 2000,
increased by 19.2% and 17.6%, respectively, over the comparable figures for the
first quarter of 1999. Net earnings of $2.0 billion for the first quarter of
2000, increased 12.4% over the first quarter of 1999. These comparisons reflect
the charges for the previously discussed Louisville Closure and the Kraft
Separation Programs, and exclude the incremental CDC income. After adjusting for
the affects of these unusual items, net earnings increased 5.6% to $2.1 billion,
diluted EPS increased 11.3% to $0.89 and basic EPS increased 9.9% to $0.89.
Year 2000
To date, the Company and its subsidiaries have experienced no material
disruptions to their business operations as a result of the Century Date Change.
External information technology specialists have stated that CDC-related
miscalculations or systems failures could occur throughout the year 2000 and
into 2001. The experience of the Company and its subsidiaries thus far suggests
that no material disruptions to their business operations are likely to occur.
However, the Company and its subsidiaries will continue to monitor the
transition to year 2000 as part of their regular problem management processes
and will respond promptly to any problems that occur.
The Company's increases in year-end inventories and trade receivables caused by
preemptive contingency plans resulted in incremental cash outflows during 1999
of approximately $300 million. The cash outflows reversed in the first quarter
of 2000. In addition, certain operating subsidiaries of the Company had
increased shipments in the fourth quarter of 1999, because customers purchased
additional product in anticipation of potential CDC-related disruptions,
resulting in incremental operating revenues and operating companies income in
1999 of approximately $225 million and $100 million, respectively. Accordingly,
there are reductions of corresponding amounts in operating revenues and
operating companies income in the first quarter of 2000.
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.
-26-
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 the Engle
class action trial discussed above in Note 4. Contingencies; the filing of a
civil lawsuit by the U.S. federal government against various cigarette
manufacturers and others as discussed in Note 4; 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; 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 Congress and in the State of New York to require the
establishment of fire-safety 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 $1.86 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 levels 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.
-27-
Food and Drug Administration ("FDA") Regulations: The FDA promulgated
regulations asserting jurisdiction over cigarettes as "drugs" or "medical
devices" under the provisions of the Food, Drug and Cosmetic Act. The
regulations included severe restrictions on the distribution, marketing and
advertising of cigarettes, and would have required the industry to comply with a
wide range of labeling, reporting, recordkeeping, manufacturing and other
requirements. 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. On March 21, 2000 the Supreme Court affirmed the
Fourth Circuit's decision and ruled that tobacco was not subject to FDA
regulation. The Company has stated that while it continues to oppose FDA
regulation over cigarettes as "drugs" or "medical devices" under the provisions
of the Food, Drug and Cosmetic Act, it would be prepared to support new
legislation that would provide for reasonable regulation at the federal level 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 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
-28-
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.
On April 17, 2000, the New York State legislature passed legislation that, if
signed by the governor, would require the State's Office of Fire Prevention and
Control to promulgate rules establishing fire-safety standards for cigarettes
that are manufactured or sold in New York. If enacted, the legislation would
require that cigarettes manufactured or sold in New York stop burning within a
time period specified by the standards or meet other performance standards set
by the Office of Fire Prevention and Control. All cigarettes manufactured or
sold in New York would be required to meet the established standard within
thirty days after the standard is promulgated and financial penalties would be
imposed for distributing cigarettes that violate the standard. The ultimate
outcome of this legislation cannot be predicted. Similar legislation has been
proposed in other states and localities and at the federal level.
It is not possible to predict what, if any, 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.
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 Note 4.
Contingencies, above, for a discussion of such litigation.)
-29-
State Settlement Agreements: As discussed in Note 4. Contingencies, during 1997
and 1998, PM Inc. and other major domestic tobacco product manufacturers entered
into agreements with states and various U.S. jurisdictions settling asserted and
unasserted health care cost recovery and other claims. These settlements provide
for substantial annual payments. They also place numerous restrictions on the
tobacco industry's conduct of its business operations, including restrictions on
the advertising and marketing of cigarettes. Among these are restrictions or
prohibitions on the following: targeting youth; use of cartoon characters; use
of brand name sponsorships and brand name non-tobacco products; outdoor and
transit brand advertising; payments for product placement; and free sampling. In
addition, the settlement agreements require companies to affirm corporate
principles to reduce underage use of cigarettes; impose requirements regarding
lobbying activities; mandate public disclosure of certain industry documents;
limit the industry's ability to challenge certain tobacco control and underage
use laws; and provide for the dissolution of certain tobacco-related
organizations and place restrictions on the establishment of any replacement
organizations.
Operating Results
For the Three Months Ended March 31,
----------------------------------------------
Operating
Operating Revenues Companies Income
-------------------- --------------------
(in millions)
2000 1999 2000 1999
------- ------- ------- -------
Domestic tobacco $ 5,446 $ 4,460 $ 1,116 $ 918
International tobacco 6,998 7,340 1,431 1,431
------- ------- ------- -------
Total tobacco $12,444 $11,800 $ 2,547 $ 2,349
======= ======= ======= =======
Domestic tobacco. During the first quarter of 2000, PM Inc.'s operating revenues
increased $986 million (22.1%) over the comparable 1999 period, due primarily to
higher volume ($303 million) and higher pricing ($675 million, including $248
million related to the January 1, 2000 increase in federal excise taxes).
Operating companies income for the first quarter of 2000 increased $198 million
(21.6%) from the comparable 1999 period, due primarily to higher volume ($236
million), price increases, net of cost increases ($187 million) and the 1999
pre-tax charges for the Louisville Closure ($130 million), partially offset by
higher marketing, administration and research costs ($333 million, primarily
marketing). Excluding the impact of the 1999 pre-tax charges for the Louisville
Closure, PM Inc.'s operating companies income of $1,116 million for the first
quarter of 2000 increased 6.5% from $1,048 million during the comparable 1999
period.
Shipment volume for the domestic tobacco industry during the first quarter of
2000 increased to 102.3 billion units, 4.6% over the first quarter of 1999. PM
Inc.'s shipment volume for the first quarter of 2000 was 52.8 billion units, an
increase of 7.1% over the comparable 1999 period. First quarter 2000 shipment
growth for the industry and PM Inc. was largely driven by wholesalers' decisions
to rebuild their inventory levels after the January 1, 2000 federal excise tax
increase. In contrast, wholesalers decreased their inventory levels during 1999,
as inventory held at the end of 1999 was subject to the federal excise tax
increase through a "floor tax." The first quarter of 2000 also had one more
shipping day than the comparable 1999 period. PM Inc. estimates that after
adjusting for these factors, industry shipment volume declined approximately
2.5% from the first quarter of 1999, while PM Inc.'s shipment volume declined
approximately 1.5%.
For the first quarter of 2000, PM Inc.'s shipment market share was 51.6%, an
increase of 1.2 share points over the comparable period of 1999. Marlboro
shipment volume increased 2.6 billion units (7.0%) over the first quarter of
1999 to 39.6 billion units for a 38.8% share of the total industry, an increase
of 0.9 share points over the comparable period of 1999. Contributing to this
growth were introductory shipments of Marlboro Milds, which will be launched
nationally at retail in May.
Based on shipments, the premium segment accounted for approximately 73.9% of the
domestic cigarette industry volume in the first quarter of 2000 and 1999. In the
premium segment, PM Inc.'s volume increased
-30-
6.6% during the first quarter of 2000, compared with a 4.6% increase for the
industry, resulting in a premium segment share of 61.7%, an increase of 1.1
share points over the first quarter of 1999.
In the discount segment, PM Inc.'s shipments increased 11.1% to 6.2 billion
units in the first quarter of 2000, compared with an industry increase of 4.6%,
resulting in a discount segment share of 23.1%, an increase of 1.4 share points
over the comparable period of 1999. Basic shipment volume for the first quarter
of 2000 was up 13.2% at 5.1 billion units, for a 19.1% share of the discount
segment, an increase of 1.4 share points from the comparable 1999 period. Basic
shipment volume was influenced by the timing of promotional shipments
year-over-year.
According to consumer purchase data from Information Resources Inc./Capstone, PM
Inc.'s share of cigarettes sold at retail grew 0.4 share points to 50.5% for the
first quarter of 2000. The first quarter 2000 retail share for Marlboro rose 1.1
share points to 37.0%.
PM Inc. cannot predict future change or rates of change in domestic tobacco
industry volume, the relative sizes of the premium and discount segments or in
PM Inc.'s shipments, shipment market share or retail market share; however, it
believes that PM Inc.'s shipments may be materially adversely affected by price
increases related to tobacco litigation settlements and, if enacted, by
increased excise taxes or other tobacco legislation discussed under
"Tobacco--Business Environment" above.
In 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 a price increase of
$9.00 per thousand in August 1999. 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.
International tobacco. During the first quarter of 2000, international tobacco
operating revenues, including excise taxes, decreased $342 million (4.7%) from
the first quarter of 1999. Excluding excise taxes, operating revenues decreased
$126 million (3.4%), due primarily to unfavorable currency ($190 million) and
the previously discussed CDC revenues ($97 million), partially offset by price
increases ($156 million).
Operating companies income for the first quarter of 2000 was equal with the
comparable 1999 period, due primarily to price increases and favorable costs
($174 million), offset by the shift of CDC income ($59 million) to the fourth
quarter of 1999, unfavorable volume/mix ($39 million) and unfavorable currency
movements ($80 million). Adjusting for the shift in CDC income, operating
companies income of $1,490 million for the first quarter of 2000 increased 4.1%
over $1,431 million for the comparable period of 1999.
PMI's first quarter 2000 volume of 171.0 billion units decreased 6.2 billion
units (3.5%) from the first quarter of 1999. Adjusting for the shift in CDC
volume, (the basis of presentation for all following PMI volume disclosures),
PMI's first quarter 2000 volume of 175.2 billion units decreased 2.0 billion
units (1.1%) from the comparable 1999 period, due primarily to a 22.5% aggregate
volume decline in the economically weakened markets of Central and Eastern
Europe (excluding Russia where volume was up), as well as lower worldwide
duty-free shipments. However, volume grew a collective 5.2% in Western Europe,
Japan and Asia, where PMI earned approximately 70% of its operating companies
income. Volume advanced in a number of important markets, including Italy,
France, the Benelux countries, Switzerland, Austria, Russia, Japan, Saudi
Arabia, Egypt, Thailand, Korea, Malaysia, Indonesia, the Philippines, Mexico and
Brazil. PMI recorded market share gains in most of its major markets. Volume was
down 4.6% in Germany due to trade purchasing patterns, the continued strong
growth of trade brands and a reduction in the number of cigarettes per vending
pack following industry price increases in the fourth quarter of 1999. Trade
purchasing patterns in the Czech Republic and a lower total industry in Poland
contributed to an overall volume decline in Central Europe. Market share in
Germany and Poland also declined from the first quarter of 1999. International
volume for Marlboro declined 2.3%; however, this decline was caused by lower
volume in Eastern Europe, other than Russia, and lower worldwide duty-free
shipments.
-31-
Food
Business Environment
Kraft, the largest processor and marketer of retail packaged food in the United
States, and its subsidiary, Kraft Foods International, Inc. ("KFI"), which
markets coffee, confectionery and grocery products in Europe and the
Asia/Pacific region, are subject to fluctuating commodity costs, currency
movements and competitive challenges in various product categories and markets,
including a trend toward increasing consolidation in the retail trade.
Additionally, certain subsidiaries and affiliates of PMI that manufacture and
sell food products in Latin America are also subject to competitive challenges
in various product categories and markets. To confront these challenges, Kraft,
KFI and PMI continue to take steps to build the value of premium brands with new
product and marketing initiatives, to improve their food business portfolios and
to reduce costs.
Fluctuations in commodity costs can cause retail price volatility, intensify
price competition and influence consumer and trade buying patterns. The North
American and international food businesses are subject to fluctuating commodity
costs, particularly dairy, coffee bean and cocoa prices. Dairy commodity costs
in the United States on average have been below the levels seen in the first
quarter of 1999. Coffee bean prices reflected in Kraft's and KFI's results for
the first quarter of 2000 were slightly lower than the first quarter of 1999.
Cocoa prices have declined during 2000, compared with 1999.
During the first quarter, Kraft completed its purchase of the outstanding common
stock of Balance Bar Co., a maker of energy and nutrition snack products. In a
separate transaction, Kraft also completed its acquisition of Boca Burger, Inc.,
a privately held manufacturer and marketer of soy-based meat alternatives. The
total cost of these acquisitions was $358 million. Neither transaction is
expected to have a material effect on 2000 operating revenues or operating
companies income of Kraft or the Company.
During 2000 and 1999, PMI and KFI sold several small international food
businesses. The operating results of businesses divested were not material to
consolidated operating results in any of the periods presented.
Operating Results
For the Three Months Ended March 31,
---------------------------------------------
Operating
Operating Revenues Companies Income
------------------- -------------------
(in millions)
2000 1999 2000 1999
------ ------ ------ ------
North American food $4,455 $4,396 $ 867 $ 685
International food 2,005 2,242 246 246
------ ------ ------ ------
Total food $6,460 $6,638 $1,113 $ 931
====== ====== ====== ======
North American food. During the first quarter of 2000, operating revenues
increased $59 million (1.3%) from the first quarter of 1999, due primarily to
higher volume ($128 million), partially offset by the previously mentioned shift
in CDC revenues ($69 million).
Operating companies income for the first quarter of 2000 increased $182 million
(26.6%) from the first quarter of 1999, primarily reflecting the 1999 pre-tax
charge for the Kraft Separation Programs ($157 million), higher volume ($90
million) and favorable margins ($75 million, driven by lower manufacturing and
commodity-related costs), partially offset by higher marketing, administration
and research costs ($65 million, the majority of which related to higher
marketing expense), unfavorable product mix ($31 million) and the shift in CDC
income ($26 million). Excluding the impact of the pre-tax charge for the Kraft
Separation Programs and adjusting for the shift in CDC income, operating
companies income of $893 million in 2000 increased 6.1% over $842 million in the
first quarter of 1999.
-32-
Volume for the first quarter of 2000 increased over the comparable 1999 period.
Volume gains were achieved by beverages, from the strength of ready-to-drink
beverages and powdered soft drinks, as well as new product introductions;
processed meats, from lunch combinations, hot dogs and luncheon meats; pizza,
from volume gains across all brands; cereals, from new product introductions;
and desserts and snacks, due to refrigerated ready-to-eat desserts, shelf-stable
puddings and mints. Offsetting these volume gains were volume declines in
enhancers, as higher shipments of spoonable dressings were more than offset by
declines in pourable salad dressings and seasoned coatings; in cheese, due to
intense price competition with private label brands; in meals, primarily due to
rice and stuffing; and in coffee, as the entire coffee category declined. In
Canada, volume was up due to new product introductions in pizza, ready-to-drink
beverages, refrigerated ready-to-eat desserts and dinner kits.
International food. Operating revenues for the first quarter of 2000 decreased
$237 million (10.6%) from the first quarter of 1999, due primarily to the impact
of divestitures ($51 million), pricing ($30 million, due primarily to lower
coffee prices), unfavorable currency ($184 million) and the previously discussed
shift in CDC revenues ($28 million), partially offset by higher volume ($35
million).
Operating companies income for the first quarter of 2000 was equal with the
first quarter of 1999, as favorable margins, primarily related to lower coffee
costs, higher volume and the gain on the sale of a business were essentially
offset by unfavorable currency, the shift in CDC income and higher marketing,
administration and research costs. Excluding the operating results of the
international food businesses divested since the beginning of 1999 and adjusting
for the shift in CDC revenues and income, operating revenues of $2,029 million
in the first quarter of 2000 decreased 7.2% from $2,187 million in 1999, and
operating companies income of $258 million in 2000 increased 6.6% from $242
million in the first quarter of 1999.
KFI's coffee volume increased over the comparable period of 1999, as volumes
were higher in most European markets. Volume growth in Central and Eastern
Europe was driven by new product launches and line extensions. In the roast and
ground category, KFI brands experienced share gains in Germany, France and
Spain, while soluble coffee brands gained share in the United Kingdom and Korea.
Confectionery volume for the first quarter of 2000 increased over the comparable
period of 1999, despite the later timing of Easter in 2000. Volume increases in
Asia Pacific and several Western European markets more than offset volume
declines in certain Eastern European markets, where weaker economic conditions
continued to persist. New product launches and line extensions contributed to
the confectionery volume growth.
Volume also increased in KFI's cheese and grocery business, driven by volume and
share advances in cream cheese products and lunch combinations in the United
Kingdom; powdered soft drinks, spoonable dressings and cheese in the
Philippines; and cheese in Indonesia.
In Latin America, volume increased from the comparable period of 1999 due
primarily to higher grocery shipments in the Caribbean, increased cheese sales
in Puerto Rico, Venezuela and the Caribbean, and higher mayonnaise volume in the
Caribbean, Venezuela and Mexico. Partially offsetting this increase was lower
powdered soft drink volume in Argentina due to continued intense price
competition with carbonated beverages.
Beer
Business Environment
During the first quarter of 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 the third quarter of 1999, Miller assumed
ownership of the former Pabst brewery in Tumwater, Washington as part of these
agreements.
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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 operating revenues or operating
companies income for the first quarter of 2000 and is not expected to have a
material impact on future operating revenues and operating companies income.
Three Months Ended March 31
Miller's operating revenues for the first quarter of 2000 increased $58 million
(5.9%) over the first quarter of 1999, due primarily to the previously mentioned
newly acquired brands, contract manufacturing fees and price increases.
Operating companies income for the first quarter of 2000 increased $17 million
(12.5%) over the first quarter of 1999, due primarily to contract manufacturing
income and favorable pricing, partially offset by higher marketing,
administration and research costs.
Miller's domestic shipment volume of 10.1 million barrels for the first quarter
of 2000 increased 2.0% from the comparable 1999 period, due primarily to
shipments of newly acquired near-premium brands. Domestic shipments of premium
brands were below the comparable 1999 period, due primarily to the
discontinuance of Lowenbrau shipments and lower domestic shipments of Molson and
Miller Genuine Draft, partially offset by increases for Icehouse and Foster's.
Domestic shipments of Miller Lite increased 1.3% from the first quarter of 1999.
Domestic shipments of near-premium products increased on shipments of the newly
acquired Olde English and Mickey's franchises, while budget products decreased
on lower shipments across most brands. Wholesalers' sales to retailers in the
first quarter of 2000 increased 6.9% from the comparable 1999 period. Excluding
the acquired brands, wholesalers' sales to retailers in the first quarter of
2000 increased 0.9% over the first quarter of 1999, reflecting increased sales
of Miller Lite, Miller Genuine Draft, Miller High Life, Icehouse and Foster's,
partially offset by lower retail sales of Molson and Lowenbrau.
Financial Services
Philip Morris Capital Corporation's financial services operating revenues and
operating companies income for the first quarter of 2000 increased 26.0% and
16.0%, respectively, from the comparable 1999 period. These increases were due
primarily to new leasing and structured finance investments and gains realized
on related portfolio management activities.
Financial Review
Net Cash Provided by Operating Activities
During the first quarter of 2000, net cash provided by operating activities was
$3.3 billion compared with $2.0 billion in the comparable 1999 period. The
increase primarily reflects the collection of higher settlement-related domestic
tobacco revenues prior to the remittance of such amounts to state governments
under the terms of the various state settlements.
Net Cash Used in Investing Activities
During the first quarter of 2000, net cash used in investing activities was $751
million, up from $425 million in 1999. The increase primarily reflects the
higher level of cash utilized to purchase businesses during the first quarter of
2000.
Net Cash Used in Financing Activities
During the first quarter of 2000, net cash of $3.4 billion was used in financing
activities, as compared with $2.4 billion used in financing activities during
the comparable 1999 period. This increase was primarily due to first
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quarter 2000 net debt repayments of $1.3 billion, compared with first quarter
1999 net debt repayments of $730 million and to higher stock repurchases and
dividends paid during the first quarter of 2000.
Debt and Liquidity
The Company's total debt (consumer products and financial services) was $13.1
billion and $14.5 billion at March 31, 2000 and December 31, 1999, respectively.
Total consumer products debt was $11.7 billion and $13.5 billion at March 31,
2000 and December 31, 1999, respectively. At March 31, 2000 and December 31,
1999, the Company's ratio of consumer products debt to total equity was 0.77 and
0.88, respectively. The ratio of total debt to total equity was 0.87 and 0.95 at
March 31, 2000 and December 31, 1999, respectively.
The Company and its subsidiaries maintain credit facilities with a number of
lending institutions, amounting to approximately $12.1 billion. These include
revolving bank credit agreements totaling $10.0 billion, which may be used to
support any commercial paper borrowings by the Company and which are available
for acquisitions and other corporate purposes. Of these revolving bank
agreements, an agreement for $8.0 billion expires in 2002 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 March 31, 2000 and December 31, 1999
were "P-1" in the commercial paper market and "A2" for long-term debt
obligations. The Company's credit ratings by Standard & Poor's ("S&P") at March
31, 2000 and December 31, 1999 were "A-1" in the commercial paper market and "A"
for long-term debt obligations.
As discussed in Note 4, PM Inc., along with other domestic tobacco companies,
has entered into tobacco litigation settlement agreements that 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): 2000, $9.2 billion; 2001, $9.9 billion; 2002,
$11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year;
and thereafter, $9.4 billion each 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. 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. 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.
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Equity and Dividends
During the first quarter of 2000 and 1999, the Company repurchased 45.2 million
and 15.6 million shares, respectively, of its common stock at a cost of $921
million and $649 million, respectively. The repurchases were made under an
existing $8 billion authority that expires in November 2001. At March 31, 2000,
cumulative repurchases under the $8 billion authority totaled 149.7 million
shares at an aggregate cost of $4.6 billion.
The Company paid $1.1 billion of dividends during the first quarter of 2000 and
1999. During the third quarter of 1999, the Company's Board of Directors
approved a 9.1% increase in the current quarterly dividend rate to $0.48 per
share. As a result, the present annualized dividend rate is $1.92 per share.
Cash and Cash Equivalents
Cash and cash equivalents were $4.2 billion at March 31, 2000 and $5.1 billion
at December 31, 1999, the decrease being largely attributable to the
continuation of the Company's share repurchase program and a lower level of
outstanding borrowings.
Market Risk
The Company is exposed to market risk, primarily related to foreign exchange,
commodity prices and interest rates. These exposures are actively monitored by
management. To manage the volatility relating to these exposures, the Company
enters into a variety of derivative financial instruments. The Company's
objective is to reduce, where it is deemed appropriate to do so, fluctuations in
earnings and cash flows associated with changes in interest rates, foreign
currency rates and commodity prices. It is the Company's policy and practice to
use derivative financial instruments only to the extent necessary to manage
exposures. Since the Company uses currency rate-sensitive and commodity
price-sensitive instruments to hedge a certain portion of its existing and
anticipated transactions, the Company expects that any loss in value for the
hedge instruments generally would be offset by increases in the value of the
underlying 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 fluctuate, 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 foreign currency swap contracts, primarily to hedge intercompany
transactions denominated in foreign currencies. At March 31, 2000 and December
31, 1999, 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 $4.6 billion and $3.8 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 March 31, 2000 and December 31,
1999, the notional amounts of currency swap agreements aggregated $2.5 billion
and $2.6 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 cheese, coffee, cocoa, milk, sugar, wheat and corn. At March 31, 2000
and December 31, 1999, the Company had net long commodity positions of $460
million and $163 million, respectively. Unrealized gains/losses on net commodity
positions were immaterial at March 31, 2000 and December 31, 1999.
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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,
the Company had an interest rate swap agreement, which converted $800 million of
fixed rate debt to variable rate debt, and which matured during the first
quarter of 2000.
Use of the above-mentioned derivative financial instruments has not had a
material impact on the Company's financial position at March 31, 2000 and
December 31, 1999, or the Company's results of operations for the three months
ended March 31, 2000 or the year ended December 31, 1999.
New Accounting Standards
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which 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.
Contingencies
See Note 4 to the Condensed Consolidated Financial Statements for a discussion
of contingencies.
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders. 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 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
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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 Eastern Europe and related shifts in consumer
preferences, and currency movements. Developments in any of these areas, which
are more fully described above and which descriptions are incorporated into this
section by reference, could cause the Company's results to differ materially
from results that have been or may be projected by or on behalf of the Company.
The Company cautions that the foregoing list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of the Company.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4. "Contingencies," of the Notes to the Condensed Consolidated
Financial Statements included in Part I, Item 1 of this report for a discussion
of legal proceedings pending against the Company and its subsidiaries. See also
Exhibits 99.1, 99.2, and 99.3 to this report.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders was held in Richmond, Virginia on April
27, 2000. 1,876,878,732 shares of Common Stock, 81.2% of outstanding shares,
were represented in person or by proxy.
The following thirteen directors were elected to a one-year term expiring
in 2001:
Number of Shares
------------------------------------
For Withheld
------------- ----------
Elizabeth E. Bailey 1,856,955,651 19,923,081
Geoffrey C. Bible 1,856,458,680 20,420,052
Harold Brown 1,855,958,239 20,920,493
Jane Evans 1,856,886,102 19,992,630
J. Dudley Fishburn 1,856,424,088 20,454,644
Robert E. R. Huntley 1,856,526,139 20,352,593
Billie Jean King 1,852,457,221 24,421,511
Rupert Murdoch 1,855,578,609 21,300,123
John D. Nichols 1,857,061,329 19,817,403
Lucio A. Noto 1,857,597,599 19,281,133
John S. Reed 1,857,065,009 19,813,723
Carlos Slim Helu 1,848,193,159 28,685,573
Stephen M. Wolf 1,856,581,072 20,297,660
The selection of PricewaterhouseCoopers LLP as independent accountants was
approved: 1,862,288,355 shares voted in favor; 5,101,496 shares voted against
and 9,488,881 shares abstained (including broker non-votes).
The 2000 Performance Incentive Plan was approved: 1,637,127,033 shares
voted in favor; 223,726,589 shares voted against and 16,025,110 shares abstained
(including broker non-votes).
The 2000 Stock Compensation Plan for Non-Employee Directors was approved:
1,633,879,035 shares voted in favor; 224,681,395 shares voted against and
18,318,302 shares abstained (including broker non-votes).
The six stockholder proposals were defeated:
Stockholder Proposal 1 - Minimum Share Ownership for Nominees for Director:
64,102,098 shares voted in favor; 1,286,400,012 shares voted against and
526,376,622 shares abstained (including broker non-votes).
Stockholder Proposal 2 - Genetic Engineering in Food Products: 42,959,612 shares
voted in favor; 1,292,410,482 shares voted against and 541,508,638 shares
abstained (including broker non-votes).
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Stockholder Proposal 3 - Tobacco Executives' Compensation and Reduction of Teen
Tobacco: 109,114,983 shares voted in favor; 1,242,769,458 shares voted against
and 524,994,291 shares abstained (including broker non-votes).
Stockholder Proposal 4 - Ensuring That Tobacco Ads Are Not Youth-Friendly:
104,356,250 shares voted in favor; 1,217,000,022 shares voted against and
555,522,460 shares abstained (including broker non-votes).
Stockholder Proposal 5 - Spin off Tobacco Business from Rest of Corporation:
48,394,613 shares voted in favor; 1,306,659,878 shares voted against and
521,824,241 shares abstained (including broker non-votes).
Stockholder Proposal 6 - Report Addressing the Implication of the Company's
Tobacco Products: 98,672,519 shares voted in favor; 1,249,657,958 shares voted
against and 528,548,255 shares abstained (including broker non-votes).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Restated Articles of Incorporation. (Incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.)
3.2 By-Laws, as amended, of the Company.
12 Statement regarding computation of ratios of earnings to fixed
charges.
27 Financial Data Schedule.
99.1 Certain Pending Litigation Matters and Recent Developments.
99.2 Status of Master Settlement Agreement.
99.3 Trial Schedule for Certain Cases.
(b) Reports on Form 8-K. The Registrant filed a Current Report on Form
8-K, dated January 26, 2000, containing the Registrant's
consolidated financial statements for the year ended December 31,
1999.
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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
/s/ LOUIS C. CAMILLERI
Louis C. Camilleri, Senior Vice President and
Chief Financial Officer
May 12, 2000
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