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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950117-01-000619.txt : 20010330
<SEC-HEADER>0000950117-01-000619.hdr.sgml : 20010330
ACCESSION NUMBER: 0000950117-01-000619
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010329
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PHILIP MORRIS COMPANIES INC
CENTRAL INDEX KEY: 0000764180
STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000]
IRS NUMBER: 133260245
STATE OF INCORPORATION: VA
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-08940
FILM NUMBER: 1584643
BUSINESS ADDRESS:
STREET 1: 120 PARK AVE
CITY: NEW YORK
STATE: NY
ZIP: 10017
BUSINESS PHONE: 9176635000
MAIL ADDRESS:
STREET 1: 120 PARK AVE
CITY: NEW YORK
STATE: NY
ZIP: 10017
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>PHILIP MORRIS COMPANIES INC. 10-K405
<TEXT>
<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 1-8940
-------------------
PHILIP MORRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
-------------------
<TABLE>
<S> <C>
VIRGINIA 13-3260245
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 PARK AVENUE,
NEW YORK, N.Y. 10017
(Address of principal executive offices) (Zip Code)
</TABLE>
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 917-663-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
Common Stock, $0.33 1/3 par value New York Stock Exchange
</TABLE>
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
-----------------------
The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant, computed by reference to the closing price of
such stock on February 28, 2001, was approximately $106 billion. At such date,
there were 2,206,007,834 shares of the registrant's Common Stock outstanding.
-----------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to shareholders for the year
ended December 31, 2000, are incorporated in Part I, Part II and Part IV hereof
and made a part hereof. The registrant's definitive proxy statement for use in
connection with its annual meeting of shareholders to be held on April 26, 2001,
filed with the Securities and Exchange Commission on March 9, 2001, is
incorporated in Part III hereof and made a part hereof.
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<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
GENERAL
Philip Morris Companies Inc. is a holding company whose principal
wholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris
International Inc., Kraft Foods Inc. and Miller Brewing Company, are engaged in
the manufacture and sale of various consumer products. A wholly-owned subsidiary
of the Company, Philip Morris Capital Corporation, engages in various leasing
and investment activities. As used herein, unless the context indicates
otherwise, the term "Company" means Philip Morris Companies Inc. and its
subsidiaries. The Company is the largest consumer packaged goods company in the
world.*
Philip Morris Incorporated ("PM Inc."), which conducts business under the
trade name "Philip Morris U.S.A.," is engaged in the manufacture and sale of
cigarettes. PM Inc. is the largest cigarette company in the United States.
Philip Morris International Inc. ("Philip Morris International" or "PMI") is a
holding company whose subsidiaries and affiliates and their licensees are
engaged primarily in the manufacture and sale of tobacco products (mainly
cigarettes) internationally. Marlboro, the principal cigarette brand of these
companies, has been the world's largest-selling cigarette brand since 1972.
Kraft Foods Inc. ("Kraft"), is the largest branded food and beverage company
headquartered in the United States. A wide variety of snacks, beverages, cheese,
packaged grocery products and convenient meals are manufactured and marketed in
the United States, Canada and Mexico by Kraft's direct subsidiary, Kraft Foods
North America, Inc. ("Kraft Foods North America"). Subsidiaries and affiliates
of Kraft Foods International, Inc. ("Kraft Foods International"), an indirect
subsidiary of Kraft, manufacture and market a wide variety of snacks, beverages,
cheese, packaged grocery products and convenient meals in Europe, the Middle
East and Africa, as well as the Latin America and Asia Pacific regions.
Miller Brewing Company ("Miller") is the second-largest brewing company in
the United States.
SOURCE OF FUNDS -- DIVIDENDS
Because the Company is a holding company, its principal source of funds is
dividends from its subsidiaries. The Company's principal wholly-owned
subsidiaries currently are not limited by long-term debt or other agreements in
their ability to pay cash dividends or make other distributions with respect to
their common stock.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's significant industry segments are domestic tobacco,
international tobacco, North American food, international food, beer and
financial services. Operating revenues and operating companies income (together
with a reconciliation to operating income) attributable to each such segment for
each of the last three years (along with total assets for each of tobacco, food,
beer and financial services at December 31, 2000, 1999 and 1998) are set forth
in Note 11 to the Company's consolidated financial statements and are
incorporated herein by reference to the Company's Annual Report to Shareholders
for the year ended December 31, 2000 (the "2000 Annual Report"). Effective in
2000, managerial responsibility for the Company's food operations in Mexico and
Puerto Rico was transferred from the international food segment to the North
American food segment. Accordingly, all prior period amounts have been
reclassified to reflect the transfer.
- ---------
* References to the Company's competitive ranking in its various businesses are
based on sales data or, in the case of cigarettes and beer, shipments, unless
otherwise indicated.
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<PAGE>
The relative percentages of operating companies income attributable to each
segment were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Domestic tobacco................................... 33.0% 32.8% 13.1%
International tobacco.............................. 32.1 33.5 44.4
North American food................................ 21.9 21.5 27.6
International food................................. 7.4 7.2 9.3
Beer............................................... 4.0 3.5 4.0
Financial services................................. 1.6 1.5 1.6
----- ----- -----
100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
The above relative percentages were affected in 1998 by domestic tobacco
litigation settlement charges of $3.4 billion, discussed below in Item 3. Legal
Proceedings.
(c) NARRATIVE DESCRIPTION OF BUSINESS
TOBACCO PRODUCTS
PM Inc. manufactures, markets and sells cigarettes in the United States and
its territories, and exports tobacco products from the United States.
Subsidiaries and affiliates of Philip Morris International and their licensees
manufacture, market and sell tobacco products outside the United States.
Domestic Tobacco Products
PM Inc. is the largest tobacco company in the United States, with total
cigarette shipments in the United States of 211.9 billion units in 2000, an
increase of 1.8% over 1999. PM Inc. accounted for 50.5% of the domestic
cigarette industry's total shipments in 2000 (an increase of 0.9 share points
over 1999). The domestic industry's cigarette shipments increased by 0.1% in
2000. PM Inc.'s and the industry's volume growth during 2000 was largely driven
by wholesalers' decisions to rebuild their inventories 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. PM Inc. estimates that after adjusting for this and
other factors, domestic industry volume declined approximately 1.0% to 2.0% in
2000, while PM Inc.'s shipment volume was essentially flat. The following table
sets forth the industry's cigarette shipments in the United States, PM Inc.'s
shipments and its share of domestic industry shipments:
<TABLE>
<CAPTION>
YEARS ENDED PM INC.
DECEMBER 31 INDUSTRY* PM INC. SHARE OF INDUSTRY
----------- --------- ------- -----------------
(IN BILLIONS OF UNITS) (%)
<S> <C> <C> <C>
2000..................... 419.8 211.9 50.5
1999..................... 419.3 208.2 49.6
1998..................... 460.8 227.6 49.4
</TABLE>
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* Source: Management Science Associates.
PM Inc.'s major premium brands are Marlboro, Virginia Slims, Parliament,
Merit and Benson & Hedges. Its principal discount brands are Basic and
Cambridge. All of its brands are marketed to take into account differing
preferences of adult smokers. Marlboro is the largest-selling cigarette brand in
the United States, with shipments of 158.2 billion units in 2000 (up 3.5% from
1999), equating to 37.7% of the domestic market (up 1.3 share points over 1999).
In 2000 and 1999, the premium and discount segments accounted for
approximately 73.5% and 26.5%, respectively, of domestic cigarette industry
volume. PM Inc.'s share of the premium segment was 60.6% in 2000, an increase of
1.1 share points over 1999. Shipments of premium cigarettes accounted for 88.2%
of PM Inc.'s 2000 volume, up from 88.0% in 1999. In 2000, industry shipments
within the
2
<PAGE>
discount category declined 0.1% from 1999 levels; PM Inc.'s 2000 shipments
within this category increased 0.2%, resulting in a share of 22.5% of the
discount category (up 0.1 share points over 1999).
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, including those related to tobacco litigation settlements and, if
enacted, by increased excise taxes or other tobacco legislation discussed below.
During 1999, PM Inc. announced plans to phase out cigarette production
capacity at its Louisville, Kentucky manufacturing plant by August 2000. The
closure of this facility was completed in 2000. PM Inc. recorded pre-tax charges
of $183 million during 1999 in connection with these actions. These charges
included enhanced severance, pension and postretirement benefits in accordance
with the terms of the underlying plans, affecting approximately 1,500 hourly and
salaried employees.
International Tobacco Products
Philip Morris International's total cigarette shipments decreased 0.1% in
2000 to 671.2 billion units. Comparisons to 1999 reflect an estimated shift of
4.2 billion units into the fourth quarter of 1999 from the first quarter of 2000
as customers purchased additional product in anticipation of business
disruptions due to the century date change. Excluding the estimated impact of
this shift in volume, Philip Morris International's total cigarette shipments
increased 1.1% over 1999. Philip Morris International estimates that its share
of the international cigarette market (which is defined as worldwide cigarette
volume excluding the United States and duty-free shipments) was 13.8% in 2000,
up from 13.5% in 1999. Philip Morris International estimates that international
cigarette market shipments were approximately 4.7 trillion units in 2000, down
slightly from 1999. Philip Morris International's leading brands -- Marlboro,
L&M, Philip Morris, Bond Street, Chesterfield, Parliament, Lark, Merit and
Virginia Slims -- collectively accounted for approximately 10.6% of the
international cigarette market, up from 10.2% in 1999. Shipments of Philip
Morris International's principal brand, Marlboro, increased 1.7% in 2000, and
represented more than 6% of the international cigarette market in 2000 and 1999.
Philip Morris International has a cigarette market share of at least 15%,
and in a number of instances substantially more than 15%, in more than 55
markets, including Argentina, Australia, Austria, Belgium, the Czech Republic,
Finland, France, Germany, Greece, Hong Kong, Hungary, Israel, Italy, Japan,
Mexico, the Netherlands, Poland, Portugal, Russia, Saudi Arabia, Singapore,
Spain, Switzerland and Turkey.
In 2000, Philip Morris International continued to invest in and expand its
international manufacturing base. Philip Morris International increased its
ownership interests in an affiliated company in Portugal and expanded facilities
in Argentina, Australia, Germany, Kazakhstan, the Netherlands, Poland, Portugal,
Romania, Russia and Switzerland.
In 1999, Philip Morris International announced the closure of a cigarette
factory and the corresponding reduction of cigarette production capacity in
Brazil. Prior to the factory closure, existing employees were offered voluntary
dismissal benefits. These benefits were accepted by one-half of the
approximately 1,000 employees at the facility. During the third quarter of 1999,
the factory was closed and the employment of the remaining employees was
terminated, and a pre-tax charge of $136 million was recorded by Philip Morris
International in connection with these actions.
Distribution, Competition and Raw Materials
PM Inc. sells its tobacco products principally to wholesalers (including
distributors), large retail organizations, including chain stores, and the armed
services. Subsidiaries and affiliates of Philip Morris International and their
licensees market cigarettes and other tobacco products worldwide, directly or
through export sales organizations and other entities with which they have
contractual arrangements.
The market for tobacco products is highly competitive, characterized by
brand recognition and loyalty, with product quality, price, marketing and
packaging constituting the significant methods of
3
<PAGE>
competition. Promotional activities include, in certain instances and where
permitted by law, allowances, the distribution of incentive items, price
reductions and other discounts. The tobacco products of the Company's
subsidiaries, affiliates and their licensees are advertised and promoted through
various media, although television and radio advertising of cigarettes is
prohibited in the United States and is prohibited or restricted in many other
countries. In addition, as discussed below under Taxes, Legislation, Regulation
and Other Matters Regarding Tobacco and Smoking -- State Settlement Agreements,
PM Inc. and other domestic tobacco manufacturers have agreed to other marketing
restrictions in the United States as part of the settlements of state health
care cost recovery actions.
PM Inc. and Philip Morris International's subsidiaries and affiliates and
their licensees purchase domestic burley and flue-cured leaf tobaccos of various
grades and styles each year. In February 2000, in light of quota reductions in
the federal quota and price-support program for tobacco farmers, PM Inc. began a
pilot partnering program with a limited number of tobacco growers in order to
ensure an adequate supply of burley tobacco. Under the terms of the program,
PM Inc. agrees in advance to purchase certain amounts of burley tobacco directly
from growers participating in the program. In February 2001, this program was
expanded to include flue-cured tobacco. PM Inc. continues to purchase the
balance of domestic tobacco requirements at auction. In addition, oriental
tobacco and certain other tobaccos are purchased outside the United States. The
tobacco is then graded, stemmed and redried prior to its storage for aging up to
three years. Large quantities of leaf tobacco inventory are maintained to
support cigarette manufacturing requirements. Tobacco is an agricultural
commodity subject to United States government controls, including the
tobacco-price support (subject to Congressional review) and production control
programs administered by the United States Department of Agriculture (the
"USDA"), either of which can substantially affect market prices. PM Inc. and
Philip Morris International believe there is an adequate supply of tobacco in
the world markets to satisfy their current and anticipated production
requirements.
Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and Smoking
The tobacco industry, both in the United States and abroad, has faced, and
continues to face, a number of issues that may adversely affect the business,
volume, results of operations, cash flows and financial position of PM Inc.,
Philip Morris International and the Company.
These issues, some of which are more fully discussed below, include pending
and threatened smoking and health litigation and recent jury verdicts against
PM Inc., including the $74 billion punitive damages verdict in the Engle smoking
and health class action case discussed in Item 3. Legal Proceedings ("Item 3");
the civil lawsuit filed by the United States federal government against various
cigarette manufacturers and others discussed in Item 3; 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"); 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 products intended for sale outside the United States; foreign and
United States governmental investigations into illegal cigarette imports;
governmental investigations; actual and proposed requirements regarding
disclosure of cigarette ingredients and other proprietary information;
governmental and private bans and restrictions on smoking; actual and proposed
price controls and restrictions on imports in certain jurisdictions outside the
United States; actual and proposed restrictions affecting tobacco manufacturing,
marketing, advertising and sales outside the United States; actual and proposed
legislation in Congress, the state of New York and other states to require the
establishment of fire-safety standards for cigarettes; the diminishing social
acceptance of smoking and increased pressure from tobacco control advocates and
unfavorable press reports; and other tobacco legislation that may be considered
by 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
4
<PAGE>
$1.87 per pack in a given locality in the United States. Congress has considered
significant increases in the federal excise tax or other payments from tobacco
manufacturers, and increases in excise and 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 comment 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. The Department has not yet published its recommendations.
Food and Drug Administration ("FDA") Regulations: In August 1996, the FDA
promulgated regulations asserting jurisdiction over cigarettes as "drugs" or
"medical devices" under the provisions of the Food, Drug and Cosmetic Act
("FDCA"). The regulations, which 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, record-keeping,
manufacturing and other requirements, were declared invalid by the United States
Supreme Court in March 2000. The Company has stated that while it continues to
oppose FDA regulation over cigarettes as "drugs" or "medical devices" under the
provisions of FDCA, it would support new legislation that would provide for
reasonable regulation by the FDA of cigarettes as cigarettes. Currently, there
are several bills pending in Congress that, if enacted, would give the FDA
authority to regulate tobacco products. The bills take a variety of approaches
to the issue of the FDA's proposed regulation of tobacco products ranging from
codification of the original FDA regulations under the "drug" and "medical
device" provisions of the FDCA to the creation of provisions that would apply
uniquely to tobacco products. All of the pending legislation could result in
substantial federal regulation of the design, performance, manufacture and
marketing of cigarettes. The ultimate outcome of the pending bills cannot be
predicted.
Ingredient Disclosure Laws: The Commonwealth of Massachusetts has enacted
legislation to require cigarette manufacturers to report the flavorings and
other ingredients used in each brand of cigarettes sold in the Commonwealth, and
on a qualified, by-brand basis to provide "nicotine-yield ratings" for their
products based on standards established by the Commonwealth. Cigarette
manufacturers sued to have the statute declared unconstitutional, arguing that
it could result in the public disclosure of valuable proprietary information. In
September 2000, the district court granted the plaintiffs' motion for summary
judgment and permanently enjoined the defendants from requiring cigarette
manufacturers to disclose brand-specific information on ingredients in their
products. Defendants have appealed the district court's ruling. 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 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 during adolescence.
5
<PAGE>
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. Since then, a
number of government agencies around the world have concluded that ETS causes
disease -- including lung cancer and heart disease -- in nonsmokers.
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 it would, in order to ensure that there will be a single,
consistent public health message on these issues, refrain from debating the
issues other than as necessary to defend itself and its opinions in the courts
and other forums in which it is required to do so. The Company also stated that
in relation to these issues, and the health effects of exposure to ETS, the
Company is prepared to defer to the judgment of public health authorities as to
what health warning messages that will best serve the public interest.
In 1999, PM Inc. and PMI established web sites that include,
among other things, views of public health authorities on smoking, disease
causation in smokers, addiction and ETS. In October 2000, the sites were updated
to reflect PM Inc.'s and PMI's agreement with the overwhelming
medical and scientific consensus that cigarette smoking is addictive, and causes
lung cancer, heart disease, emphysema and other serious diseases in smokers.
Consistent with the Company's position set forth in its October 1997 submission
to the United States Senate Judiciary Committee (discussed above), the web sites
advise smokers and potential smokers to rely on the messages of public health
authorities in making all smoking-related decisions. The sites further
PM Inc.'s and PMI's efforts to implement this position.
The sites also state that PM Inc. and PMI recognize and accept
that many people have health concerns regarding ETS. In addition, because of
concerns relating to conditions such as asthma and respiratory infections,
PM Inc. and PMI believe that particular care should be exercised
where children are concerned, and that smokers who have children -- particularly
young ones -- should seek to minimize their exposure to ETS.
The World Health Organization's Framework Convention for Tobacco Control:
The World Health Organization has begun negotiations regarding a proposed
Framework Convention for Tobacco Control. The proposed treaty would require
signatory nations to enact legislation that would require, among other things,
specific actions to prevent youth smoking; restrict tobacco product marketing;
inform the public about the health consequences of smoking and the benefits of
quitting; regulate the content of tobacco products; impose new package labeling
requirements; eliminate cigarette smuggling and counterfeit cigarettes; restrict
smoking in public places; increase and harmonize cigarette excise taxes; abolish
duty-free tobacco sales; and permit and encourage litigation against tobacco
product manufacturers. PM Inc. and PMI have stated that they would
support a treaty that member states could consider for ratification, based on
the following four principles: (1) smoking-related decisions should be made on
the basis of a consistent public health message; (2) effective measures should
be taken to prevent minors from smoking; (3) the right of adults to choose to
smoke should be preserved; and (4) all manufacturers of tobacco products should
compete on a level playing field. The outcome of the treaty negotiations cannot
be predicted.
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 educational campaigns relating to tobacco
consumption or tobacco control programs, or provide additional funding for
governmental tobacco control activities, further restrict the advertising of
cigarettes, require additional warnings, including graphic 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
6
<PAGE>
to restrict the sale and distribution of cigarettes. Legislative initiatives
affecting the regulation of the tobacco industry have also been considered in a
number of jurisdictions outside the United States. The European Union has issued
a directive on tobacco product regulation that would, among other things, reduce
maximum permitted levels of tar, nicotine and carbon monoxide yields, require
manufacturers to disclose ingredients and toxicological data on ingredients,
require health warnings to cover 30% of the front of a pack of cigarettes and
40% of the back, and prohibit the use on packaging of texts, names, trademarks
and figurative or other signs suggesting that a particular tobacco product is
less harmful than others.
In August 2000, New York State enacted legislation that requires the State's
Office of Fire Prevention and Control to promulgate by January 1, 2003
fire-safety standards for cigarettes sold in New York. The legislation requires
that cigarettes sold in New York stop burning within a time period to be
specified by the standards or meet other performance standards set by the Office
of Fire Prevention and Control. All cigarettes sold in New York will be required
to meet the established standards within 180 days after the standards are
promulgated. It is not possible to predict the impact of this law on PM Inc.
until the standards are published. Similar legislation has been proposed in
other states and localities and at the federal level.
It is not possible to predict what, if any, additional foreign or domestic
governmental legislation or regulations will be adopted relating to the
manufacturing, advertising, sale or use of cigarettes, or to the tobacco
industry generally. However, if any or all of the foregoing were to be
implemented, the business, volume, results of operations, cash flows and
financial position of PM Inc., PMI and the Company could be materially adversely
affected.
Governmental Investigations: PMI and its subsidiary, Philip Morris Duty Free
Inc. have received subpoenas requesting documents in connection with an
investigation by Canadian authorities into allegations of contraband shipments
of cigarettes manufactured in Canada in the early 1990s. While the outcome of
this investigation cannot be predicted, PMI and Philip Morris Duty Free Inc.
believe they have acted lawfully.
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 case in Florida, in which PM Inc. is a
defendant, and a civil health care cost recovery action filed by the United
States Department of Justice in September 1999 against domestic tobacco
manufacturers and others, including the Company and PM Inc. (See Item 3 for a
discussion of such litigation.)
State Settlement Agreements: As discussed in Item 3, during 1997 and 1998,
PM Inc. and other major domestic tobacco product manufacturers entered into
agreements with states and various United States 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.
FOOD PRODUCTS
Kraft Foods North America and Kraft Foods International have made a number
of acquisitions and divestures during the past three years.
On December 11, 2000, the Company acquired all of the outstanding shares of
Nabisco Holdings Corp. ("Nabisco") for $55 per share in cash. During 2001,
Nabisco's operations are being integrated with those of Kraft Foods North
America and Kraft Foods International. The aggregate cost to purchase Nabisco's
outstanding shares, retire employee stock options and other payments was
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approximately $15.2 billion. In addition, the acquisition included the
assumption of approximately $4.0 billion of existing Nabisco debt. For a
discussion of the Nabisco acquisition, see Note 3 to the Company's consolidated
financial statements which is incorporated herein by reference to the 2000
Annual Report.
By combining Nabisco's operations with the operations of Kraft Foods North
America and Kraft Foods International, the Company currently expects to generate
annual cost synergies in excess of $400 million in 2002, growing to more than
$550 million in 2003. The Company's statement of earnings charges to obtain
these synergies will consist principally of systems integration, employee
training and benefit costs, and will aggregate approximately $300 million from
2001 to 2003. Consequently, the Company expects to achieve net cost synergies of
approximately $100 million in 2001, $300 million in 2002 and $475 million in
2003. In addition, the Company expects to achieve increased operating companies
income from revenue synergies of approximately $25 million in 2002, increasing
to approximately $50 million in 2003.
During the first quarter of 2000, Kraft Foods North America purchased the
outstanding common stock of Balance Bar Co., a maker of energy and nutrition
snack products. In a separate transaction, Kraft Foods North America also
acquired Boca Burger, Inc., a privately-held manufacturer and marketer of
soy-based meat alternatives. During 2000, Kraft Foods International sold a
French confectionery business and Kraft Foods North America sold two small food
businesses. During 1999, Kraft Foods International sold three international food
businesses. During 1998, Kraft Foods International sold four international food
businesses.
The impact of these acquisitions and divestitures, excluding Nabisco, has
not had a material effect on the Company's results of operations.
North America
Kraft Foods North America's principal products are snacks, beverages,
cheese, grocery and convenient meals which include:
SNACKS: Oreo, Chips Ahoy!, Newtons, Nilla, Nutter Butter,
Stella D'oro and SnackWell's cookies; Ritz, Premium, Triscuit,
Wheat Thins, Cheese Nips, Better Cheddars, Nabisco Honey Maid
Grahams and Teddy Grahams crackers; Planters nuts and salty
snacks; Life Savers, Creme Savers, Altoids and Gummi Savers sugar
confectionery products; Terry's and Toblerone chocolate
confectionery products; Handi-Snacks two-compartment snacks;
Balance Bar nutrition and energy snacks; and Jell-O ready-to-eat
refrigerated desserts.
BEVERAGES: Maxwell House, General Foods International Coffees,
Starbucks, Yuban and Gevalia coffees; Capri Sun, Tang and Crystal
Light aseptic juice drinks; and Kool-Aid, Tang, Capri Sun, Crystal
Light and Country Time powdered soft drinks.
CHEESE: Kraft and Cracker Barrel natural cheeses; Philadelphia
cream cheese; Kraft and Velveeta process cheeses; Kraft grated
cheeses; Cheez Whiz process cheese sauce; Easy Cheese aerosol
cheese spread; and Knudsen and Breakstone's cottage cheese and
sour cream.
GROCERY: Jell-O dry packaged desserts; Cool Whip frozen
whipped topping; Post ready-to-eat cereals; Cream of Wheat and
Cream of Rice hot cereals; Kraft and Miracle Whip spoonable
dressings; Kraft salad dressings; A-1 steak sauce; Kraft and
Bull's-Eye barbecue sauces; Grey Poupon premium mustards; and
Shake 'N Bake coatings.
CONVENIENT MEALS: DiGiorno, Tombstone, Jack's, California
Pizza Kitchen and Delissio frozen pizzas; Kraft macaroni & cheese
dinners; Taco Bell and Stove Top Oven Classics meal kits;
Lunchables lunch combinations; Oscar Mayer and Louis Rich cold
cuts, hot dogs and bacon; Boca Burger soy-based meat alternatives;
Stove Top stuffing mix; and Minute rice.
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International
Kraft Foods International's principal products are snacks, beverages,
cheese, grocery and convenient meals which include:
SNACKS: Milka, Suchard, Cote d'Or, Marabou, Toblerone, Freia,
Terry's, Daim, Figaro, Korona, Poiana, Prince Polo, Siesta, Lacta
and Gallito chocolate confectionery products; Estrella, Maarud and
Lyux salty snacks; Oreo, Chips Ahoy!, Ritz, Terrabusi, Canale,
Club Social, Cerealitas, Trakinas and Lucky biscuits; and Sugus
and Artic sugar confectionery products.
BEVERAGES: Jacobs, Gevalia, Carte Noire, Jacques Vabre, Kaffee
HAG, Grand' Mere, Kenco, Saimaza, Maxwell House and Dadak coffees;
Suchard Express, O'Boy, Milka and Kaba chocolate drinks; and Tang,
Clight, Kool-Aid, Royal, Verao, Fresh, Frisco, Q-Refres-Ko and
Ki-Suco powdered soft drinks.
CHEESE: Philadelphia cream cheese; Kraft Sottilette, Dairylea
and Eden process cheeses; El Caserio and Invernizzi cheeses; and
Cheese Whiz process cheese sauce.
GROCERY: Kraft pourable and spoonable salad dressings; Miracel
Whip spoonable dressing; Royal dry packaged desserts and baking
powder; Kraft and ETA peanut butter; and Vegemite yeast spread.
CONVENIENT MEALS: Lunchables lunch combinations; Kraft and
Miracoli pasta dinners and sauces; and Simmenthal meats in Italy.
Distribution, Competition and Raw Materials
Kraft Foods North America's products are generally sold to supermarket
chains, wholesalers, club stores, mass merchandisers, distributors, convenience
stores, gasoline stations and other retail food outlets. In general, the retail
trade for food products is consolidating. Food products are distributed through
distribution centers, satellite warehouses, company-operated and public
cold-storage facilities, depots and other facilities. Most distribution in North
America is in the form of warehouse delivery, but snacks and frozen pizza are
distributed through two direct-store-delivery systems. Selling efforts are
supported by national and regional advertising on television and radio and in
magazines and newspapers, as well as by sales promotions, product displays,
trade incentives, informative material offered to customers and other
promotional activities. Subsidiaries and affiliates of Kraft Foods International
sell their food products primarily in the same manner and also engage the
services of independent sales offices and agents.
Kraft Foods North America, Kraft Foods International and their subsidiaries
are subject to highly competitive conditions in all aspects of their business.
Competitors include large national and international companies and numerous
local and regional companies. Certain of their competitors may have different
profit objectives and some international competitors may be less susceptible to
currency exchange rates. In addition, certain of their international competitors
benefit from government subsidies. Their food products also compete with generic
products and private-label products of food retailers, wholesalers and
cooperatives. Kraft Foods North America, Kraft Foods International and their
subsidiaries compete primarily on the basis of product quality, brand
recognition, brand loyalty, service, marketing, advertising and price.
Substantial advertising and promotional expenditures are required to maintain or
improve a brand's market position or to introduce a new product.
Kraft Foods North America, Kraft Foods International and their subsidiaries
are major purchasers of milk, cheese, nuts, green coffee beans, cocoa, corn
products, wheat, rice, poultry, beef, vegetable oil, and sugar and other
sweeteners. They also use significant quantities of glass, plastic and cardboard
to package their products. They continuously monitor worldwide supply and cost
trends of these commodities to enable them to take appropriate action to obtain
ingredients and packaging needed for production.
Kraft Foods North America, Kraft Foods International and their subsidiaries
purchase a substantial portion of their milk requirements from independent
agricultural cooperatives and individual producers,
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<PAGE>
and a substantial portion of their cheese requirements from independent sources.
The prices for milk and other dairy product purchases are substantially
influenced by government programs, as well as by market supply and demand.
During 2000, dairy commodity costs in the United States were below the levels
seen in 1999.
The most significant cost item in coffee products is green coffee beans,
which are purchased on world markets. Green coffee bean prices are affected by
the quality and availability of supply, trade agreements among producing and
consuming nations, the unilateral policies of the producing nations, changes in
the value of the United States dollar in relation to certain other currencies
and consumer demand for coffee products. Coffee bean prices during 2000 were
lower than 1999.
A significant cost item in chocolate confectionery products is cocoa, which
is purchased on world markets, and the price of which is affected by the quality
and availability of supply and changes in the value of the British pound
sterling and the United States dollar relative to certain other currencies.
Cocoa bean prices during 2000 were lower than 1999.
The prices paid for raw materials and agricultural materials used in food
products generally reflect external factors such as weather conditions,
commodity market fluctuations, currency fluctuations and the effects of
governmental agricultural programs. Although the prices of the principal raw
materials can be expected to fluctuate as a result of these factors, Kraft
believes such raw materials to be in adequate supply and generally available
from numerous sources. However, Kraft and its subsidiaries use hedging
techniques to minimize the impact of price fluctuations in their principal raw
materials. They do not fully hedge against changes in commodity prices and these
strategies may not protect Kraft or its subsidiaries from sharp increases in
specific raw material costs, which have been experienced in the past.
Regulation
All of Kraft Foods North America's United States food products and packaging
materials are subject to regulations administered by the FDA or, with respect to
products containing meat and poultry, the USDA. Among other things, these
agencies enforce statutory prohibitions against misbranded and adulterated
foods, establish safety standards for food processing, establish ingredients and
manufacturing procedures for certain foods, establish standards of identity for
certain foods, determine the safety of food additives and establish labeling
standards and nutrition labeling requirements for food products.
In addition, various states regulate the business of Kraft Foods North
America's operating units by licensing dairy plants, enforcing federal and state
standards of identity for selected food products, grading food products,
inspecting plants, regulating certain trade practices in connection with the
sale of dairy products and imposing their own labeling requirements on food
products.
Many of the food commodities on which Kraft Foods North America's United
States businesses rely are subject to governmental agricultural programs. These
programs have substantial effects on prices and supplies and are subject to
Congressional and administrative review.
Almost all of the activities of the Company's food operations outside of the
United States are subject to local and national regulations similar to those
applicable to Kraft Foods North America's United States businesses and, in some
cases, international regulatory provisions, such as those of the European Union
relating to labeling, packaging, food content, pricing, marketing and
advertising, and related areas.
The European Union and certain individual countries require that food
products containing genetically modified organisms or classes of ingredients
derived from them be labeled accordingly. Other countries may adopt similar
regulations. The FDA has concluded that there is no basis for similar mandatory
labeling under current United States law.
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BEER
Products
Miller's brands include Miller Lite, Miller Genuine Draft, Miller Genuine
Draft Light, Icehouse, Foster's, the Miller High Life franchise, Leinenkugel's,
Olde English 800 and Mickey's in the premium/near premium segment; Milwaukee's
Best, Red Dog, Hamm's and Magnum in the below-premium segment; and Sharp's
non-alcoholic brew. In December 2000, Miller sold its rights to Molson
trademarks in the United States. During 1999, Miller purchased four trademarks
from the Pabst Brewing Company ("Pabst") and the Stroh Brewery Company
("Stroh"). Miller began brewing and shipping the newly acquired brands, Henry
Weinhard's, Olde English 800, Mickey's and Hamm's during the second quarter of
1999. Miller's license agreement for the rights to brew and sell Lowenbrau in
the United States expired on September 30, 1999.
Miller's total shipment volume (which excludes international shipments of
Miller products by other brewers under license and contract-brewing
arrangements) of 42.5 million barrels for 2000 decreased 3.7% from 1999. Export
shipments decreased 0.4%, with a planned, corresponding increase in licensee
volume. Domestic shipments of 41.6 million barrels decreased 3.8% from 1999 due
to higher pricing, discontinued brands (primarily Molson and Lowenbrau) and
Miller's continuing efforts to reduce distributor inventories. Miller's
estimated market share of the United States malt beverage industry (based on
shipments) was 20.7% in 2000, down from 21.6% in 1999. Wholesalers' sales of
Miller's products to retailers in 2000 decreased 3.3% from 1999. Domestic
shipments of premium/near premium-priced brands in 2000 increased 1.0 percentage
point to 79.2% of total domestic shipments due primarily to the impact of the
brands acquired during 1999.
The following table sets forth, based on shipments (including imports and
exports), the United States industry's sales of beer and brewed non-alcoholic
beverages, as estimated by Miller; Miller's unit sales; and Miller's estimated
share of industry sales:
<TABLE>
<CAPTION>
YEARS ENDED MILLER'S
DECEMBER 31 INDUSTRY MILLER SHARE OF INDUSTRY
- ----------- -------- ------ -----------------
(IN THOUSANDS (%)
OF BARRELS)
<S> <C> <C> <C>
2000.................................... 205,628 42,532 20.7
1999.................................... 204,593 44,175 21.6
1998.................................... 201,717 42,674 21.2
</TABLE>
During 1999, Miller acquired a brewery in Tumwater, Washington as part of
the purchase of brands from Pabst and Stroh. In addition, Miller recorded a
pre-tax charge of $29 million to write down three other breweries to their
estimated fair values. During 2000, one of the breweries was closed, while the
remaining two breweries were sold.
Distribution, Competition and Raw Materials
Beer is distributed primarily through independent wholesalers. The United
States malt beverage industry is highly competitive, with the principal methods
of competition being product quality, price, distribution, marketing and
advertising. Miller engages in a wide variety of advertising and sales promotion
activities. Barley malt, hops, corn syrup and water represent the principal
ingredients used in manufacturing Miller's products, and are generally available
in the market. The production process, which includes fermentation and aging
periods, is conducted throughout the year. Containers (bottles, cans and kegs)
for beer are purchased from various suppliers.
Regulation
The malt beverage industry is highly regulated at both the state and federal
levels. The Alcoholic Beverage Labeling Act of 1988 requires all alcoholic
beverages manufactured for sale in the United States to include the following
statement on containers: "GOVERNMENT WARNING: (1) According to the Surgeon
General, women should not drink alcoholic beverages during pregnancy because of
the risk of birth defects. (2) Consumption of alcoholic beverages impairs your
ability to drive a car or
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<PAGE>
operate machinery, and may cause health problems." The statute empowers the
Bureau of Alcohol, Tobacco and Firearms to regulate the size and format of the
warning.
The federal excise tax is 32 cents per package of six 12-ounce containers.
Excise taxes, sales taxes and other taxes affecting beer are also levied by
various states, counties and municipalities. In the opinion of Miller, increases
in excise taxes have had, and could continue to have, an adverse effect on
shipments.
Advertising of alcoholic beverages, including beer, has come under increased
scrutiny by governmental agencies and others. In 1999, the Federal Trade
Commission issued a report to Congress entitled Self-Regulation in the Alcohol
Industry: A Review of Industry Efforts to Avoid Promoting Alcohol to Underage
Consumers. The report discusses the benefits of self-regulation in general,
describes key provisions of the alcohol industry's voluntary advertising codes,
considers those areas where self-regulation is successful and where it falls
short, and recommends steps the industry could take to strengthen member
compliance with the codes.
FINANCIAL SERVICES
Philip Morris Capital Corporation ("PMCC") invests in leveraged and direct
finance leases, other tax-oriented financing transactions and third-party
financings. Total assets of PMCC were $8.4 billion at December 31, 2000, up from
$7.7 billion at December 31, 1999, reflecting an increase in net finance assets.
OTHER MATTERS
Customers
None of the Company's business segments is dependent upon a single customer
or a few customers, the loss of which would have a material adverse effect on
the Company's results of operations.
Employees
At December 31, 2000, the Company employed approximately 178,000 people
worldwide.
Trademarks
Trademarks are of material importance to all three of the Company's consumer
products businesses and are protected by registration or otherwise in the United
States and most other markets where the related products are sold.
Environmental Regulation
The Company and its subsidiaries are subject to various federal, state and
local laws and regulations concerning the discharge of materials into the
environment, or otherwise related to environmental protection, including the
Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act
and the Comprehensive Environmental Response, Compensation and Liability Act
(commonly known as "Superfund"), which imposes joint and several liability on
each responsible party. In 2000, subsidiaries (or former subsidiaries) of the
Company were involved in approximately 110 active matters subjecting them to
potential remediation costs under Superfund or otherwise. The Company and its
subsidiaries expect to continue to make capital and other expenditures in
connection with environmental laws and regulations. Although it is not possible
to predict precise levels of environmental-related expenditures, compliance with
such laws and regulations, including the payment of any remediation costs and
the making of such expenditures, has not had, and is not expected to have, a
material adverse effect on the Company's results of operations, capital
expenditures, financial position, earnings and competitive position.
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<PAGE>
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders, including this Annual Report on Form 10-K. One can identify these
forward-looking statements by use of words such as "strategy," "expects,"
"plans," "believes," "will," "estimates," "intends," "projects," "goals,"
"targets" 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. 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, and local
economic conditions. Their results are dependent upon their continued ability to
promote brands successfully; to anticipate and respond to new consumer trends;
to develop new products and markets; to broaden brand portfolios; to improve
productivity; and to respond to changing prices for their raw materials. In
addition, Philip Morris International, Kraft Foods International and Kraft Foods
North America are subject to the effects of foreign economies and the related
shifts in consumer preferences, and currency movements. Developments in any of
these areas, which are more fully described elsewhere in Part I hereof and in
the Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 20 to 34 of the 2000 Annual Report, 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.
The Company cautions that the above 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 it or on its behalf.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The amounts of operating revenues and long-lived assets attributable to each
of the Company's geographic segments and the amount of export sales from the
United States for each of the last three fiscal years are set forth in Note 11
to the Company's consolidated financial statements, incorporated herein by
reference to the 2000 Annual Report.
Subsidiaries of the Company export tobacco and tobacco-related products,
coffee products, grocery products, cheese, processed meats and beer. In 2000,
the value of all exports from the United States by these subsidiaries amounted
to approximately $4 billion.
ITEM 2. DESCRIPTION OF PROPERTY.
TOBACCO PRODUCTS
PM Inc. owns and operates six tobacco manufacturing and processing
facilities -- four in the Richmond, Virginia area, one in Louisville, Kentucky
and one in Cabarrus County, North Carolina. Subsidiaries and affiliates of
Philip Morris International own, lease or have an interest in 57 cigarette or
component manufacturing facilities in 31 countries outside the United States,
including cigarette manufacturing facilities in Bergen Op Zoom, the Netherlands
and in Berlin, Germany.
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FOOD PRODUCTS
Kraft has 228 manufacturing and processing facilities, 81 of which are
located in the United States. Outside the United States, Kraft has 147
manufacturing and processing facilities located in 46 countries. Kraft owns 213
and leases 15 of these facilities. In addition, Kraft has 550 distribution
centers and depots, of which 179 are located outside the United States. Kraft
owns 114 distribution centers and depots, with the remainder being leased.
Kraft anticipates closing or selling a number of Nabisco facilities that do
not align strategically with Kraft's business. In addition, the integration of
Nabisco's operations may result in the closure or sale of a number of Kraft
facilities.
BEER
Miller owns and operates nine breweries, located in Milwaukee, Wisconsin
(2); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia; Irwindale,
California; Trenton, Ohio; Chippewa Falls, Wisconsin; and Tumwater, Washington.
Miller also owns the Celis Brewery in Austin, Texas, where Miller ceased
production of Celis brands as of December 31, 2000. Miller also owns a
hops-processing facility in Wisconsin and owns or leases warehouses in several
locations.
During 1999, Miller recorded a pre-tax charge of $29 million to write-down
the book value of three brewing facilities to their estimated fair values.
During 2000, one of the facilities was closed while the remaining two facilities
were sold.
GENERAL
The plants and properties owned and operated by the Company's subsidiaries
are maintained in good condition and are believed to be suitable and adequate
for present needs.
ITEM 3. LEGAL PROCEEDINGS.
Legal proceedings covering a wide range of matters are pending or threatened
in various United States and foreign jurisdictions against the Company, its
subsidiaries and affiliates, including PM Inc., PMI and their respective
indemnitees. Various types of claims are raised in these proceedings, including
product liability, consumer protection, antitrust, tax, patent infringement,
employment matters, claims for contribution and claims of competitors and
distributors.
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. Other
tobacco-related litigation includes 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 and suits by foreign governments seeking to
recover damages for taxes lost as a result of the allegedly illegal importation
of cigarettes into their jurisdictions. 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. In July 2000, a
jury in a Florida smoking and health class action returned a punitive damages
award of approximately $74 billion against PM Inc. (See discussion of the Engle
case below.) 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
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<PAGE>
recovery and certain other actions pending as of February 15, 2001, and
discusses certain developments in such cases since November 1, 2000.
As of February 15, 2001, there were approximately 1,500 smoking and health
cases filed and served on behalf of individual plaintiffs in the United States
against PM Inc. and, in some instances, the Company, compared with approximately
380 such cases on December 31, 1999, and approximately 510 such cases on
December 31, 1998. Approximately 1,200 of these cases are pending before a
single West Virginia state court in a consolidated proceeding. An estimated 17
of the individual cases involve allegations of various personal injuries
allegedly related to exposure to ETS. In addition, approximately 3,065
additional individual cases are pending in Florida by current and former flight
attendants claiming personal injuries allegedly related to ETS. The flight
attendants allege that they are 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 February 15, 2001, there were an estimated 34 smoking and health
putative class actions pending in the United States against PM Inc. and, in some
cases, the Company (including eight that involve allegations of various personal
injuries related to exposure to ETS), compared with approximately 50 such cases
on December 31, 1999, and approximately 60 such cases on December 31, 1998. Some
of these actions purport to constitute statewide class actions and were filed
after May 1996, when the United States Court of Appeals for the Fifth Circuit,
in the Castano case, reversed a federal district court's certification of a
purported nationwide class action on behalf of persons who were allegedly
"addicted" to tobacco products.
As of February 15, 2001, there were an estimated 53 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 60 such cases pending on December 31, 1999, and 140 such cases on
December 31, 1998.
There are also a number of tobacco-related actions pending outside the
United States against PMI and its affiliates and subsidiaries, including an
estimated 67 smoking and health cases brought on behalf of individuals
(Argentina (47), Brazil (8), Canada (1), Germany (3), Hong Kong (1), Ireland
(1), Israel (1), Italy (2), Japan (1), the Philippines (1), and Spain (1)),
compared with approximately 55 such cases on December 31, 1999 and 27 such cases
on December 31, 1998. In addition, there are 11 smoking and health putative
class actions pending outside the United States (Brazil (2), Canada (4), Israel
(2), and Spain (3)), compared with 10 such cases on December 31, 1999. In
addition, health care cost recovery actions have been brought in Israel, the
Marshall Islands, the Province of 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),
Honduras, the Kyrgyz Republic, Nicaragua (dismissed, as discussed below), the
Province of Ontario, Canada (dismissed, as discussed below), Panama, the Russian
Federation, Tajikistan, Thailand (voluntarily dismissed), Ukraine (dismissed, as
discussed below), Venezuela, and seven Brazilian states.
Federal Government's Lawsuit
In 1999, the United States government filed a lawsuit in the United States
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 ("MCRA"), the
Medicare Secondary Payer ("MSP") 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.
moved to dismiss this lawsuit on numerous grounds,
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including that the statutes invoked by the government do not provide a basis for
the relief sought. In September 2000, the trial court dismissed the government's
MCRA and MSP claims, but permitted discovery to proceed on the government's
claims for equitable relief under RICO. In October 2000, the government moved
for reconsideration of the trial court's order to the extent that it dismissed
the MCRA claims for health care costs paid pursuant to government health benefit
programs other than Medicare and the Federal Employees Health Benefits Act. The
motion remains pending. In February 2001, the government filed an amended
complaint attempting to replead the MSP claim. In February 2001, two Native
American tribes moved to intervene and file a class action complaint on behalf
of federally recognized Native American tribes seeking to recover costs spent on
providing health care to tribal members. The motion remains pending. Trial is
scheduled for July 2003, although trial dates are subject to change. The Company
and PM Inc. believe that they have a number of valid defenses to the lawsuit and
will continue to vigorously defend it.
Recent Industry Trial Results
There have been several jury verdicts in tobacco-related litigation during
the past two years. In July 2000, the jury in the Engle smoking and health class
action in Florida returned a verdict assessing punitive damages totaling
approximately $145 billion against all defendants in the case, including
approximately $74 billion against PM Inc. (See "Engle Trial," below.)
In March 2001, a Texas jury returned a verdict in favor of defendant in an
individual smoking and health case against another cigarette manufacturer. In
February 2001, a South Carolina jury returned a verdict in favor of defendant in
an individual smoking and health case against another cigarette manufacturer,
and plaintiffs have appealed. In January 2001, a mistrial was declared in a case
in New York in which an asbestos manufacturers' personal injury settlement trust
sought contribution or reimbursement from cigarette manufacturers, including PM
Inc., 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. In January 2001, a New York jury returned a verdict in favor of
defendants, including PM Inc., in an individual smoking and health case.
In October 2000, a Florida jury awarded plaintiff in an individual smoking
and health case $200,000 in compensatory damages against another cigarette
manufacturer. In December 2000, the trial court vacated the jury's verdict and
granted defendant's motion for a new trial; plaintiff and defendant have
appealed. In July 2000, a Mississippi jury returned a verdict in favor of
defendant in an individual smoking and health case. Plaintiffs' post-trial
motions challenging the verdict are currently pending. In June 2000, a New York
jury returned a verdict in favor of all defendants, including PM Inc., in
another individual smoking and health case, and plaintiffs have appealed the
verdict. In March 2000, a California jury 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. is
appealing the verdict and damages award.
In July 1999, a Louisiana jury returned a verdict in favor of defendants in
an individual smoking and health case against another cigarette manufacturer. 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 damages awards in the Oregon and
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California actions have been reduced to $32 million and $25 million,
respectively. PM Inc. is appealing the verdicts and the damages 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.
In December 1999, a French court, in an action brought on behalf of a
deceased smoker, found that another cigarette manufacturer had a duty to warn
him about risks associated with smoking prior to 1976, when the French
government required warning labels on cigarette packs, and failed to do so. The
court did not determine causation or liability, which shall be considered in
future proceedings. Neither the Company nor its affiliates are parties to this
action.
Engle Trial
Verdicts have been returned and judgment has been entered against PM Inc.
and other defendants in the first two phases of this three-phase smoking and
health class action trial in Florida. 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 trial concerning 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 that defendants were negligent and engaged in extreme and outrageous conduct
or acted with reckless disregard with the intent to inflict emotional distress.
During phase two of the trial, 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. In April 2000, the jury determined liability against the
defendants and awarded $12.7 million in compensatory damages to the three named
plaintiffs.
In July 2000, the same jury returned a verdict assessing punitive damages on
a lump sum basis for the entire class totaling approximately $145 billion
against the various defendants in the case, including approximately $74 billion
severally against PM Inc. PM Inc. believes that the punitive damages award was
determined improperly and that it should ultimately be set aside on any one of
numerous grounds. Included among these grounds are the following: under
applicable law, (i) defendants are entitled to have liability and damages for
each plaintiff tried by the same jury, an impossibility due to the jury's
dismissal; (ii) punitive damages cannot be assessed before the jury determines
entitlement to, and the amount of, compensatory damages for all class members;
(iii) punitive damages must bear a reasonable relationship to compensatory
damages, a determination that cannot be made before compensatory damages are
assessed for all class members; and (iv) punitive damages can "punish" but
cannot "destroy" the defendant. In March 2000, at the request of the Florida
legislature, the Attorney General of Florida issued an advisory legal opinion
stating that "Florida law is clear that compensatory damages must be determined
prior to an award of punitive damages" in cases such as Engle. As noted above,
compensatory damages for all but three members of the class have not been
determined.
Following the verdict in the second phase of the trial, the jury was
dismissed, notwithstanding that liability and compensatory damages for all but
three class members have not yet been determined. According to the trial plan,
phase three of the trial 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.
It is unclear how the trial plan will be further implemented. The trial plan
provides that the punitive damages award should be standard as to each class
member and acknowledges that the actual size of the class will not be known
until the last class member's case has withstood appeal, i.e., the
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punitive damages amount would be divided equally among those plaintiffs who, in
addition to the successful phase two plaintiffs, are ultimately successful in
phase three of the trial and in any appeal.
Following the jury's punitive damages verdict in July 2000, defendants
removed the case to federal district court following the intervention
application of a union health fund that raised federal issues in the case. In
November 2000, the federal district court remanded the case to state court on
the grounds that the removal was premature.
The trial judge in the state court, without a hearing, then immediately
denied the defendants' post-trial motions and entered judgment on the
compensatory and punitive damages awarded by the jury. PM Inc. and the Company
believe that the entry of judgment by the trial court is unconstitutional and
violates Florida law. PM Inc. has filed an appeal with respect to the entry of
judgment, class certification and numerous other reversible errors that have
occurred during the trial. PM Inc. has also posted a $100 million bond to stay
execution of the judgment with respect to the $74 billion in punitive damages
that has been awarded against it. The bond was posted pursuant to legislation
that was enacted in Florida in May 2000 that limits the size of the bond that
must be posted in order to stay execution of a judgment for punitive damages in
a certified class action to no more than $100 million, regardless of the amount
of punitive damages ("bond cap legislation"). Plaintiffs have indicated that
they believe the bond cap legislation is unconstitutional and may seek to
challenge the $100 million bond. If the bond were found to be invalid, it would
be commercially impossible for PM Inc. to post a bond in the full amount of the
judgment and, absent appellate relief, PM Inc. would not be able to stay any
attempted execution of the judgment in Florida. PM Inc. and the Company will
take all appropriate steps to seek to prevent this worst-case scenario from
occurring and believe these efforts should be successful.
In other developments, in August 1999, the trial judge denied a motion filed
by PM Inc. and other defendants to disqualify the judge. The motion asserted,
among other things, that the trial judge was required to disqualify himself
because he is a former smoker who has a serious medical condition of a type that
the plaintiffs claim, and the jury has 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
Appeals denied defendants' petition to disqualify the trial judge. 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, and in May 2000 the writ of certiorari was denied.
PM Inc. and the Company remain of the view that the Engle case should not
have been certified as a class action. The 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. As
indicated above, PM Inc. has filed an appeal challenging the class certification
and the compensatory and punitive damages awards, as well as numerous other
reversible errors that it believes occurred during the trial to date.
Pending and Upcoming Trials
On March 19, 2001, trial commenced in New York in a health care cost
recovery action in which PM Inc. is a defendant, and trial commenced in Florida
in an individual case brought by a flight attendant claiming damages from ETS in
which PM Inc. is a defendant. Also, on March 19, 2001, trial commenced in
California in an individual smoking and health case in which PM Inc. is a
defendant. In early April, trial is scheduled to begin in New Jersey in another
individual smoking and health case in which PM Inc. is a defendant.
In January 2001, the court granted defendants' motion for a mistrial in a
smoking and health class action in West Virginia in which PM Inc. is a
defendant, and in which plaintiffs seek creation of a trust fund to pay the
costs of monitoring the medical conditions of members of the purported class to
detect possible smoking-related illnesses. In March 2001, the court denied the
defendants' motion to decertify the class, and scheduled retrial of the case
beginning in September 2001.
As set forth in Exhibit 99.3 hereto, additional cases against PM Inc. and,
in some instances, the Company, are scheduled for trial through the end of 2001,
including two health care cost recovery actions; two asbestos contribution
cases; two purported smoking and health class actions and a
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purported Lights/Ultra Lights class action (discussed below); and an estimated
12 individual smoking and health cases, including a consolidated trial of
approximately 1,200 individual smoking and health cases scheduled to begin in
June 2001 in West Virginia. In addition, to date, approximately 25 cases
involving flight attendants' claims for damages from ETS are currently scheduled
for trial during 2001. Cases against other tobacco companies are also scheduled
for trial through the end of 2001. Trial dates, however, are subject to change.
Litigation Settlements
In November 1998, PM Inc. and certain other United States tobacco product
manufacturers entered into the Master Settlement Agreement (the "MSA") with 46
states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the
United States Virgin Islands, American Samoa and the Northern Marianas to settle
asserted and unasserted health care cost recovery and other claims. PM Inc. and
certain other United States tobacco product manufacturers had previously settled
similar claims brought by Mississippi, Florida, Texas and Minnesota (together
with the MSA, the "State Settlement Agreements") and an ETS smoking and health
class action brought on behalf of airline flight attendants. The State
Settlement Agreements and certain ancillary agreements are filed as exhibits to
various of the Company's reports filed with the Securities and Exchange
Commission, and such agreements and the ETS settlement are discussed in detail
therein. As set forth in Exhibit 99.2, to date, the MSA has received final
judicial approval in 51 of the 52 settling jurisdictions.
The State 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: 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: 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.
The State Settlement Agreements also include provisions relating to
advertising and marketing restrictions, public disclosure of certain industry
documents, limitations on challenges to certain tobacco control and underage use
laws, restrictions on lobbying activities and other provisions. See Item 1 (c).
Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and
Smoking -- State Settlement Agreements.
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 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, volumes, 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
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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, described in Exhibit 99.1, has arisen, challenging the
validity of the MSA and alleging violations of the antitrust laws.
SMOKING AND HEALTH LITIGATION
Plaintiffs' allegations of liability in smoking and health cases are based
on various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, breach of special duty, conspiracy, concert of
action, violations of deceptive trade practice laws and consumer protection
statutes, and claims under the federal and state RICO statutes. In certain of
these cases, plaintiffs claim that cigarette smoking exacerbated the injuries
caused by their exposure to asbestos. Plaintiffs in the smoking and health
actions seek various forms of relief, including compensatory and punitive
damages, treble/multiple damages and other statutory damages and penalties,
creation of medical monitoring and smoking cessation funds, disgorgement of
profits, and injunctive and equitable relief. Defenses raised in these cases
include lack of proximate cause, assumption of the risk, comparative fault
and/or contributory negligence, statutes of limitations and preemption by the
Federal Cigarette Labeling and Advertising Act.
In May 1996, the United States Court of Appeals for the Fifth Circuit held
in the Castano case that a class consisting of all "addicted" smokers nationwide
did not meet the standards and requirements of the federal rules governing class
actions. Since this class decertification, lawyers for plaintiffs have filed
numerous putative smoking and health class action suits in various state and
federal courts. In general, these cases purport to be brought on behalf of
residents of a particular state or states (although a few cases purport to be
nationwide in scope) and raise "addiction" claims similar to those raised in the
Castano case and, in many cases, claims of physical injury as well. As of
February 15, 2001, smoking and health putative class actions were pending in
Alabama, California, Florida, Hawaii, Illinois, Indiana, Iowa, Louisiana,
Massachusetts, Michigan, Missouri, Nevada, New Jersey, New Mexico, New York,
North Carolina, Pennsylvania, Tennessee, Texas, Utah and West Virginia, as well
as in Australia, Brazil, Canada and Israel. Class certification has been denied
or reversed by courts in 24 smoking and health class actions involving PM Inc.
in Arkansas, California (1), the District of Columbia, Illinois, Kansas,
Louisiana, Maryland, Michigan, Minnesota, New Jersey (6), New York (2), Ohio,
Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin, while
classes remain certified in the Engle case in Florida (discussed above), a
medical monitoring case in Louisiana, a medical monitoring case in West Virginia
(discussed above) and a case in California. Some of the decisions denying the
plaintiffs' motions for class certification 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.
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, multiple
damages and other statutory damages and penalties, injunctions prohibiting
alleged marketing and sales to minors, disclosure of research, disgorgement of
profits, funding of anti-smoking programs, disclosure of nicotine yields, and
payment of attorney and expert witness fees.
The claims asserted in these health care cost recovery actions include the
equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs'
payment of health care costs allegedly attributable to smoking, the equitable
claim of indemnity, common law claims of negligence, strict liability, breach of
express and implied warranty, violation of a voluntary undertaking or special
duty,
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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 payor of medical costs
(such as an insurer) can seek recovery of health care costs from a third party
solely by "standing in the shoes" of the injured party. Defendants argue that
plaintiffs should be required to bring any actions as subrogees of individual
health care recipients and should be subject to all defenses available against
the injured party.
Excluding the cases covered by the MSA, as of February 15, 2000, there were
an estimated 53 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," in 1999, the United States government filed a health care cost
recovery action 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, the Province of British Columbia, Canada and France and, in the United
States, by Bolivia, Ecuador, Guatemala, Honduras, the Kyrgyz Republic,
Nicaragua, the Province of Ontario, Canada, Panama, the Russian Federation,
Tajikistan, Thailand (voluntarily dismissed), Ukraine, Venezuela and seven
Brazilian states. The actions brought by Bolivia, Ecuador, Guatemala, Honduras,
Nicaragua, the Province of Ontario, Panama, the Russian Federation, Ukraine,
Venezuela and five Brazilian states were consolidated for pre-trial purposes and
transferred to the United States District Court for the District of Columbia. As
described below, the court has dismissed the claims of Guatemala, Nicaragua, the
Province of Ontario and Ukraine. The court remanded cases of Venezuela, Ecuador
and two Brazilian states to state court in Florida. Other entities have stated
that they are considering filing health care cost recovery actions.
Seven federal circuit courts of appeals, the Second, Third, Fifth, Seventh,
Eighth, Ninth and Eleventh circuits, as well as the Tennessee intermediate
appellate court, relying primarily on grounds that 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 refused to consider plaintiffs' appeals from the cases decided by
the courts of appeals for the Second, Third and Ninth Circuits.
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 district court for the District of
Columbia dismissed a lawsuit filed by Guatemala, ruling that the claimed
injuries were too remote. 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 August 2000, the federal district court for the District
of Columbia dismissed the claims of the Province of Ontario, and the Province
has appealed. In January 2001, the Superior Court of the District of Columbia
dismissed a suit brought by Argentine health plans finding that plaintiff's
claims were too remote to permit recovery. 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. In December 1999, the federal district court in the District of
Columbia denied defendants' motion to dismiss a suit filed by union and welfare
funds seeking reimbursement of health care expenditures allegedly caused by
tobacco products. Defendants are appealing this decision.
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CERTAIN OTHER TOBACCO-RELATED LITIGATION
Asbestos Contribution Cases: As of February 15, 2001, an estimated 10 suits
were pending on behalf of former asbestos manufacturers, asbestos manufacturers'
personal injury settlement trusts and an insurance company against domestic
tobacco manufacturers, including PM Inc. and others, and an additional eight
such suits had been filed but not yet served. 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 January 2001, a mistrial was declared in an asbestos
contribution case in New York.
Lights/Ultra Lights Cases: As of February 15, 2001, there were nine putative
class actions pending against PM Inc. and the Company, in Arizona, Florida,
Illinois, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania and Tennessee,
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. In February 2001, an
Illinois state court granted plaintiff's motion for class certification, and
trial in this case is scheduled for November 2001.
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 retailers 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. In February 2001, one plaintiff
moved for an order to show cause why PM Inc. should not be held in contempt of
court for allegedly violating the provision of the court's preliminary
injunction enjoining PM Inc. from precluding retailers from advertising or
conducting promotional programs for competitors.
Vending Machine Case: Plaintiffs, who began their case as a purported
nationwide class of cigarette vending machine operators, allege that PM Inc. has
violated the Robinson-Patman Act in connection with its promotional and
merchandising programs available to retail stores and not available to cigarette
vending machine operators. Plaintiffs request actual damages, treble damages,
injunctive relief, attorneys' fees and costs, and other unspecified relief. In
June 1999, the court denied plaintiffs' motion for a preliminary injunction.
Plaintiffs have withdrawn their request for class action status. Trial on the
claims of ten plaintiffs, which was set for November 2000, has been continued
without a new trial date being set, and the court heard PM Inc.'s motion for
summary judgment on those claims in November 2000. The claims of remaining
plaintiffs have been stayed pending disposition of the ten claims previously
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 alleged violations of California's Business
and Professions Code regarding unfair and fraudulent business practices.
Plaintiffs sought statutory penalties, injunctions barring the sale of
cigarettes or requiring issuance of appropriate warnings, restitution,
disgorgement of profits and other relief. Defendants' motion for summary
judgment was granted in part, and plaintiffs' "Proposition 65" claims were
dismissed. In August 2000, the parties to one of the cases entered into a
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settlement agreement, which was expressly conditioned upon a finding by the
California Attorney General that the settlement was in the public interest. The
Attorney General made that finding in October 2000. The parties to the remaining
action entered into a separate settlement agreement in October 2000. The two
settlement agreements, which together require PM Inc. to pay approximately
$245,000 to the plaintiffs as costs, collectively resolve all claims that were,
or could have been, brought in these two actions. In November 2000, the court
granted defendants' motion seeking approval of both settlements and entry of a
final judgment in both cases.
Tobacco Price Cases: As of February 15, 2001, there were 39 putative class
actions pending against PM Inc. and other domestic tobacco manufacturers as well
as, in certain instances, the Company and PMI alleging that the defendants
conspired to fix cigarette prices in violation of antitrust laws. Seven of the
putative class actions were filed in various federal district courts by direct
purchasers of tobacco products and the remaining 32 were filed in 15 states and
the District of Columbia by retail purchasers of tobacco products. The seven
federal class actions have been consolidated; in November 2000, the court
hearing the consolidated cases granted in part and denied in part defendants'
motion to dismiss and to strike portions of the consolidated complaint. The
court has ordered the provisional certification of a class of plaintiffs who
made direct purchases between February 1996 and February 2000. On March 12,
defendants filed a motion to dismiss the fraudulent concealment allegations in
the second amended complaint. The cases are listed in Exhibit 99.1.
Tobacco Growers' Case: In February 2000, a suit was filed on behalf of a
purported class of tobacco growers and quota-holders and amended complaints were
filed in May 2000 and in August 2000. The second amended complaint alleges that
cigarette manufacturers, including PM Inc., violated antitrust laws by
bid-rigging and allocating purchases at tobacco auctions and by conspiring to
undermine the tobacco quota and price-support system administered by the federal
government. In October 2000, defendants filed motions to dismiss the amended
complaint and to transfer the case, and plaintiffs filed a motion for class
certification. In November 2000, the court granted defendants' motion to
transfer the case to the United States District Court for the Middle District of
North Carolina. In December 2000, plaintiffs served a motion for leave to file a
third amended complaint to add tobacco leaf buyers as defendants. This motion
was granted and the additional parties were served in February 2001.
Cigarette Importation Cases: As of February 15, 2001, the European
Community, various Departments of Colombia and Ecuador had filed suits in the
United States against the Company and certain of its subsidiaries, including PM
Inc. and PMI, and other cigarette manufacturers and their affiliates, alleging
that defendants illegally imported cigarettes into the plaintiff jurisdictions
in an effort to evade taxes. The claims asserted in these cases include
negligence, negligent misrepresentation, unjust enrichment, violations of RICO
and its state-law equivalents and conspiracy. Plaintiffs in these cases seek
actual damages, treble damages and undisclosed injunctive relief. Ecuador's
lawsuit has not been served. In January 2001, the Company and certain
subsidiaries moved to dismiss the complaints filed in the European Community and
Colombia cases on the grounds of lack of standing, failure to join indispensable
parties, and failure to state a claim for relief.
Consolidated Putative Punitive Damages Cases: In September 2000, a putative
class action was filed in the federal district court in the Eastern District of
New York that purports to consolidate punitive damages claims in ten
tobacco-related actions currently pending in the federal district court in the
Eastern Districts of New York and Pennsylvania. In November 2000, the court
hearing this case indicated that, in its view, it appears likely that plaintiffs
will be able to demonstrate a basis for certification of an opt-out compensatory
damages class and a non-opt-out punitive damages class. In December 2000,
plaintiffs served a motion for leave to file an amended complaint and a motion
for class certification. A hearing on plaintiffs' motion for class certification
was held on March 15, 2001.
CERTAIN OTHER ACTIONS
National Cheese Exchange Cases: Since 1996, seven putative class actions
have been filed by various dairy farmers alleging that Kraft, its subsidiaries
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. Three cases were consolidated in state court
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in Wisconsin, and in November 1999, the court granted Kraft's motion for summary
judgment. The plaintiffs' appeal is now pending before the Wisconsin Court of
Appeals. Kraft's motions to dismiss were granted in the cases pending in
Illinois state court and in the United States District Court for the Central
District of California. Appellate courts have reversed and remanded both cases
for further proceedings. No classes have been certified in any of the cases.
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 $2.1 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
overturned 184 of the assessments. The decisions to overturn 163 assessments
have been appealed by the tax authorities to the regional appellate court in
Milan. To date, the regional appellate court has rejected 51 of the appeals
filed by the tax authorities. The tax authorities have appealed 31 of the 51
decisions of the regional appellate court to the Italian Supreme Court. The
remaining 20 decisions are expected to be appealed as well. In a separate
proceeding in October 1997, a Naples 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. In December 2000, the Milan prosecutor took certain
procedural steps that may indicate his intention to recommend that charges be
pursued against certain of these present and former officers and directors. 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.
Unfavorable verdicts awarding compensatory and punitive damages have been
returned in the Engle smoking and health class action trial, and judgment has
been entered against PM Inc. It is possible that additional cases could be
decided unfavorably and that there could be further adverse developments in the
Engle case. 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 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, as well as valid bases for appeal of adverse verdicts
against it. All such cases are, and will continue to be, vigorously defended.
However, the Company and its subsidiaries may enter into discussions in an
attempt to settle particular cases if they believe it is in the best interests
of the Company's stockholders to do so.
Reference is made to Note 15 to the Company's consolidated financial
statements which are incorporated herein by reference to the 2000 Annual Report
for a description of certain pending legal proceedings. Reference is also made
to Exhibit 99.1 to this Form 10-K for a list of pending smoking and
24
<PAGE>
health class actions, health care cost recovery actions, and certain other
actions, and for a description of certain developments in such proceedings;
Exhibit 99.2 for the status of the MSA in each of the settling jurisdictions;
and Exhibit 99.3 for a schedule of smoking and health class actions, health care
cost recovery and certain other actions that are currently scheduled for trial
through 2001. Copies of Note 15 and Exhibits 99.1, 99.2 and 99.3 are available
upon written request to the Corporate Secretary, Philip Morris Companies Inc.,
120 Park Avenue, New York, NY 10017.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following are the executive officers of the Company as of February 28,
2001:
<TABLE>
<CAPTION>
NAME OFFICE AGE
- ---- ------ ---
<S> <C> <C>
Geoffrey C. Bible............. Chairman of the Board and Chief Executive Officer 63
John D. Bowlin................ President and Chief Executive Officer of Miller Brewing 50
Company
Bruce S. Brown................ Vice President, Taxes 61
Louis C. Camilleri............ Senior Vice President and Chief Financial Officer 46
Nancy J. De Lisi.............. Vice President and Treasurer 50
Roger K. Deromedi............. Director and Co-Chief Executive Officer of Kraft Foods 47
Inc.; and President and Chief Executive Officer of
Kraft Foods International Inc.
Betsy D. Holden............... Director and Co-Chief Executive Officer of Kraft Foods 45
Inc.; and President and Chief Executive Officer of
Kraft Foods North America Inc.
John R. Nelson................ President and Chief Executive Officer of Philip Morris 48
International Inc.
G. Penn Holsenbeck............ Vice President, Associate General Counsel and Corporate 54
Secretary
George R. Lewis............... President and Chief Executive Officer of Philip Morris 59
Capital Corporation
Steven C. Parrish............. Senior Vice President, Corporate Affairs 50
Timothy A. Sompolski.......... Senior Vice President, Human Resources and 48
Administration
Michael E. Szymanczyk......... President and Chief Executive Officer of Philip Morris 52
Incorporated
Joseph A. Tiesi............... Vice President and Controller 42
Charles R. Wall............... Senior Vice President and General Counsel 55
William H. Webb............... Chief Operating Officer 61
</TABLE>
All of the above-mentioned officers have been employed by the Company in
various capacities during the past five years.
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information called for by this Item is hereby incorporated by reference
to the paragraph captioned "Quarterly Financial Data (Unaudited)" on page 59 of
the 2000 Annual Report and made a part hereof.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this Item is hereby incorporated by reference
to the information with respect to 1996-2000 appearing under the caption
"Selected Financial Data" on page 35 of the 2000 Annual Report and made a part
hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this Item is hereby incorporated by reference
to the paragraphs captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 20 to 34 of the 2000 Annual Report
and made a part hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information called for by this Item is hereby incorporated by reference
to the paragraphs in the MD&A captioned "Market Risk" and "Value at Risk" on
pages 32 to 33 of the 2000 Annual Report and made a part hereof.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is hereby incorporated by reference
to the 2000 Annual Report as set forth under the caption "Quarterly Financial
Data (Unaudited)" on page 59 and in the Index to Consolidated Financial
Statements and Schedules (see Item 14) and made a part hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Except for the information relating to the executive officers of the Company
set forth in Part I of this Report, the information called for by Items 10-13 is
hereby incorporated by reference to the Company's definitive proxy statement for
use in connection with its annual meeting of stockholders to be held on April
26, 2001, filed with the Securities and Exchange Commission on March 9, 2001,
and is made a part hereof.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Index to Consolidated Financial Statements and Schedules
<TABLE>
<CAPTION>
REFERENCE
-----------------------------
FORM 10-K 2000
ANNUAL REPORT ANNUAL REPORT
PAGE PAGE
---- ----
<S> <C> <C>
Data incorporated by reference to the Company's 2000 Annual
Report:
Consolidated Balance Sheets at December 31, 2000 and
1999.................................................. -- 36-37
Consolidated Statements of Earnings for the years ended
December 31, 2000, 1999 and 1998...................... -- 38
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998.......... -- 40
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998................ -- 38-39
Notes to Consolidated Financial Statements.............. -- 41-59
Report of Independent Accountants....................... -- 60
Data submitted herewith:
Report of Independent Accountants....................... S-1 --
Financial Statement Schedule -- Valuation and Qualifying
Accounts.............................................. S-2 --
</TABLE>
Schedules other than those listed above have been omitted either because
such schedules are not required or are not applicable.
(b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K
dated November 22, 2000, covering Item 5 (Other Events) and Item 7
(Financial Statements, Pro Forma Financial Information and Exhibits) of
Form 8-K and included the following: (1) unaudited pro forma condensed
combined balance sheet of the Company and Nabisco Holdings Corp. at
September 30, 2000 and unaudited pro forma condensed combined statements
of earnings of the Company and Nabisco Holdings Corp. for the nine
months ended September 30, 2000, and for the year ended December 31,
1999, all in connection with the Company's acquisition of Nabisco
Holdings Corp. The Company filed a Current Report on Form 8-K dated
December 11, 2000 covering Item 2 (Acquisition or Disposition of Assets)
and Item 7 (Financial Statements, Pro Forma Financial Information and
Exhibits) in connection with the completed acquisition of Nabisco
Holdings Corp. Subsequent to the last quarter of the period for which
this Report is filed, the Company filed (i) a Current Report on Form 8-K
on January 31, 2001, relating to its 2000 financial statements; (ii) a
Current Report on Form 8-K/A on February 22, 2001, which amends the
Current Report on Form 8-K dated December 11, 2000; and (iii) a Current
Report on Form 8-K covering Item 9 (Regulation FD disclosure) on
March 16, 2001.
(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.1-10.15 are management contracts, compensatory plans or
arrangements):
<TABLE>
<S> <C>
3.1 -- Restated Articles of Incorporation of the Company.(1)
3.2 -- By-Laws, as amended, of the Company.
4.1 -- Indenture dated as of August 1, 1990, between the Company
and The Chase Manhattan Bank (formerly known as Chemical
Bank), Trustee.(2)
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
4.2 -- First Supplemental Indenture dated as of February 1, 1991,
to Indenture dated as of August 1, 1990, between the
Company and The Chase Manhattan Bank (formerly known as
Chemical Bank) Trustee.(3)
4.3 -- Second Supplemental Indenture dated as of January 21, 1992,
to Indenture dated as of August 1, 1990, between the Company
and The Chase Manhattan Bank (formerly known as Chemical Bank)
Trustee.(4)
4.4 -- Indenture dated as of December 2, 1996, between the Company
and The Chase Manhattan Bank, Trustee.(5)
4.5 -- 5-Year Revolving Credit Agreement dated as of October 14,
1997, among the Company, and the Initial Lenders named
therein and Citibank, N.A., and The Chase Manhattan Bank as
Administrative Agents and Credit Suisse First Boston, as
Syndication Agent, and Deutsche Bank AG, New York Branch, as
Documentation Agent.(6)
10.1 -- Financial Counseling Program.(7)
10.2 -- Philip Morris Benefit Equalization Plan, as amended.(8)
10.3 -- Form of Employee Grantor Trust Enrollment Agreement.(9)
10.4 -- Automobile Policy.(7)
10.5 -- Form of Employment Agreement between the Company and its
executive officers.(10)
10.6 -- Supplemental Management Employees' Retirement Plan of the
Company, as amended.(7)
10.7 -- The Philip Morris 1992 Incentive Compensation and Stock
Option Plan.(7)
10.8 -- 1992 Compensation Plan for Non-Employee Directors, as
amended.(11)
10.9 -- Unit Plan for Incumbent Non-Employee Directors, effective
January 1, 1996.(9)
10.10 -- The Philip Morris 1987 Long Term Incentive Plan.(7)
10.11 -- Form of Executive Master Trust between the Company, The
Chase Manhattan Bank (formerly known as Chemical Bank) and
Handy Associates.(10)
10.12 -- 1997 Performance Incentive Plan.(12)
10.13 -- Philip Morris Long-Term Disability Benefit Equalization
Plan, as amended.(7)
10.14 -- Philip Morris Survivor Income Benefit Equalization Plan, as
amended.(7)
10.15 -- Post-Retirement Consulting Agreement between the Company and
Murray H. Bring.(20)
10.16 -- 2000 Performance Incentive Plan.(21)
10.17 -- 2000 Stock Compensation Plan for Non-Employee Directors.(21)
10.18 -- Comprehensive Settlement Agreement and Release dated October
17, 1997, related to settlement of Mississippi health care cost
recovery action.(7)
10.19 -- Settlement Agreement dated August 25, 1997, related to
settlement of Florida health care cost recovery action.(13)
10.20 -- Comprehensive Settlement Agreement and Release dated January
16, 1998, related to settlement of Texas health care cost recovery
action.(14)
10.21 -- Settlement Agreement and Stipulation for Entry of Judgment,
dated May 8, 1998, regarding the claims of the State of Minnesota.(15)
10.22 -- Settlement Agreement and Release, dated May 8, 1998,
regarding the claims of Blue Cross and Blue Shield of
Minnesota.(15)
10.23 -- Stipulation of Amendment to Settlement Agreement and For
Entry of Agreed Order, dated July 2, 1998, regarding the
settlement of the Mississippi health care cost recovery
action.(16)
10.24 -- Stipulation of Amendment to Settlement Agreement and For
Entry of Consent Decree, dated July 24, 1998, regarding the
settlement of the Texas health care cost recovery
action.(16)
10.25 -- Stipulation of Amendment to Settlement Agreement and For
Entry of Consent Decree, dated September 11, 1998, regarding
the settlement of the Florida health care cost recovery
action.(17)
10.26 -- Master Settlement Agreement relating to state health care
cost recovery and other claims.(18)
10.27 -- Agreement and Plan of Merger dated as of June 25, 2000,
among Nabisco Holdings Corp., Philip Morris Companies Inc.
and Strike Acquisition Corp.(22)
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
10.28 -- Voting and Indemnity Agreement dated as of June 25, 2000,
between Nabisco Group Holdings Corp. and Philip Morris
Companies Inc.(22)
12 -- Statements re computation of ratios.(19)
13 -- Pages 20-60 of the 2000 Annual Report, but only to the
extent set forth in Items 1, 3, 5-7, 7A, 8 and 14 hereof.
With the exception of the aforementioned information
incorporated by reference in this Annual Report on
Form 10-K, the 2000 Annual Report is not to be deemed
"filed" as part of this Report.
21 -- Subsidiaries of the Company.
23 -- Consent of independent accountants.
24 -- Powers of attorney.
99.1 -- Certain Pending Litigation Matters and Recent Developments.
99.2 -- Status of the Master Settlement Agreement.
99.3 -- Trial Schedule.
</TABLE>
- ---------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-36450) dated August 22, 1990.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-39059) dated February 21, 1991.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-45210) dated January 22, 1992.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-3/A (No. 333-35143) dated January 29, 1998.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-8940).
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997.
(12) Incorporated by reference to the Company's proxy statement dated March 10,
1997.
(13) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 25, 1997.
(14) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 16, 1998.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1998.
29
<PAGE>
(18) Incorporated by reference to the Company's Current Report on Form 8-K dated
November 25, 1998, as amended by Form 8/K-A dated December 24, 1998.
(19) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 26, 2000.
(20) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
(21) Incorporated by reference to the Company's proxy statement dated March 10,
2000.
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2000.
30
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PHILIP MORRIS COMPANIES INC.
By: /s/ GEOFFREY C. BIBLE
-----------------------------------
(Geoffrey C. Bible,
Chairman of the Board and
Date: March 29, 2001 Chief Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GEOFFREY C. BIBLE Director, Chairman of the Board March 29, 2001
- --------------------------------------- and Chief Executive Officer
(Geoffrey C. Bible)
/s/ LOUIS C. CAMILLERI Senior Vice President and Chief March 29, 2001
- --------------------------------------- Financial Officer
(Louis C. Camilleri)
/s/ JOSEPH A. TIESI Vice President and Controller March 29, 2001
- ---------------------------------------
(Joseph A. Tiesi)
*ELIZABETH E. BAILEY,
HAROLD BROWN,
JANE EVANS,
J. DUDLEY FISHBURN,
ROBERT E. R. HUNTLEY,
BILLIE JEAN KING,
JOHN D. NICHOLS,
LUCIO A. NOTO,
JOHN S. REED,
CARLOS SLIM HELU,
STEPHEN M. WOLF Directors
*BY: /s/ LOUIS C. CAMILLERI March 29, 2001
----------------------------
(Louis C. Camilleri
Attorney-in-fact)
</TABLE>
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
PHILIP MORRIS COMPANIES INC.:
Our audits of the consolidated financial statements referred to in our
report dated January 29, 2001 appearing in the 2000 Annual Report to
Shareholders of Philip Morris Companies Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the financial statement schedule listed in
Item 14(a) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 29, 2001
S-1
<PAGE>
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN MILLIONS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------- ---------- ----------------------- ---------- ----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- --------- -------- -------- ---------- ---------
(a) (b)
<S> <C> <C> <C> <C> <C>
2000:
CONSUMER PRODUCTS:
Allowance for discounts............. $ 7 $815 $ -- $813 $ 9
Allowance for doubtful accounts..... 180 3 62 35 210
Allowance for returned goods........ 8 111 -- 111 8
---- ---- ------- ---- ----
$195 $929 $ 62 $959 $227
---- ---- ------- ---- ----
---- ---- ------- ---- ----
FINANCIAL SERVICES:
Allowance for losses................ $118 $ 3 $ -- $ -- $121
---- ---- ------- ---- ----
---- ---- ------- ---- ----
1999:
CONSUMER PRODUCTS:
Allowance for discounts............. $ 9 $760 $ -- $762 $ 7
Allowance for doubtful accounts..... 192 46 1 59 180
Allowance for returned goods........ 21 100 -- 113 8
---- ---- ------- ---- ----
$222 $906 $ 1 $934 $195
---- ---- ------- ---- ----
---- ---- ------- ---- ----
FINANCIAL SERVICES:
Allowance for losses................ $116 $ 2 $ -- $ -- $118
---- ---- ------- ---- ----
---- ---- ------- ---- ----
1998:
CONSUMER PRODUCTS:
Allowance for discounts............. $ 8 $607 $ -- $606 $ 9
Allowance for doubtful accounts..... 157 36 27 28 192
Allowance for returned goods........ 6 79 -- 64 21
---- ---- ------- ---- ----
$171 $722 $ 27 $698 $222
---- ---- ------- ---- ----
---- ---- ------- ---- ----
FINANCIAL SERVICES:
Allowance for losses................ $101 $ 15 $ -- $ -- $116
---- ---- ------- ---- ----
---- ---- ------- ---- ----
</TABLE>
- ---------
Notes:
(a) Primarily related to divestitures, acquisitions and currency translation.
(b) Represents charges for which allowances were created.
S-2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>EXHIBIT 3.2
<TEXT>
<PAGE>
Exhibit 3.2
BY-LAWS
of
PHILIP MORRIS COMPANIES INC.
ARTICLE I
Meetings of Stockholders
Section 1. Annual Meetings. - The annual meeting of the stockholders
for the election of directors and for the transaction of such other business as
may properly come before the meeting, and any postponement or adjournment
thereof, shall be held on such date and at such time as the Board of Directors
may in its discretion determine.
Section 2. Special Meetings. - Unless otherwise provided by law,
special meetings of the stockholders may be called by the chairman of the Board
of Directors, or in the chairman's absence, the deputy chairman of the Board of
Directors (if any), the vice chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) or, in the
absence of all of the foregoing, an executive vice president or by order of the
Board of Directors, whenever deemed necessary.
Section 3. Place of Meetings. - All meetings of the stockholders shall
be held at such place in the Commonwealth of Virginia as from time to time may
be fixed by the Board of Directors.
Section 4. Notice of Meetings. - Notice, stating the place, day and
hour and, in the case of a special meeting, the purpose or purposes for which
the meeting is called, shall be given not less than ten nor more than sixty days
before the date of the meeting (except as a different time is specified herein
or by law), to each stockholder of record having voting power in respect of the
business to be transacted thereat.
Notice of a stockholders' meeting to act on an amendment of the
Articles of Incorporation, a plan of merger or share exchange, a proposed sale
of all, or substantially all of the Corporation's assets, otherwise than in the
usual and regular course of business, or the dissolution of the Corporation
shall be given not less than twenty-five nor more than sixty days before the
date of the meeting and shall be accompanied, as appropriate, by a copy of the
proposed amendment, plan of merger or share exchange or sale agreement.
May 4, 2000
-1-
<PAGE>
Notwithstanding the foregoing, a written waiver of notice signed by the
person or persons entitled to such notice, either before or after the time
stated therein, shall be equivalent to the giving of such notice. A stockholder
who attends a meeting shall be deemed to have (i) waived objection to lack of
notice or defective notice of the meeting, unless at the beginning of the
meeting he or she objects to holding the meeting or transacting business at the
meeting, and (ii) waived objection to consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the meeting
notice, unless he or she objects to considering the matter when it is presented.
Section 5. Quorum. - At all meetings of the stockholders, unless a
greater number or voting by classes is required by law, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, action on a matter is approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless the vote
of a greater number or voting by classes is required by law or the Articles of
Incorporation, and except that in elections of directors those receiving the
greatest number of votes shall be deemed elected even though not receiving a
majority. Less than a quorum may adjourn.
Section 6. Organization and Order of Business. - At all meetings of the
stockholders, the chairman of the Board of Directors or, in the chairman's
absence, the deputy chairman of the Board of Directors (if any), the vice
chairman of the Board of Directors (if any), the president (if one shall have
been elected by the Board of Directors) or, in the absence of all of the
foregoing, the most senior executive vice president, shall act as chairman. In
the absence of all of the foregoing officers or, if present, with their consent,
a majority of the shares entitled to vote at such meeting, may appoint any
person to act as chairman. The secretary of the Corporation or, in the
secretary's absence, an assistant secretary, shall act as secretary at all
meetings of the stockholders. In the event that neither the secretary nor any
assistant secretary is present, the chairman may appoint any person to act as
secretary of the meeting.
The chairman shall have the right and authority to prescribe such
rules, regulations and procedures and to do all such acts and things as are
necessary or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the dismissal of business not
properly presented, the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof and the opening and closing of the voting polls.
At each annual meeting of stockholders, only such business shall be
conducted as shall have been properly brought before the meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of the
Corporation who shall be entitled to
-2-
<PAGE>
vote at such meeting and who complies with the notice procedures set forth in
this Section 6. In addition to any other applicable requirements, for business
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the secretary of
the Corporation. To be timely, a stockholder's notice must be given, either by
personal delivery or by United States certified mail, postage prepaid, and
received at the principal executive offices of the Corporation (i) not less than
120 days nor more than 150 days before the first anniversary of the date of the
Corporation's proxy statement in connection with the last annual meeting of
stockholders or (ii) if no annual meeting was held in the previous year or the
date of the applicable annual meeting has been changed by more than 30 days from
the date contemplated at the time of the previous year's proxy statement, not
less than 60 days before the date of the applicable annual meeting. A
stockholder's notice to the secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting, including the
complete text of any resolutions to be presented at the annual meeting, and the
reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the Corporation's stock transfer books, of such
stockholder proposing such business, (c) a representation that such stockholder
is a stockholder of record and intends to appear in person or by proxy at such
meeting to bring the business before the meeting specified in the notice, (d)
the class and number of shares of stock of the Corporation beneficially owned by
the stockholder and (e) any material interest of the stockholder in such
business. Notwithstanding anything in the By-Laws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 6. The chairman of an annual meeting shall, if the
facts warrant, determine that the business was not brought before the meeting in
accordance with the procedures prescribed by this Section 6. If the chairman
should so determine, he or she shall so declare to the meeting and the business
not properly brought before the meeting shall not be transacted. Notwithstanding
the foregoing provisions of this Section 6, a stockholder seeking to have a
proposal included in the Corporation's proxy statement shall comply with the
requirements of Regulation 14A under the Securities Exchange Act of 1934, as
amended (including, but not limited to, Rule 14a-8 or its successor provision).
The secretary of the Corporation shall deliver each such stockholder's notice
that has been timely received to the Board of Directors or a committee
designated by the Board of Directors for review.
Section 7. Voting. - A stockholder may vote his or her shares in person
or by proxy. Any proxy shall be delivered to the secretary of the meeting at or
prior to the time designated by the chairman or in the order of business for so
delivering such proxies. No proxy shall be valid after eleven months from its
date, unless otherwise provided in the proxy. Each holder of record of stock of
any class shall, as to all matters in respect of which stock of such class has
voting power, be entitled to such vote as is provided in the Articles of
Incorporation for each share of stock of such class standing
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<PAGE>
in the holders's name on the books of the Corporation. Unless required by
statute or determined by the chairman to be advisable, the vote on any question
need not be by ballot. On a vote by ballot, each ballot shall be signed by the
stockholder voting or by such stockholder's proxy, if there be such proxy.
Section 8. Written Authorization. - A stockholder or a stockholder's
duly authorized attorney-in-fact may execute a writing authorizing another
person or persons to act for him or her as proxy. Execution may be accomplished
by the stockholder or such stockholder's duly authorized attorney-in-fact or
authorized officer, director, employee or agent signing such writing or causing
such stockholder's signature to be affixed to such writing by any reasonable
means including, but not limited to, by facsimile signature.
Section 9. Electronic Authorization. - The secretary or any vice
president may approve procedures to enable a stockholder or a stockholder's duly
authorized attorney-in-fact to authorize another person or persons to act for
him or her as proxy by transmitting or authorizing the transmission of a
telegram, cablegram, internet transmission, telephone transmission or other
means of electronic transmission to the person who will be the holder of the
proxy or to a proxy solicitation firm, proxy support service organization or
like agent duly authorized by the person who will be the holder of the proxy to
receive such transmission, provided that any such transmission must either set
forth or be submitted with information from which the inspectors of election can
determine that the transmission was authorized by the stockholder or the
stockholder's duly authorized attorney-in-fact. If it is determined that such
transmissions are valid, the inspectors shall specify the information upon which
they relied. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section 9
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used, provided that such copy, facsimile telecommunication or other reproduction
shall be a complete reproduction of the entire original writing or transmission.
Section 10. Inspectors. - At every meeting of the stockholders for
election of directors, the proxies shall be received and taken in charge, all
ballots shall be received and counted and all questions concerning the
qualifications of voters, the validity of proxies, and the acceptance or
rejection of votes shall be decided, by two or more inspectors. Such inspectors
shall be appointed by the chairman of the meeting. They shall be sworn
faithfully to perform their duties and shall in writing certify to the returns.
No candidate for election as director shall be appointed or act as inspector.
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<PAGE>
ARTICLE II
Board of Directors
Section 1. General Powers. - The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors.
Section 2. Number. - The number of directors shall be thirteen (13).
Section 3. Term of Office and Qualification. - Each director shall
serve for the term for which he or she shall have been elected and until a
successor shall have been duly elected.
Section 4. Nomination and Election of Directors. - At each annual
meeting of stockholders, the stockholders entitled to vote shall elect the
directors. No person shall be eligible for election as a director unless
nominated in accordance with the procedures set forth in this Section 4.
Nominations of persons for election to the Board of Directors may be made by the
Board of Directors or any committee designated by the Board of Directors or by
any stockholder entitled to vote for the election of directors at the applicable
meeting of stockholders who complies with the notice procedures set forth in
this Section 4. Such nominations, other than those made by the Board of
Directors or any committee designated by the Board of Directors, may be made
only if written notice of a stockholder's intent to nominate one or more persons
for election as directors at the applicable meeting of stockholders has been
given, either by personal delivery or by United States certified mail, postage
prepaid, to the secretary of the Corporation and received (i) not less than 120
days nor more than 150 days before the first anniversary of the date of the
Corporation's proxy statement in connection with the last annual meeting of
stockholders, or (ii) if no annual meeting was held in the previous year or the
date of the applicable annual meeting has been changed by more than 30 days from
the date contemplated at the time of the previous year's proxy statement, not
less than 60 days before the date of the applicable annual meeting, or (iii)
with respect to any special meeting of stockholders called for the election of
directors, not later than the close of business on the seventh day following the
date on which notice of such meeting is first given to stockholders. Each such
stockholder's notice shall set forth (a) as to the stockholder giving the
notice, (i) the name and address, as they appear on the Corporation's stock
transfer books, of such stockholder, (ii) a representation that such stockholder
is a stockholder of record and intends to appear in person or by proxy at such
meeting to nominate the person or persons specified in the notice, (iii) the
class and number of shares of stock of the Corporation beneficially owned by
such stockholder, and (iv) a description of all arrangements or understandings
between such stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made by such stockholder; and (b) as to each person whom the
stockholder proposes to nominate for
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<PAGE>
election as a director, (i) the name, age, business address and, if known,
residence address of such person, (ii) the principal occupation or employment of
such person, (iii) the class and number of shares of stock of the Corporation
which are beneficially owned by such person, (iv) any other information relating
to such person that is required to be disclosed in solicitations of proxies for
election of directors or is otherwise required by the rules and regulations of
the Securities and Exchange Commission promulgated under the Securities Exchange
Act of 1934, as amended, and (v) the written consent of such person to be named
in the proxy statement as a nominee and to serve as a director if elected. The
secretary of the Corporation shall deliver each such stockholder's notice that
has been timely received to the Board of Directors or a committee designated by
the Board of Directors for review. Any person nominated for election as director
by the Board of Directors or any committee designated by the Board of Directors
shall, upon the request of the Board of Directors or such committee, furnish to
the secretary of the Corporation all such information pertaining to such person
that is required to be set forth in a stockholder's notice of nomination. The
chairman of the meeting of stockholders shall, if the facts warrant, determine
that a nomination was not made in accordance with the procedures prescribed by
this Section 4. If the chairman should so determine, he or she shall so declare
to the meeting and the defective nomination shall be disregarded.
Section 5. Organization. - At all meetings of the Board of Directors,
the chairman of the Board of Directors or, in the chairman's absence, the deputy
chairman of the Board of Directors (if any), the vice chairman of the Board of
Directors (if any), the president (if one shall have been elected by the Board
of Directors) or, in the absence of all of the foregoing, the senior most
executive vice president, shall act as chairman of the meeting. The secretary of
the Corporation or, in the secretary's absence, an assistant secretary, shall
act as secretary of meetings of the Board of Directors. In the event that
neither the secretary nor any assistant secretary shall be present at such
meeting, the chairman of the meeting shall appoint any person to act as
secretary of the meeting.
Section 6. Vacancies. - Any vacancy occurring in the Board of
Directors, including a vacancy resulting from amending these By-Laws to increase
the number of directors by thirty percent or less, may be filled by the
affirmative vote of a majority of the remaining directors though less than a
quorum of the Board of Directors.
Section 7. Place of Meeting. - Meetings of the Board of Directors,
regular or special, may be held either within or without the Commonwealth of
Virginia.
Section 8. Organizational Meeting. - The annual organizational meeting
of the Board of Directors shall be held immediately following adjournment of the
annual meeting of stockholders and at the same place, without the requirement of
any notice other than this provision of the By-Laws.
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<PAGE>
Section 9. Regular Meetings: Notice. - Regular meetings of the Board of
Directors shall be held at such times and places as it may from time to time
determine. Notice of such meetings need not be given if the time and place have
been fixed at a previous meeting.
Section 10. Special Meetings. - Special meetings of the Board of
Directors shall be held whenever called by order of the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the vice
chairman of the Board of Directors (if any), the president (if any) or two of
the directors. Notice of each such meeting, which need not specify the business
to be transacted thereat, shall be mailed to each director, addressed to his or
her residence or usual place of business, at least two days before the day on
which the meeting is to be held, or shall be sent to such place by telegraph,
telex or telecopy or be delivered personally or by telephone, not later than the
day before the day on which the meeting is to be held.
Section 11. Waiver of Notice. - Whenever any notice is required to be
given to a director of any meeting for any purpose under the provisions of law,
the Articles of Incorporation or these By-Laws, a waiver thereof in writing
signed by the person or persons entitled to such notice, either before or after
the time stated therein, shall be equivalent to the giving of such notice. A
director's attendance at or participation in a meeting waives any required
notice to him or her of the meeting unless at the beginning of the meeting or
promptly upon the director's arrival, he or she objects to holding the meeting
or transacting business at the meeting and does not thereafter vote for or
assent to action taken at the meeting.
Section 12. Quorum and Manner of Acting. - Except where otherwise
provided by law, a majority of the directors fixed by these By-Laws at the time
of any regular or special meeting shall constitute a quorum for the transaction
of business at such meeting, and the act of a majority of the directors present
at any such meeting at which a quorum is present shall be the act of the Board
of Directors. In the absence of a quorum, a majority of those present may
adjourn the meeting from time to time until a quorum be had. Notice of any such
adjourned meeting need not be given.
Section 13. Order of Business. - At all meetings of the Board of
Directors business may be transacted in such order as from time to time the
Board of Directors may determine.
Section 14. Committees. - In addition to the executive committee
authorized by Article III of these By-Laws, other committees, consisting of two
or more directors, may be designated by the Board of Directors by a resolution
adopted by the greater number of (i) a majority of all directors in office at
the time the action is being taken or (ii) the number of directors required to
take action under Article II, Section 12 hereof.
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<PAGE>
Any such committee, to the extent provided in the resolution of the Board of
Directors designating the committee, shall have and may exercise the powers and
authority of the Board of Directors in the management of the business and
affairs of the Corporation, except as limited by law.
ARTICLE III
Executive Committee
Section 1. How Constituted and Powers. - The Board of Directors, by
resolution adopted pursuant to Article II, Section 14 hereof, may designate, in
addition to the chairman of the Board of Directors, one or more directors to
constitute an executive committee, who shall serve during the pleasure of the
Board of Directors. The executive committee, to the extent provided in such
resolution and permitted by law, shall have and may exercise all of the
authority of the Board of Directors.
Section 2. Organization, Etc. - The executive committee may choose a
chairman and secretary. The executive committee shall keep a record of its acts
and proceedings and report the same from time to time to the Board of Directors.
Section 3. Meetings. - Meetings of the executive committee may be
called by any member of the committee. Notice of each such meeting, which need
not specify the business to be transacted thereat, shall be mailed to each
member of the committee, addressed to his or her residence or usual place of
business, at least two days before the day on which the meeting is to be held or
shall be sent to such place by telegraph, telex or telecopy or be delivered
personally or by telephone, not later than the day before the day on which the
meeting is to be held.
Section 4. Quorum and Manner of Acting. - A majority of the executive
committee shall constitute a quorum for transaction of business, and the act of
a majority of those present at a meeting at which a quorum is present shall be
the act of the executive committee. The members of the executive committee shall
act only as a committee, and the individual members shall have no powers as
such.
Section 5. Removal. - Any member of the executive committee may be
removed, with or without cause, at any time, by the Board of Directors.
Section 6. Vacancies. - Any vacancy in the executive committee shall be
filled by the Board of Directors.
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<PAGE>
ARTICLE IV
Officers
Section 1. Number. - The officers of the Corporation shall be a
chairman of the Board of Directors, a deputy chairman of the Board of Directors
(if elected by the Board of Directors), a president (if elected by the Board of
Directors), one or more vice chairmen of the Board of Directors (if elected by
the Board of Directors), a chief operating officer (if elected by the Board of
Directors), one or more vice presidents (one or more of whom may be designated
executive vice president or senior vice president), a treasurer, a controller, a
secretary, one or more assistant treasurers, assistant controllers and assistant
secretaries and such other officers as may from time to time be chosen by the
Board of Directors. Any two or more offices may be held by the same person.
Section 2. Election, Term of Office and Qualifications. - All officers
of the Corporation shall be chosen annually by the Board of Directors, and each
officer shall hold office until a successor shall have been duly chosen and
qualified or until the officer resigns or is removed in the manner hereinafter
provided. The chairman of the Board of Directors, the deputy chairman of the
Board of Directors (if any), the president (if any) and the vice chairmen of the
Board of Directors (if any) shall be chosen from among the directors.
Section 3. Vacancies. - If any vacancy shall occur among the officers
of the Corporation, such vacancy shall be filled by the Board of Directors.
Section 4. Other Officers, Agents and Employees - Their Powers and
Duties. - The Board of Directors may from time to time appoint such other
officers as the Board of Directors may deem necessary, to hold office for such
time as may be designated by it or during its pleasure, and the Board of
Directors or the chairman of the Board of Directors may appoint, from time to
time, such agents and employees of the Corporation as may be deemed proper, and
may authorize any officers to appoint and remove agents and employees. The Board
of Directors or the chairman of the Board of Directors may from time to time
prescribe the powers and duties of such other officers, agents and employees of
the Corporation.
Section 5. Removal. - Any officer, agent or employee of the Corporation
may be removed, either with or without cause, by a vote of a majority of the
Board of Directors or, in the case of any agent or employee not appointed by the
Board of Directors, by a superior officer upon whom such power of removal may be
conferred by the Board of Directors or the chairman of the Board of Directors.
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<PAGE>
Section 6. Chairman of the Board of Directors and Chief Executive
Officer. - The chairman of the Board of Directors shall preside at meetings of
the stockholders and of the Board of Directors and shall be a member of the
executive committee. The chairman shall be the Chief Executive Officer of the
Corporation and shall be responsible to the Board of Directors. He or she shall
be responsible for the general management and control of the business and
affairs of the Corporation and shall see to it that all orders and resolutions
of the Board of Directors are implemented. The chairman shall from, time to
time, report to the Board of Directors on matters within his or her knowledge
which the interests of the Corporation may require be brought to its notice. The
chairman shall do and perform such other duties as from time to time the Board
of Directors may prescribe.
Section 7. Deputy Chairman of the Board of Directors. - In the absence
of the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if elected by the Board of Directors) shall preside at meetings of
the stockholders and of the Board of Directors. The deputy chairman shall be
responsible to the chairman of the Board of Directors and shall perform such
duties as shall be assigned to him or her by the chairman of the Board of
Directors. The deputy chairman shall from time to time report to the chairman of
the Board of Directors on matters within the deputy chairman's knowledge which
the interests of the Corporation may require be brought to the chairman's
notice.
Section 8. President. - In the absence of the chairman of the Board of
Directors and the deputy chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) shall
preside at meetings of the stockholders and of the Board of Directors. The
president shall be responsible to the chairman of the Board of Directors.
Subject to the authority of the chairman of the Board of Directors, the
president shall be devoted to the Corporation's business and affairs under the
basic policies set by the Board of Directors and the chairman of the Board of
Directors. He or she shall from, time to time, report to the chairman of the
Board of Directors on matters within the president's knowledge which the
interests of the Corporation may require be brought to the chairman's notice. In
the absence of the chairman of the Board of Directors and the deputy chairman of
the Board of Directors (if any), the president (if any) shall, except as
otherwise directed by the Board of Directors, have all of the powers and the
duties of the chairman of the Board of Directors. The president (if any) shall
do and perform such other duties as from time to time the Board of Directors or
the chairman of the Board of Directors may prescribe.
Section 9. Vice Chairmen of the Board of Directors. - In the absence of
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), the vice chairman of the Board of
Directors designated for such purpose by the chairman of the Board of Directors
(if any) shall preside at meetings of the stockholders and of the Board of
Directors. Each vice chairman of the Board of Directors shall be responsible to
the chairman of the Board of Directors. Each vice chairman of the
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<PAGE>
Board of Directors shall from time to time report to the chairman of the Board
of Directors on matters within the vice chairman's knowledge which the interests
of the Corporation may require be brought to the chairman's notice. In the
absence or inability to act of the chairman of the Board of Directors, the
deputy chairman of the Board of Directors (if any) and the president (if any),
such vice chairman of the Board of Directors as the chairman of the Board of
Directors may designate for the purpose shall have the powers and discharge the
duties of the chairman of the Board of Directors. In the event of the failure or
inability of the chairman of the Board of Directors to so designate a vice
chairman of the Board of Directors, the Board of Directors may designate a vice
chairman of the Board of Directors who shall have the powers and discharge the
duties of the chairman of the Board of Directors.
Section 10. Chief Operating Officer. - The chief operating officer (if
any) shall be responsible to the Chairman of the Board of Directors for the
principal operating businesses of the Corporation and shall perform those duties
which may from time to time be assigned.
Section 11. Vice Presidents. - The vice presidents of the Corporation
shall assist the chairman of the Board of Directors, the deputy chairman of the
Board of Directors, the president (if any) and the vice chairmen (if any) of the
Board of Directors in carrying out their respective duties and shall perform
those duties which may from time to time be assigned to them. The chief
financial officer shall be a vice president of the Corporation (or more senior)
and shall be responsible for the management and supervision of the financial
affairs of the Corporation.
Section 12. Treasurer. - The treasurer shall have charge of the funds,
securities, receipts and disbursements of the Corporation. He or she shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such banks or trust companies or with such bankers or other
depositaries as the Board of Directors may from time to time designate. The
treasurer shall render to the Board of Directors, the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if any), the vice chairmen of the Board of Directors (if any), and the chief
financial officer, whenever required by any of them, an account of all of his
transactions as treasurer. If required, the treasurer shall give a bond in such
sum as the Board of Directors may designate, conditioned upon the faithful
performance of the duties of the treasurer's office and the restoration to the
Corporation at the expiration of his or her term of office or in case of death,
resignation or removal from office, of all books, papers, vouchers, money or
other property of whatever kind in his or her possession or under his or her
control belonging to the Corporation. The treasurer shall perform such other
duties as from time to time may be assigned to him or her.
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<PAGE>
Section 13. Assistant Treasurers. - In the absence or disability of the
treasurer, one or more assistant treasurers shall perform all the duties of the
treasurer and, when so acting, shall have all the powers of, and be subject to
all restrictions upon, the treasurer. Assistant treasurers shall also perform
such other duties as from time to time may be assigned to them.
Section 14. Secretary. - The secretary shall keep the minutes of all
meetings of the stockholders and of the Board of Directors in a book or books
kept for that purpose. He or she shall keep in safe custody the seal of the
Corporation, and shall affix such seal to any instrument requiring it. The
secretary shall have charge of such books and papers as the Board of Directors
may direct. He or she shall attend to the giving and serving of all notices of
the Corporation and shall also have such other powers and perform such other
duties as pertain to the secretary's office, or as the Board of Directors, the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), the president (if any) or any vice chairman of the Board of
Directors may from time to time prescribe.
Section 15. Assistant Secretaries. - In the absence or disability of
the secretary, one or more assistant secretaries shall perform all of the duties
of the secretary and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the secretary. Assistant secretaries shall
also perform such other duties as from time to time may be assigned to them.
Section 16. Controller. - The controller shall be administrative head
of the controller's department. He or she shall be in charge of all functions
relating to accounting and the preparation and analysis of budgets and
statistical reports and shall establish, through appropriate channels, recording
and reporting procedures and standards pertaining to such matters. The
controller shall report to the chief financial officer and shall aid in
developing internal corporate policies whereby the business of the Corporation
shall be conducted with the maximum safety, efficiency and economy. The
controller shall be available to all departments of the Corporation for advice
and guidance in the interpretation and application of policies which are within
the scope of his or her authority. The controller shall perform such other
duties as from time to time may be assigned to him or her.
Section 17. Assistant Controllers. - In the absence or disability of
the controller, one or more assistant controllers shall perform all of the
duties of the controller and, when so acting, shall have all of the powers of,
and be subject to all the restrictions upon, the controller. Assistant
controllers shall also perform such other duties as from time to time may be
assigned to them.
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ARTICLE V
Contracts, Checks, Drafts, Bank Accounts, Etc.
Section 1. Contracts. - The chairman of the Board of Directors, the
deputy chairman of the Board of Directors (if any), the president (if any), any
vice chairman of the Board of Directors (if any), any vice president, the
treasurer and such other persons as the chairman of the Board of Directors may
authorize shall have the power to execute any contract or other instrument on
behalf of the Corporation; no other officer, agent or employee shall, unless
otherwise in these By-Laws provided, have any power or authority to bind the
Corporation by any contract or acknowledgement, or pledge its credit or render
it liable pecuniarily for any purpose or to any amount.
Section 2. Loans. - The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president, the treasurer
and such other persons as the Board of Directors may authorize shall have the
power to effect loans and advances at any time for the Corporation from any
bank, trust company or other institution, or from any corporation, firm or
individual, and for such loans and advances may make, execute and deliver
promissory notes or other evidences of indebtedness of the Corporation, and, as
security for the payment of any and all loans, advances, indebtedness and
liability of the Corporation, may pledge, hypothecate or transfer any and all
stocks, securities and other personal property at any time held by the
Corporation, and to that end endorse, assign and deliver the same.
Section 3. Voting of Stock Held. - The chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if any), any vice chairman of the Board of Directors (if any), any vice
president or the secretary may from time to time appoint an attorney or
attorneys or agent or agents of the Corporation to cast the votes that the
Corporation may be entitled to cast as a stockholder or otherwise in any other
corporation, any of whose stock or securities may be held by the Corporation, at
meetings of the holders of the stock or other securities of such other
corporation, or to consent in writing to any action by any other such
corporation, and may instruct the person or persons so appointed as to the
manner of casting such votes or giving such consent, and may execute or cause to
be executed on behalf of the Corporation such written proxies, consents, waivers
or other instruments as such officer may deem necessary or proper in the
premises; or the chairman of the Board of Directors, the deputy chairman of the
Board of Directors (if any), the president (if any), any vice chairman of the
Board of Directors (if any), any vice president or the secretary may attend in
person any meeting of the holders of stock or other securities of such other
corporation and thereat vote or exercise any and all powers of the Corporation
as the holder of such stock or other securities of such other corporation.
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<PAGE>
ARTICLE VI
Certificates Representing Shares
Certificates representing shares of the Corporation shall be signed by
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), or the vice chairman of the Board of Directors (if any), or
the president of the Corporation (if any) and the secretary or an assistant
secretary. Any and all signatures on such certificates, including signatures of
officers, transfer agents and registrars, may be facsimile.
ARTICLE VII
Dividends
The Board of Directors may declare dividends from funds of the
Corporation legally available therefor.
ARTICLE VIII
Seal
The Board of Directors shall provide a suitable seal or seals, which
shall be in the form of a circle, and shall bear around the circumference the
words "Philip Morris Companies Inc." and in the center the word and figures
"Virginia, 1985."
ARTICLE IX
Fiscal Year
The fiscal year of the Corporation shall be the calendar year.
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ARTICLE X
Amendment
The power to alter, amend or repeal the By-Laws of the Corporation or
to adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made
by the Board of Directors may be repealed or changed by the stockholders, or new
By-Laws may be adopted by the stockholders, and the stockholders may prescribe
that any By-Laws made by them shall not be altered, amended or repealed by the
directors.
ARTICLE XI
Emergency By-Laws
If a quorum of the Board of Directors cannot be readily assembled
because of some catastrophic event, and only in such event, these By-Laws shall,
without further action by the Board of Directors, be deemed to have been amended
for the duration of such emergency, as follows:
Section 1. Section 6 of Article II shall read as follows:
Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the directors present at a meeting of
the Board of Directors called in accordance with these By-Laws.
Section 2. The first sentence of Section 10 of Article II shall read as
follows:
Special meetings of the Board of Directors shall be held whenever
called by order of the chairman of the Board of Directors or a deputy
chairman (if any),or of the president (if any) or any vice chairman of
the Board of Directors (if any) or any director or of any person having
the powers and duties of the chairman of the Board of Directors, the
deputy chairman, the president or any vice chairman of the Board of
Directors.
Section 3. Section 12 of Article II shall read as follows:
The directors present at any regular or special meeting called in
accordance with these By-Laws shall constitute a quorum for the
transaction of business at such meeting, and the action of a majority
of such directors shall be the act of the Board of Directors, provided,
however, that in the event that only one director is present at any
such meeting no action except the election of directors shall be taken
until at least two additional directors have been elected and are in
attendance.
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>EXHIBIT 13
<TEXT>
<PAGE>
Exhibit 13
Financial Review
- --------------------------------------------------------------------------------
Contents
20 Management's Discussion and Analysis of Financial
Condition and Results of Operations
35 Selected Financial Data -- Five-Year Review
36 Consolidated Balance Sheets
38 Consolidated Statements of Earnings and
Consolidated Statements of Cash Flows
40 Consolidated Statements of Stockholders' Equity
41 Notes to Consolidated Financial Statements
60 Report of Independent Accountants
60 Company Report on Financial Statements
19
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Philip Morris Companies Inc. (the "Company") is a holding company whose
principal wholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris
International Inc., Kraft Foods Inc., and Miller Brewing Company, are engaged in
the manufacture and sale of various consumer products. These products include
cigarettes, food (consisting principally of a wide variety of beverages, cheese,
snacks, convenient meals and packaged grocery products) and beer. A wholly-owned
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.
Consolidated Operating Results
(in millions)
<TABLE>
<CAPTION>
2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Domestic tobacco $22,658 $19,596 $15,310
International tobacco 26,374 27,506 27,390
North American food 18,461 17,897 17,640
International food 8,071 8,900 9,671
Beer 4,375 4,342 4,105
Financial services 417 355 275
- --------------------------------------------------------------------------------
Operating revenues $80,356 $78,596 $74,391
================================================================================
<CAPTION>
(in millions)
2000 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Income
Domestic tobacco $ 5,350 $ 4,865 $ 1,489
International tobacco 5,211 4,968 5,029
North American food 3,547 3,190 3,128
International food 1,208 1,063 1,054
Beer 650 511 451
Financial services 262 228 183
- --------------------------------------------------------------------------------
Operating companies income 16,228 14,825 11,334
General corporate expenses (831) (627) (645)
Minority interest (127) (126) (128)
Amortization of goodwill (591) (582) (584)
- --------------------------------------------------------------------------------
Operating income $14,679 $13,490 $ 9,977
================================================================================
</TABLE>
On December 11, 2000, the Company acquired all of the outstanding shares of
Nabisco Holdings Corp. ("Nabisco") for $55 per share in cash. The purchase of
the outstanding shares, retirement of employee stock options and other payments
totaled approximately $15.2 billion. In addition, the acquisition included the
assumption of approximately $4.0 billion of existing Nabisco debt. The
acquisition was financed by the Company through the issuance of $9.2 billion of
commercial paper borrowings, $3.0 billion of short-term floating rate notes and
$3.0 billion of available cash. The acquisition has been accounted for as a
purchase. Nabisco's balance sheet has been consolidated with the Company's
balance sheet as of December 31, 2000; however, Nabisco's earnings subsequent to
December 11, 2000 have not been included in the consolidated operating results
of the Company since such amounts were insignificant to consolidated operating
results for the year ended December 31, 2000. The Company's interest cost on
borrowings associated with acquiring Nabisco has been included in interest and
other debt expense, net, on the Company's consolidated statement of earnings for
the year ended December 31, 2000.
In 2001, the Company's wholly-owned subsidiary Kraft Foods Inc. ("Kraft")
plans to undertake an initial public offering ("IPO") of less than 20% of its
common stock. If completed as anticipated, the IPO proceeds will be used to
retire a portion of the debt incurred to acquire Nabisco.
- - 2000 compared with 1999: Operating revenues for 2000 increased $1.8 billion
(2.2%) over 1999, due primarily to an increase in revenues from the Company's
domestic tobacco operations. The operating revenue comparison 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 2000 increased $2.5 billion
(3.2%) over 1999.
Operating income for 2000 increased $1.2 billion (8.8%) over 1999. The
operating income comparison was affected by the following unusual items:
20
<PAGE>
Sale of Molson Rights in the U.S.: In December 2000, the Company sold its
rights to Molson trademarks in the United States ("Molson Sale") for proceeds of
$131 million, on which a pre-tax gain of $100 million was recorded. The pre-tax
gain is included in the beer segment's marketing, administration and research
costs in the consolidated statements of earnings.
Sale of French Confectionery Business: In August 2000, the Company sold a
French confectionery business ("French Confectionery Sale") for proceeds of $251
million on which a pre-tax gain of $139 million was recorded. The pre-tax gain
is included in the international food segment's marketing, administration and
research costs in the consolidated statements of earnings.
Louisville Factory Closure: During 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"). Consequently, PM Inc. recorded pre-tax charges of $183 million during
1999. These 1999 charges, which are in marketing, administration and research
costs in the consolidated statements of earnings for the domestic tobacco
segment, included enhanced severance, pension and postretirement benefits for
approximately 1,500 hourly and salaried employees. Severance benefits, which
were either paid in a lump sum or as income protection payments over a period of
time, commenced upon termination of employment. Payments of enhanced pension and
postretirement benefits are being 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,
were charged to expense as incurred during the closing period. As of June 30,
2000, the facility was closed. As of December 31, 2000, the remaining liability
of approximately $50 million is comprised of severance, substantially all of
which will be paid in the first six months of 2001 in accordance with the
Company's plans.
Kraft Separation Programs: During 1999, Kraft Foods North America ("Kraft
N.A.") 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 N.A. recorded a pre-tax charge of
$157 million for 1999. This charge was included in marketing, administration and
research costs in the consolidated statements of earnings for 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. The program was completed during 2000.
Salary and related benefit costs of employees prior to their retirement or
termination date were expensed as incurred.
Brazil Factory Closure: During 1999, Philip Morris International Inc. ("PM
International") announced the closure of a cigarette factory and the
corresponding reduction of cigarette production capacity in Brazil (the "Brazil
Factory Closure"). Prior to the Brazil Factory Closure, existing employees were
offered voluntary dismissal benefits. These benefits were accepted by half of
the approximately 1,000 employees at the facility. During the third quarter of
1999, the factory was closed and the remaining employees were terminated. PM
International recorded a pre-tax charge of $136 million in marketing,
administration and research costs in the consolidated statements of earnings of
the international tobacco segment to write down the tobacco machinery and
equipment no longer in use and to recognize the cost of severance benefits. As
of December 31, 2000, the remaining liability of approximately $4 million
consists principally of severance.
Beer Asset Write-Downs: Miller Brewing Company ("Miller") recorded a
pre-tax charge of $29 million in marketing, administration and research costs in
the 1999 consolidated statements of earnings of the beer segment to write down
the book value of three brewing facilities to their estimated fair values (the
"Beer Asset Write-Downs"). During 2000, one of the facilities was closed, while
the remaining two facilities were sold.
The operating income comparison was adversely affected by approximately
$100 million of operating income from the incremental CDC sales made in 1999.
Including the incremental CDC income in 2000 and excluding the previously
discussed pre-tax gains and pre-tax charges in each year, as well as the results
from operations divested since the beginning of 1999, operating income for 2000
increased $687 million (5.0%) over 1999, due primarily to higher operating
results from all segments, partially offset by higher general corporate expenses
of $204 million. The increase in general corporate expenses 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 $1.4 billion (9.5%) over 1999, due primarily to higher operating
results from all segments, the impact of the 2000 pre-tax gains and 1999 charges
and incremental CDC income. Including the incremental CDC income in 2000 and
excluding the 2000 pre-tax gains and 1999 pre-tax charges, as well as the
results from operations divested since the beginning of 1999, operating
companies income for 2000 increased $901 million (5.9%) over 1999.
Currency movements decreased operating revenues by $2.9 billion ($1.6
billion, excluding excise taxes), and operating companies income by $495 million
from 1999. Decreases in operating revenues and operating companies income were
due primarily to the strength of the U.S. dollar against the Euro. Although the
Company cannot predict future movements in currency rates, strengthening of the
U.S. dollar, primarily against the Euro, if sustained during 2001, could
continue to have an unfavorable impact on operating revenues and operating
companies income comparisons with 2000.
Interest and other debt expense, net, decreased $76 million (9.6%) in 2000
from 1999. This decrease was due primarily to lower levels of average debt
outstanding and higher interest income on cash and cash equivalents.
21
<PAGE>
Diluted and basic earnings per share ("EPS"), which were $3.75 and $3.77,
respectively, for 2000, increased by 17.6% and 17.4%, respectively, over 1999.
Net earnings of $8.5 billion in 2000 increased 10.9% over 1999. These results
include the pre-tax gains and charges, as well as the impact of the incremental
CDC income. After adjusting for the effect of these unusual items, net earnings
increased 6.3% to $8.4 billion, and diluted and basic EPS increased 12.4% and
12.7% to $3.71 and $3.73, respectively.
- - 1999 compared with 1998: Operating revenues for 1999 increased $4.2 billion
(5.7%) over 1998, due primarily to settlement-related price increases from
domestic tobacco operations. The comparison of operating revenues was also
affected by incremental year 2000 related revenues of approximately $225
million, as customers purchased additional product in anticipation of business
disruptions from the CDC, as well as the divestiture of several international
food businesses.
Operating income for 1999 increased $3.5 billion (35.2%) over 1998, due
largely to 1998 pre-tax charges of $3.4 billion related to domestic tobacco
litigation settlements. Operating income for 1999 reflects pre-tax charges of
$183 million related to the Louisville Closure; $157 million related to the
Kraft Separation Programs; $136 million related to the Brazil Factory Closure;
and $29 million related to Beer Asset Write-Downs. In addition to the previously
mentioned 1999 charges, operating income for 1999 also includes approximately
$100 million of incremental income related to the CDC. Operating income for 1998
includes pre-tax charges of $3.4 billion related to tobacco litigation
settlements, $319 million related primarily to domestic tobacco voluntary early
retirement and separation programs, $116 million related to the settlement of
shareholder litigation and $18 million for separation programs covering
approximately 100 hourly and salaried employees at the Company's corporate
headquarters. Excluding the pre-tax charges for 1999 and 1998, as well as
results from operations divested since the beginning of 1998 and incremental
income related to the CDC, operating income for 1999 increased 0.7% over 1998,
due primarily to higher operating income from the Company's food and beer
operations.
On a reported basis, operating companies income increased $3.5
billion (30.8%) from 1998, due primarily to the previously mentioned 1998
charges for tobacco litigation settlements. Excluding the pre-tax charges, as
well as the results of divested operations and incremental income related to the
CDC, operating companies income increased 1.4% over 1998, due primarily to
higher earnings in the Company's food and beer operations.
Currency movements decreased operating revenues by $782 million ($517
million, after excluding excise taxes) and operating companies income by $46
million during 1999. Decreases in operating revenues and operating companies
income arising from the strength of the U.S. dollar against Western European and
Latin American currencies were partially mitigated by a weaker U.S. dollar
against the Japanese yen and other Asian currencies.
Interest and other debt expense, net, in 1999 decreased $95 million (10.7%)
from 1998. This decrease was due primarily to higher interest income, lower
average debt outstanding and lower average interest rates on the Company's
consumer products debt portfolio during 1999.
Diluted and basic EPS, which were $3.19 and $3.21, respectively, for 1999,
increased by 45.0% and 45.2%, respectively, over 1998. Net earnings of $7.7
billion in 1999 increased 42.9% from 1998, due primarily to the previously
mentioned 1998 tobacco litigation settlement charges. These results include the
impact of pre-tax charges in 1999 for the Louisville Closure, the Brazil Factory
Closure, the Kraft Separation Programs, the Beer Asset Write-Downs, and
incremental CDC income, as well as 1998 pre-tax charges for separation programs
and domestic tobacco and other litigation settlement charges. Excluding the
after-tax impact of these items, net earnings increased 2.2% to $7.9 billion,
and diluted and basic EPS increased 4.1% and 3.8% to $3.30 and $3.31,
respectively.
- - Year 2000: To date, the Company and its subsidiaries have experienced no
material disruptions to their business operations as a result of the CDC.
External information technology specialists have stated that CDC-related
miscalculations or systems failures could occur 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 management processes and will respond promptly to any problems
that occur.
The Company's increases in 1999 year-end inventories and trade receivables
caused by preemptive CDC 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. The increased shipments in 1999 resulted in incremental operating
revenues and operating companies income in 1999 of approximately $225 million
and $100 million, respectively, and corresponding decreases in operating
revenues and operating companies income in 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
22
<PAGE>
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.
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. ("PM International") and the Company.
These issues, some of which are more fully discussed below, include pending
and threatened smoking and health litigation and recent jury verdicts against PM
Inc., including the $74 billion punitive damages verdict in the Engle smoking
and health class action case discussed in Note 15. Contingencies, of the Notes
to Consolidated Financial Statements ("Note 15"); the civil lawsuit filed by the
U.S. federal government against various cigarette manufacturers and others
discussed in Note 15; 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"); 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 products intended for
sale outside the United States; foreign and United States governmental
investigations into illegal cigarette imports; 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; actual and proposed
legislation in Congress, the State of New York and other States to require the
establishment of fire-safety standards for cigarettes; the diminishing social
acceptance of smoking and increased pressure from tobacco control advocates 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 $1.87 per pack
in a given locality in the United States. Congress has considered significant
increases in the federal excise tax or other payments from tobacco
manufacturers, and increases in excise and 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 PM International, increases in excise and
similar taxes have had an adverse impact on sales of cigarettes. Any future
increases, the extent of which cannot be predicted, could result in volume
declines for the cigarette industry, including PM Inc. and PM International, and
might cause sales to shift from the premium segment to the discount segment.
- - Federal Trade Commission ("FTC"): In September 1997, the FTC issued a
request for public comments on its proposed revision of its "tar" and nicotine
test methodology and reporting procedures 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. The Department has not yet published its recommendations.
- - Food and Drug Administration ("FDA") Regulations: In August 1996, the FDA
promulgated regulations asserting jurisdiction over cigarettes as "drugs" or
"medical devices" under the provisions of the Food, Drug and Cosmetic Act
("FDCA"). The regulations, which 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, record-keeping,
manufacturing and other requirements, were declared invalid by the United States
Supreme Court in March 2000. The Company has stated that while it continues to
oppose FDA regulation over cigarettes as "drugs" or "medical devices" under the
provisions of FDCA, it would support new legislation that would provide for
reasonable regulation by the FDA of cigarettes as cigarettes. Currently, there
are several bills pending in Congress that if enacted, would give the FDA
authority to regulate tobacco products. The bills take a variety of approaches
to the issue of the FDA's proposed regulation of tobacco products ranging from
codification of the original FDA regulations under the "drug" and "medical
device" provisions of the FDCA to the creation of provisions that would apply
uniquely to tobacco products. All of the pending legislation could result in
substantial Federal regulation of the design, performance, manufacture and
marketing of cigarettes. The ultimate outcome of the pending bills cannot be
predicted.
- - Ingredient disclosure laws: The Commonwealth of Massachusetts has enacted
legislation to require cigarette manufacturers to report the flavorings and
other ingredients used in each brand of cigarettes sold in the Commonwealth, and
on a qualified, by-brand basis to provide "nicotine-yield ratings" for
23
<PAGE>
their products based on standards established by the Commonwealth. Cigarette
manufacturers sued to have the statute declared unconstitutional, arguing that
it could result in the public disclosure of valuable proprietary information. In
September 2000, the district court granted the plaintiffs' motion for summary
judgment and permanently enjoined the defendants from requiring cigarette
manufacturers to disclose brand specific information on ingredients in their
products. Defendants have appealed the district court's ruling. 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 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 during 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. Since then, a
number of government agencies around the world have concluded that ETS causes
disease--including lung cancer and heart disease--in nonsmokers.
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 it would, in order to ensure that there will be a single,
consistent public health message on these issues, refrain from debating the
issues other than as necessary to defend itself and its opinions in the courts
and other forums in which it is required to do so. The Company also stated that
in relation to these issues, and the health effects of exposure to ETS, the
Company is prepared to defer to the judgment of public health authorities as to
what health warning messages will best serve the public interest.
In 1999, PM Inc. and PM International established websites that include,
among other things, views of public health authorities on smoking, disease
causation in smokers, addiction and ETS. In October 2000, the sites were updated
to reflect PM Inc.'s and PM International's agreement with the overwhelming
medical and scientific consensus that cigarette smoking is addictive, and causes
lung cancer, heart disease, emphysema and other serious diseases in smokers.
Consistent with the Company's position set forth in its October 1997 submission
to the United States Senate Judiciary Committee (discussed above), the websites
advise smokers and potential smokers to rely on the messages of public health
authorities in making all smoking-related decisions. The site furthers PM Inc.'s
and PM International's efforts to implement this position.
The sites also state that PM Inc. and PM International recognize and accept
that many people have health concerns regarding ETS. In addition, because of
concerns relating to conditions such as asthma and respiratory infections, PM
Inc. and PM International believe that particular care should be exercised where
children are concerned, and that smokers who have children--particularly young
ones--should seek to minimize their exposure to ETS.
- - The World Health Organization's Framework Convention for Tobacco Control:
The World Health Organization ("WHO") has begun negotiations regarding a
proposed Framework Convention for Tobacco Control. The proposed treaty would
require signatory nations to enact legislation that would require, among other
things, specific actions to prevent youth smoking; restrict tobacco product
marketing; inform the public about the health consequences of smoking and the
benefits of quitting; regulate the content of tobacco products; impose new
package labeling requirements; eliminate cigarette smuggling and counterfeit;
restrict smoking in public places; increase and harmonize cigarette excise
taxes; and impose liability on tobacco product manufacturers. PM Inc. and PM
International have stated that they would support a treaty that member states
could consider for ratification, based on the following four principles: (1)
smoking-related decisions should be made on the basis of a consistent public
health message; (2) effective measures should be taken to prevent minors from
smoking; (3) the right of adults to choose to smoke should be preserved; and (4)
all manufacturers of tobacco products should compete on a level playing field.
The outcome of the treaty negotiations cannot be predicted.
- - 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 educational campaigns relating to tobacco
consumption or tobacco control programs, or provide additional funding for
governmental tobacco control activities, further restrict the advertising of
cigarettes, require additional warnings, including graphic 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 affecting the
regulation of the tobacco industry have also been considered in a number of
jurisdictions outside the United States, including the
24
<PAGE>
European Union's proposed directive on tobacco product regulation. That
directive would, among other things, prohibit the use of brand descriptors such
as "lights," require ingredient disclosure and testing, reduce the maximum "tar"
ceilings from 12 mg to 10 mg, and put similar limitations on the cigarettes
manufactured for export from the European Union.
In August 2000, New York State enacted legislation that requires the
State's Office of Fire Prevention and Control to promulgate by January 1, 2003
fire-safety standards for cigarettes sold in New York. The legislation requires
that cigarettes sold in New York stop burning within a time period to be
specified by the standards or meet other performance standards set by the Office
of Fire Prevention and Control. All cigarettes sold in New York will be required
to meet the established standards within one hundred and eighty days after the
standards are promulgated. It is not possible to predict the impact of this law
on PM Inc. until the standards are published. Similar legislation has been
proposed in other states and localities and at the federal level.
It is not possible to predict what, if any, additional 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., PM International 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 case in Florida in which PM Inc. is a defendant
and a civil health care cost recovery action filed by the United States
Department of Justice in September 1999 against domestic tobacco manufacturers
and others, including the Company and PM Inc. (See Note 15 for a discussion of
such litigation.)
- - State settlement agreements: As discussed in Note 15, during 1997 and 1998,
PM Inc. and other major domestic tobacco product manufacturers entered into
agreements with states and various U.S. jurisdictions settling asserted and
unasserted health care cost recovery and other claims. These settlements provide
for substantial annual payments. They also place numerous restrictions on the
tobacco industry's conduct of its business operations, including restrictions on
the advertising and marketing of cigarettes. Among these are restrictions or
prohibitions on the following: targeting youth; use of cartoon characters; use
of brand name sponsorships and brand name non-tobacco products; outdoor and
transit brand advertising; payments for product placement; and free sampling. In
addition, the settlement agreements require companies to affirm corporate
principles to reduce underage use of cigarettes; impose requirements regarding
lobbying activities; mandate public disclosure of certain industry documents;
limit the industry's ability to challenge certain tobacco control and underage
use laws; and provide for the dissolution of certain tobacco-related
organizations and place restrictions on the establishment of any replacement
organizations.
Operating Results
<TABLE>
<CAPTION>
Operating
(in millions) Operating Revenues Companies Income
- -----------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
tobacco $22,658 $19,596 $15,310 $ 5,350 $4,865 $1,489
International
tobacco 26,374 27,506 27,390 5,211 4,968 5,029
- -----------------------------------------------------------------------------------
Total $49,032 $47,102 $42,700 $10,561 $9,833 $6,518
===================================================================================
</TABLE>
2000 compared with 1999
- - Domestic tobacco: During 2000, PM Inc.'s operating revenues increased $3.1
billion (15.6%) over 1999, due primarily to higher pricing ($2.7 billion,
including amounts related to the January 1, 2000 federal excise tax increase)
and higher volume ($0.3 billion).
Operating companies income for 2000 increased $485 million (10.0%) over
1999, due primarily to price increases, net of cost increases ($1.2 billion),
higher volume ($237 million) and the absence of 1999 pre-tax charges for the
Louisville Closure ($183 million), partially offset by higher marketing,
administration and research costs ($1.2 billion, primarily increased marketing
related to consumer promotions). Excluding the impact of the 1999 pre-tax
charges for the Louisville Closure, PM Inc.'s operating income of $5,350 million
in 2000 increased by 6.0% over $5,048 million in 1999.
Shipment volume for the domestic tobacco industry during 2000 increased to
419.8 billion units, a 0.1% increase over 1999. PM Inc.'s shipment volume for
2000 was 211.9 billion units, an increase of 1.8% over 1999. Shipment growth for
the industry and PM Inc. during 2000 was largely driven by wholesalers'
decisions to rebuild their inventories 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 a federal excise tax
increase. PM Inc. estimates that after adjusting for this and other factors,
industry shipment volume declined approximately 1.0% to 2.0% from 1999, while PM
Inc.'s shipment volume was essentially flat.
For 2000, PM Inc.'s shipment market share was 50.5%, an increase of 0.9
share points over 1999. Marlboro shipment volume increased 5.4 billion units
(3.5%) from 1999 to 158.2 billion units for a 37.7% share of the total industry,
an increase of 1.3 share points over 1999. Contributing to this growth were
introductory shipments of Marlboro Milds, which were launched nationally at
retail in April.
Based on shipments, the premium segment accounted for approximately 73.5%
of the domestic cigarette industry volume in 2000, an increase of 0.1 share
points over 1999. In the premium segment, PM Inc.'s volume increased 2.0% during
2000, compared with a 0.2% increase for the industry, resulting in a premium
segment share of 60.6%, an increase of 1.1 share points over 1999.
25
<PAGE>
In the discount segment, PM Inc.'s shipments increased 0.2% to 25.0 billion
units in 2000, compared with an industry decrease of 0.1%, resulting in a
discount segment share of 22.5%, an increase of 0.1 share points from 1999.
Basic shipment volume for 2000 was up 6.1% to 21.6 billion units, for a 19.4%
share of the discount segment, an increase of 1.1 share points from 1999.
According to consumer purchase data from Information Resources
Inc./Capstone, PM Inc.'s share of cigarettes sold at retail grew 0.6 share
points to 50.5% for 2000. The 2000 retail share for Marlboro rose 1.1 share
points to 37.1%.
In December 2000, PM Inc. announced a price increase of $7.00 per thousand
cigarettes on its domestic premium and discount brands. This followed price
increases of $3.00 per thousand in July 2000, $6.50 per thousand in January 2000
and $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.
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, including those related to tobacco litigation settlements and, if
enacted, by increased excise taxes or other tobacco legislation discussed above
under the caption "Tobacco-Business Environment."
- - International tobacco: During 2000, international tobacco operating
revenues, including excise taxes, decreased $1.1 billion (4.1%) from 1999.
Excluding excise taxes, operating revenues decreased $310 million (2.2%), due
primarily to unfavorable currency movements ($759 million) and the previously
discussed shift in CDC revenues ($194 million), partially offset by price
increases ($363 million) and favorable volume/mix ($223 million).
Operating companies income for 2000 increased $243 million (4.9%) over
1999, due primarily to price increases and favorable costs ($517 million), the
1999 pre-tax charge for the Brazil Factory Closure ($136 million) and lower
marketing, administration and research costs, partially offset by unfavorable
currency movements ($404 million) and the shift of CDC income ($118 million) to
the fourth quarter of 1999. Adjusting for the shift in CDC income and excluding
the 1999 impact of the pre-tax charge for the Brazil Factory Closure, operating
companies income of $5,270 million in 2000 increased 4.5% over $5,045 million in
1999.
PM International's 2000 volume of 671.2 billion units decreased 0.9 billion
units (0.1%) from 1999. Adjusting for the shift in CDC volume, (the basis of
presentation for all following PM International volume disclosures), PM
International's volume of 675.4 billion units for 2000 increased 7.5 billion
units (1.1%) over 1999, due primarily to volume increases in Western and Eastern
Europe and Asia, partially offset by lower worldwide duty-free shipments, which
were affected by the July 1999 cessation of duty-free sales within the European
Union, and lower volume in Central Europe. Volume advanced in a number of
important markets, including Italy, France, Spain, the Benelux countries,
Portugal, Greece, Russia, Ukraine, Kazakhstan, Saudi Arabia, Egypt, Japan,
Indonesia, Thailand, Korea, Malaysia and Mexico. PM International recorded
market share gains in many of its major markets. Volume and share in Germany
were adversely affected by heightened competition and the growth of trade
brands. Trade inventory distortions in Poland and market softness and the timing
of shipments in the Czech Republic contributed to PM International's overall
volume decline in Central Europe. In Turkey, lower volume and share were due to
a significant tax-driven price increase in December 1999, which affected the
premium segment in particular. PM International's volume was lower in Argentina
due to tax-driven pricing in a recessionary environment. International volume
for Marlboro increased 1.7%, as higher volumes in Japan, Italy, France, Greece,
Spain, Saudi Arabia, Russia, Korea, Malaysia, Thailand, Indonesia, Brazil and
Mexico were partially offset by lower volumes in Poland, the Czech Republic and
certain Eastern European markets, and by lower worldwide duty-free shipments.
1999 compared with 1998
- - Domestic tobacco: During 1999, PM Inc.'s operating revenues increased $4.3
billion (28.0%) over 1998, due primarily to higher pricing ($5.5 billion,
largely related to tobacco litigation settlements), partially offset by lower
volume ($1.3 billion).
During 1999, PM Inc. recorded pre-tax charges of $183 million related to
the Louisville Factory Closure. During 1998, pre-tax charges of $319 million
were recorded principally for voluntary separation, early retirement and
severance programs. The 1998 charges were primarily for enhanced pension and
postretirement benefits for the approximately 2,100 hourly and salaried
employees at various operating locations who elected to participate in the
program. Benefit payments were made in accordance with the provisions of the
related pension and postretirement benefit plans. Operating companies income for
the domestic tobacco segment also included pre-tax tobacco litigation settlement
charges of $3,381 million for the year ended December 31, 1998.
Operating companies income for 1999 increased $3.4 billion over 1998,
primarily reflecting the effect of the 1998 pre-tax tobacco litigation
settlement charges ($3,381 million), price increases, net of cost increases
($1,359 million) and lower pre-tax charges for separation programs ($136
million), partially offset by lower volume ($918 million) and higher marketing,
administration and research costs ($679 million, primarily for increased
marketing related to consumer promotions). Excluding the impact of the 1998
tobacco litigation settlement charges and the separation programs in each year,
PM Inc.'s operating companies income of $5,048 million in 1999 decreased 2.7%
from $5,189 million in 1998.
Domestic tobacco industry shipment volume during 1999 declined 9.0% from
1998, primarily as a result of settlement-related price increases and the
trade's decision to lower inventories at the end of 1999 in advance of the
January 1, 2000 increase in the federal excise tax rate. PM Inc.'s shipment
volume for 1999 was 208.2 billion units, a decrease of 8.5% from 1998; however,
PM Inc.'s shipment market share increased 0.2 share points over 1998 to 49.6%.
Excluding the effects of the trade's decisions to lower inventories, PM Inc.
estimates that its volume
26
<PAGE>
would have decreased by approximately 7.3% and that its shipment market share
would have increased by 0.5 share points to 50.1%. Marlboro shipment volume
declined 9.7 billion units (6.0%) from 1998 to 152.8 billion units for a 36.4%
share of the total industry, an increase of 1.2 share points over the comparable
1998 period.
Based on shipments, the premium segment accounted for approximately 73.4%
of domestic cigarette industry volume in 1999, an increase of 0.4 share points
over 1998. In the premium segment, PM Inc.'s volume decreased 6.8% during 1999,
compared with an 8.5% decrease for the industry, resulting in a premium segment
share of 59.5%, an increase of 1.1 share points over 1998.
In the discount segment, PM Inc.'s shipments decreased 19.5% to 24.9
billion units in 1999, compared with an industry decline of 10.3%, resulting in
a discount segment share of 22.4%, a decrease of 2.6 share points from 1998.
Basic shipment volume for 1999 declined 3.0 billion units (12.9%) to 20.4
billion units, for an 18.3% share of the discount segment, a decrease of 0.5
share points from 1998.
In December 1998, PM Inc. paid $150 million for options to purchase the
U.S. rights to manufacture and market three cigarette trademarks, L&M, Lark and
Chesterfield, the international rights to which were already owned by PM
International. During the second quarter of 1999, PM Inc. substantially
completed its acquisition of these trademarks. Including the $150 million paid
in December 1998, the total acquisition price for these trademarks was
approximately $300 million. L&M, Lark and Chesterfield represented less than
0.2% of domestic cigarette industry volume in 1999 and 1998.
- - International tobacco: During 1999, international tobacco operating
revenues, including excise taxes, increased $116 million (0.4%) over 1998.
Excluding excise taxes, operating revenues decreased $343 million (2.4%), due
primarily to unfavorable volume/mix ($476 million) and unfavorable currency
movements ($162 million), partially offset by price increases ($217 million) and
incremental revenues related to the CDC ($97 million).
Operating companies income for 1999 decreased $61 million (1.2%) from 1998,
due primarily to the Brazil Factory Closure discussed above ($136 million),
unfavorable volume/mix ($141 million) and higher marketing, administration and
research costs, partially offset by price increases and favorable costs ($289
million) and incremental CDC income ($59 million). Excluding the impact of the
pre-tax charge and the incremental CDC income, operating companies income of
$5,045 million in 1999 increased 0.3% from $5,029 million in 1998.
PM International's 1999 volume of 672.1 billion units, including 4.2
billion units of incremental CDC volume, decreased 44.8 billion units (6.3%)
from 1998. Excluding incremental CDC volume (the basis of presentation for all
following PM International volume disclosures), volume decreased 49.1 billion
units (6.8%) from 1998. However, volume grew a collective 4.8% in the more
profitable core markets of Western Europe and Japan. These gains were more than
offset by a 33.1% aggregate volume decline in the lower-margin markets of Russia
and the rest of Eastern Europe, reflecting difficult business conditions, as
well as lower worldwide duty-free shipments. Volume advanced in a number of
important markets, including Italy, France, Portugal, the Benelux and
Scandinavian countries, Greece, Austria, Hungary, the Slovak Republic, Romania,
Saudi Arabia, Egypt, Turkey, Japan and Mexico. In Asia, PM International
recorded higher volume in the markets of Korea, Singapore, Malaysia and
Thailand. PM International recorded market share gains in virtually all of its
major markets. In Germany, volume was essentially flat, and share was lower,
reflecting intense competition. International volume for Marlboro declined 1.9%;
however, excluding Eastern Europe and worldwide duty-free shipments, Marlboro
volume rose 4.1%.
During 1999, PM International increased its ownership interest in a
Portuguese tobacco company from 65% to 90% at a cost of $70 million. Also during
1999, PM International increased its ownership interest in a Polish tobacco
company from 75% to 96% at a cost of $104 million.
Food
Business Environment
Kraft, through its direct wholly-owned subsidiary, Kraft N.A. and its indirect
wholly-owned subsidiary, Nabisco, is the largest branded food and beverage
company based in the United States of America. A wide variety of beverages,
cheese, snacks, convenient meals and packaged grocery products is manufactured
and marketed in the United States of America, Canada, Mexico and Puerto Rico by
Kraft N.A. Subsidiaries and affiliates of Kraft Foods International, Inc.
("Kraft Foods International"), an indirect subsidiary of Kraft, manufacture and
market a wide variety of beverages, cheese, snacks, convenient meals and
packaged grocery products primarily in Europe, Middle East and Africa, and the
Latin American and Asia Pacific regions. Kraft N.A. and Kraft Foods
International are subject to fluctuating commodity costs, currency movements and
competitive challenges in various product categories and markets, including a
trend toward increasing consolidation in the retail trade and changing consumer
preferences. To confront these challenges, Kraft continues to take steps to
build the value of premium brands with new product and marketing initiatives, to
improve its food business portfolio 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. Dairy commodity
costs in the United States on average have been below the levels seen in 1999.
Coffee and cocoa bean prices were also lower than 1999.
During the latter part of 2000, energy costs rose in response to higher
prices charged for oil and natural gas. However, this increase in energy costs
did not have a material adverse effect on operating results.
Kraft reports year-end results as of the Saturday closest to December 31
each year. This resulted in fifty-three weeks of operating results in the
Company's consolidated statements of earnings for the year ended December 31,
2000. The benefit to operating results from an extra week of shipments was
essentially offset by reductions in retail trade inventories.
27
<PAGE>
On December 11, 2000, the Company acquired all of the outstanding shares of
Nabisco for $55 per share in cash. The purchase of the outstanding shares,
retirement of employee stock options and other payments totaled approximately
$15.2 billion. In addition, the acquisition included the assumption of
approximately $4.0 billion of existing Nabisco debt. The acquisition was
financed by the Company through the issuance of $9.2 billion of commercial paper
borrowings, $3.0 billion of short-term floating rate notes and $3.0 billion of
available cash. The acquisition has been accounted for as a purchase. Nabisco's
balance sheet has been consolidated with the Company's balance sheet as of
December 31, 2000; however, Nabisco's earnings subsequent to December 11, 2000
have not been included in the consolidated operating results of the Company
since such amounts were insignificant to consolidated operating results for the
year ended December 31, 2000. The Company's interest cost on borrowings
associated with acquiring Nabisco has been included in interest and other debt
expense, net, on the Company's consolidated statement of earnings for the year
ended December 31, 2000.
To satisfy United States regulatory concerns about competition in
connection with the acquisition, Nabisco sold its domestic dry packaged dessert
and baking powder businesses, as well as its intense mints and gum businesses in
December 2000. Since these businesses were sold at fair value, no gain or loss
related to these sales was recorded in the Company's consolidated statements of
earnings for the year ended December 31, 2000. The Company plans to sell six
additional Nabisco businesses that do not align strategically with Kraft's
operations. During 2001, the Company will finalize the Nabisco acquisition
balance sheet, including the completion of fair value appraisals of Nabisco's
assets. During this process, the Company will also finalize its plans to
integrate the operations of Nabisco with Kraft. The Company anticipates closing
a number of Nabisco manufacturing facilities. Charges to close these facilities,
estimated to be in a range of $500 million to $600 million, will be taken as
adjustments to excess purchase price when plans are finalized and announced. In
addition, the integration of Nabisco's operations may result in closing several
Kraft facilities. The Company estimates that the closure of Kraft facilities
could result in charges to the 2001 consolidated statements of earnings in the
range of $200 million to $300 million. These charges will be taken when the
integration plans have been finalized and announced.
In 2001, Kraft plans to undertake an IPO of less than 20% of its common
stock. If completed as anticipated, the IPO proceeds will be used to retire a
portion of the debt incurred as a result of the acquisition of Nabisco.
During the first quarter of 2000, Kraft purchased the outstanding common
stock of Balance Bar Co., a maker of energy and nutrition snack products. In a
separate transaction, Kraft also acquired Boca Burger, Inc., a manufacturer and
marketer of soy-based meat alternatives. The total cost of these acquisitions
was $358 million. The effects of these and other smaller acquisitions did not
have a material effect on the 2000 operating revenues or the operating companies
income of Kraft.
During 2000 and 1999, Kraft sold several small international and domestic
food businesses. The aggregate proceeds received in these transactions were $300
million in 2000 and $175 million in 1999. The Company recorded pre-tax gains of
$172 million in 2000 and $62 million in 1999. The operating results of
businesses divested were not material to consolidated operating results in any
of the periods presented.
During 1998, Kraft entered into a licensing agreement with the Starbucks
coffee chain to market, sell and distribute Starbucks coffee to grocery
customers across the United States. In addition, Kraft entered into a licensing
agreement with the California Pizza Kitchen restaurant chain to manufacture,
market and sell California Pizza Kitchen frozen pizza to grocery customers.
Neither of these agreements had a material impact on Kraft's 2000, 1999 or 1998
operating results.
During the third quarter of 2000, Kraft recalled taco shells, supplied to
Kraft under a manufacturing agreement with an unrelated food company, that were
found to contain genetically modified corn not intended for human consumption.
The costs related to the recall were not material to the operating results of
the North American food segment or the Company. Kraft cannot predict the impact,
if any, that negative publicity surrounding the recall will have on future sales
of its Mexican dinner products.
Operating Results
<TABLE>
<CAPTION>
Operating
(in millions) Operating Revenues Companies Income
- ---------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
North American
food $18,461 $17,897 $17,640 $3,547 $3,190 $3,128
International
food 8,071 8,900 9,671 1,208 1,063 1,054
- ---------------------------------------------------------------------------------
Total $26,532 $26,797 $27,311 $4,755 $4,253 $4,182
=================================================================================
</TABLE>
1999 and 1998 operating revenues and operating companies income have been
reclassified to reflect the transfer of managerial responsibility for Mexico and
Puerto Rico to North American food from international food.
2000 compared with 1999
- - North American food: During 2000, operating revenues increased $564 million
(3.2%) over 1999, due primarily to higher volume ($483 million), the impact of
acquisitions ($148 million) and higher pricing ($79 million), partially offset
by the shift in CDC revenues ($142 million).
Operating companies income for 2000 increased $357 million (11.2%) over
1999, primarily reflecting favorable margins ($318 million, driven by lower
commodity-related costs), the absence of the 1999 pre-tax charge for the Kraft
Separation Programs ($157 million) and higher volume ($283 million), partially
offset by higher marketing, administration and research costs ($310 million, the
majority of which related to higher marketing expenses), unfavorable product mix
($43 million) and the shift in CDC income ($54 million). Excluding the impact of
the pre-tax charges for the Kraft
28
<PAGE>
Separation Programs, the results of operations divested since the beginning of
1999, and adjusting for the shift in CDC income, operating companies income of
$3,570 million in 2000 increased 7.8% over $3,312 million for 1999.
Volume for 2000 increased 2.8% over 1999. Excluding the impact of divested
businesses and the shift in volume related to the CDC, volume increased 3.8%, of
which 0.3 percentage points related to the net impact of the 53rd week of
shipments and trade inventory reductions in 2000. Volume gains were achieved in
Beverages, Desserts and Cereals, driven primarily from the strength of
ready-to-drink beverages, and coffee, resulting from the continued success of
Starbucks grocery coffee. Volume also grew in shelf-stable puddings and frozen
toppings and from the first-quarter acquisition of the Balance Bar brand. In
Oscar Mayer and Pizza, volume increased due primarily to lunch combinations, hot
dogs, luncheon meats, the first-quarter acquisition of the Boca Burger brand and
from new product introductions in frozen pizza. Volume also increased in
Biscuits, Snacks and Confectionery driven primarily by line extensions in mints
and chocolate products.
Volume declined in Cheese, Meals and Enhancers due primarily to a decrease
in the food service business due to the expiration of an exclusive distribution
agreement and the loss of a national supply agreement; meals, due to declines in
rice and ethnic foods; and enhancers, due to decreases in barbecue sauces and
seasoned coatings. These declines were partially offset by an increase in retail
cheese volume, with gains in processed, natural and cream cheese products.
- - International food: Operating revenues for 2000 decreased $829 million
(9.3%) from 1999, due primarily to unfavorable currency movements ($887
million), lower pricing ($30 million, due primarily to lower coffee prices), the
shift in CDC revenues ($52 million) and the impact of divested businesses,
partially offset by higher volume ($291 million).
Operating companies income for 2000 increased $145 million (13.6%) over
1999, due primarily to the pre-tax gain on the French Confectionery Sale ($139
million), higher volume ($147 million) and favorable margins ($84 million,
primarily related to lower commodity costs), partially offset by unfavorable
currency ($96 million), higher marketing, administration and research costs ($78
million) and the shift in CDC income ($26 million). Excluding the gain on the
French Confectionery Sale, 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 $7,966 million in 2000 decreased
6.8% from $8,547 million in 1999 and operating companies income of $1,050
million in 2000 increased 5.4% over $996 million in 1999.
Volume for 2000 increased 1.4% over 1999. Excluding the impact of divested
businesses and the shift in volume related to the CDC, volume increased 4.8%, of
which 1.6 percentage points related to the impact of the 53rd week of shipments
in 2000.
In Europe, Middle East and Africa, volume increased over 1999, with growth
in all categories. In beverages, coffee volume grew in the developing markets of
Central and Eastern Europe and in the established markets of Sweden, Austria,
Italy and the United Kingdom. Snacks volume increased, driven by new product
launches and line extensions in confectionery. Cheese volume grew in Italy and
Spain. Convenient meals volume increased, driven by new lunch combinations
products in the United Kingdom and boxed dinner line extensions in Germany and
Belgium. Higher grocery volume was driven by spoonable dressings in Italy and
Spain.
Volume increased in the Latin American and Asia Pacific regions driven by
gains across all categories. Beverage volume increased due to higher coffee
volume from increased shipments to the Caribbean and the relaunch of a coffee
mix in China. Refreshment beverage volume grew due to new flavor introductions
in Brazil, marketing programs in China and the Philippines and expansion in
Thailand. Snacks volume increased, driven primarily by higher sugar
confectionery sales in Indonesia and China and the launch of new chocolate
products in Brazil and Argentina. Cheese volume increased driven primarily by
cream cheese in Australia and Japan and higher volume in the Philippines and
Indonesia. Convenient meals volume was higher, driven by increased shipments of
dinners to Asian markets. Grocery volume increased due to higher yeast spread
sales in Australia and shipments of cereals and gelatin products to Asia.
1999 compared with 1998
- - North American food: During 1999, operating revenues increased $257 million
(1.5%) from 1998, due primarily to higher volume ($93 million), the shift in CDC
revenues ($71 million) and favorable pricing ($65 million).
Operating companies income for 1999 increased $62 million (2.0%) from 1998,
due primarily to favorable margins ($428 million, driven by lower manufacturing
and commodity-related costs), higher volume ($58 million) and income related to
the shift in CDC income ($27 million), partially offset by the Kraft Separation
Programs ($157 million), higher marketing, administration and research costs
($247 million, the majority of which related to higher marketing expense) and
unfavorable product mix ($20 million).
Volume for 1999 increased 2.1% over 1998. Volume gains were achieved in
Beverages, Desserts and Cereals, driven primarily by the strength of
ready-to-drink beverages as well as powdered soft drinks due to new product
introductions, and coffee, resulting from volume and share gains associated with
the continued rollout of Starbucks coffee to grocery customers. Volume also grew
in ready-to-eat refrigerated desserts and in frozen whipped toppings. These
increases were partially offset by lower volume in cereals due to aggressive
competitive activity and lower volume in dry packaged desserts. In Oscar Mayer
and Pizza, volume was up due primarily to pizza, resulting from the
29
<PAGE>
continued success of rising crust pizza and new product introductions. Volume
also grew in processed meats from increases in lunch combinations, bacon and hot
dogs, partially offset by declines in luncheon meats. Volume also increased in
Biscuits, Snacks and Confectionery driven primarily by growth in mints and
two-compartment snacks.
Volume declined in Cheese, Meals and Enhancers due primarily to lower food
service shipments and the planned exit of lower-margin product lines in Canada.
Enhancers also contributed to the volume decline, as increases in barbecue sauce
were more than offset by lower shipments of spoonable dressings. These declines
were partially offset by an increase in retail cheese volume, with gains in
several product lines, including natural cheese, sour cream and cottage cheese,
and meals, primarily as a result of new product introductions.
- International food: Operating revenues for 1999 decreased $771 million
(8.0%) from 1998, due to lower pricing ($366 million, due to the effect of lower
coffee commodity costs), unfavorable currency movements ($303 million) and the
impact of divestitures ($191 million), partly offset by the consolidation of
previously unconsolidated subsidiaries ($69 million). Operating companies income
for 1999 increased $9 million (0.9%) from 1998, due primarily to favorable
margins ($79 million, primarily related to lower commodity costs) and the shift
in CDC income ($13 million), partially offset by higher marketing,
administration and research costs ($47 million) and unfavorable currency
movements. Volume decreased 1.8% from 1998 due primarily to the impact of
divested businesses.
In Europe, Middle East and Africa, volume was down as lower snacks volume
was partly offset by volume gains in beverages, convenient meals and grocery. In
snacks, confectionery volume was lower due to the economic weakness in Russia
and other parts of Eastern Europe, as well as unusually warm summer weather
across Europe. In beverages, coffee volume grew in France, Spain, Denmark,
Switzerland, Hungary and the Slovak Republic. In refreshment beverages, volume
benefited from expansion of powdered soft drinks in Poland and Bulgaria. In
convenient meals, volume growth was driven by the launch of lunch combinations
in Germany and the continued success of lunch combinations in the United
Kingdom.
Volume increased in the Latin American and Asia Pacific regions due
primarily to gains in cheese, convenient meals and grocery volumes in the Asia
Pacific region. In cheese, higher volume was reported in Australia, Japan, the
Philippines and Indonesia. In grocery, volume benefited from growth in
Australia, reflecting new varieties in spoonable and pourable dressings and
higher sales of peanut butter. This increase was partially offset by lower
volume in Latin America, due primarily to reduced confectionery volume in Brazil
and powdered soft drink volume in Argentina, partially offset by higher powdered
soft drink volume in Brazil.
Beer
Business Environment
In December 2000, Miller sold its rights to Molson trademarks in the United
States for proceeds of $131 million, on which a pre-tax gain of $100 million was
recorded.
During 1999, Miller purchased four trademarks from the Pabst Brewing
Company ("Pabst") and the Stroh Brewery Company ("Stroh"). Miller also agreed to
increase its contract manufacturing of Pabst products. Miller began brewing and
shipping the 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.
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 and is not expected to have a material impact on future
operating revenues and operating companies income.
During 1999, Miller recorded a pre-tax charge of $29 million in marketing,
administration and research costs in the consolidated statements of earnings of
the beer segment to write down the book value of three brewing facilities to
their estimated fair values. During 2000, one of the facilities was closed,
while the remaining two facilities were sold.
- - 2000 compared with 1999: Miller's operating revenues for 2000 increased $33
million (0.8%) over 1999, due primarily to higher pricing ($195 million) and the
previously mentioned acquired brands and contract manufacturing fees
(aggregating $101 million), partially offset by lower volume ($199 million) and
the impact of divestitures ($64 million). Operating companies income for 2000
increased $139 million (27.2%) over 1999, due primarily to the pre-tax gain on
the sale of Molson rights in the United States ($100 million), higher pricing
($138 million) and income from acquired brands and contract manufacturing,
partially offset by lower volume ($109 million) and higher marketing,
administration and research costs. Excluding the Molson Sale, Beer Asset
Write-Downs and results of operations divested since the beginning of 1999,
operating companies income of $543 million in 2000 increased 5.4% over $515
million in 1999.
Miller's domestic shipment volume of 41.6 million barrels for 2000
decreased 3.8% from 1999, reflecting higher pricing, Miller's continuing efforts
to reduce distributor inventories and discontinued brands. Excluding
discontinued brands, total domestic shipment volume was down 2.6%. Domestic
shipments of premium/near-premium brands decreased across most brands from 1999.
Domestic shipments of below-premium products also decreased on lower shipments
across most brands. Miller's estimated market share of the U.S. malt beverage
industry (based on shipments, including exports) was 20.7%, a decrease of 0.9
share points from the prior year. Wholesalers' sales to retailers in 2000
decreased 3.3% from 1999. Excluding the acquired brands, wholesalers' sales to
retailers in 2000 decreased 4.6% from 1999, reflecting lower retail sales of
Miller Lite, Miller Genuine Draft, Miller Genuine Draft Light, Icehouse, Miller
High Life, Milwaukee's Best, Red Dog, Magnum, Meister Brau and Southpaw Light as
well as the discontinuance of Lowenbrau and the sale of Molson rights.
30
<PAGE>
- - 1999 compared with 1998: Miller's operating revenues for 1999 increased
$237 million (5.8%) over 1998, due primarily to the acquired brands, contract
manufacturing fees and price increases. Operating companies income for 1999
increased $60 million (13.3%) over 1998, due primarily to favorable pricing and
lower product costs and the impact of the acquired brands and contract
manufacturing fees, partially offset by the Beer Asset Write-Downs recorded in
1999.
Miller's domestic shipment volume of 43.3 million barrels for 1999
increased 3.8% from 1998, reflecting the commencement of shipments of the
acquired brands (Olde English 800, Hamm's, Mickey's and Henry Weinhard's).
Excluding shipments of the acquired brands, domestic shipment volume declined
0.1% from 1998, reflecting lower domestic shipments of premium brands, primarily
the Miller Genuine Draft franchise, Molson and Lowenbrau (which resulted from
the expiration of the above-mentioned license), partially offset by increases
for its flagship brand, Miller Lite, as well as the Icehouse franchise and
Foster's. Domestic shipments of near-premium products increased on higher
shipments of Miller High Life, while budget brand products decreased on lower
shipments across all brands. Miller's estimated market share of the U.S. malt
beverage industry (based on shipments, including exports) was 21.6%, an increase
of 0.4 share points from 1998, due primarily to the acquired brands.
Wholesalers' sales to retailers in 1999 decreased 0.6% from 1998, excluding the
acquired brands. This decline was due primarily to lower sales of the Miller
Genuine Draft franchise, Molson, Lowenbrau and the Milwaukee's Best franchise,
partially offset by higher sales of Miller Lite, Icehouse, Foster's and Miller
High Life.
Financial Services
Philip Morris Capital Corporation's ("PMCC") financial services operating
revenues and operating companies income for 2000 increased $62 million (17.5%)
and $34 million (14.9%), respectively, over 1999. These increases were due
primarily to new leasing and structured finance investments and gains realized
on related portfolio management activities.
PMCC's operating revenues and operating companies income for 1999 increased
$80 million (29.1%) and $45 million (24.6%), respectively, over 1998. These
increases were due primarily to increased leasing revenues and the continued
growth of PMCC's portfolio of finance assets.
Financial Review
- - Net cash provided by operating activities: During 2000, net cash provided
by operating activities of $11.0 billion was slightly below 1999, due primarily
to the timing of tobacco litigation settlement payments, partially offset by
higher net earnings. During 1999, net cash provided by operating activities was
$11.4 billion, compared with $8.1 billion in 1998. The increase over 1998
primarily reflects higher net earnings and the collection of higher
settlement-related domestic tobacco revenues prior to the remittance of such
amounts to state governments under the terms of the various state settlements.
- - Net cash used in investing activities: During 2000, 1999 and 1998, net cash
used in investing activities was $17.5 billion, $2.7 billion and $2.6 billion,
respectively. The increase from 1999 primarily reflects the cash used for the
acquisition of Nabisco.
Capital expenditures for 2000 decreased 3.8%, to $1.7 billion, of which 34%
related to tobacco operations and 54% related to food operations, primarily for
modernization and consolidation of manufacturing facilities and expansion of
certain production capacity. Capital expenditures are currently expected to
increase by approximately $300 million in 2001, due primarily to the integration
of Nabisco. The 2001 expenditures are currently expected to be funded from
operations.
- - Net cash provided by (used in) financing activities: During 2000, net cash
of $2.7 billion was provided by financing activities, compared with $7.5 billion
used in financing activities during 1999. This difference was due primarily to
an increase of $10.7 billion in net debt issuances in 2000 to finance the
acquisition of Nabisco.
During 1999, net cash of $7.5 billion was used in financing activities,
compared with $3.9 billion used in financing activities during 1998. This
difference was primarily due to an increase of $3.0 billion of cash spent on
stock repurchases and an increase of $354 million in dividends paid during 1999,
partially offset by lower net debt issuances in 1999 ($231 million, compared
with $332 million in 1998).
- - Debt and liquidity: The Company's total debt (consumer products and
financial services) was $29.1 billion and $14.5 billion at December 31, 2000 and
1999, respectively. Total consumer products debt was $27.2 billion and $13.5
billion at December 31, 2000 and 1999. At December 31, 2000 and 1999, the
Company's ratio of consumer products debt to total equity was 1.81 and 0.88,
respectively. The ratio of total debt to total equity was 1.94 and 0.95 at
December 31, 2000 and 1999, respectively. The increase in the ratio of debt to
equity was due to the issuance of debt in 2000 to finance the acquisition of
Nabisco. In 2001, Kraft plans to undertake an IPO of less than 20% of its common
stock. If completed as anticipated, the IPO proceeds will be used to retire a
portion of the debt incurred to acquire Nabisco.
Fixed rate debt constituted approximately 50% and 91% of total consumer
products debt at December 31, 2000 and 1999, respectively. The decrease in the
percentage of fixed rate debt at December 31, 2000 is due primarily to
commercial paper borrowings in 2000 to fund the acquisition of Nabisco. The
average interest rate on total consumer products debt, including the impact of
currency and interest rate swap agreements discussed in Market Risk below, was
approximately 6.9% at December 31, 2000 and 1999.
The Company and its subsidiaries maintain credit facilities with a number
of lending institutions, amounting to approximately $19.1 billion at December
31, 2000. Approximately $18.7 billion of these facilities were unused at
December 31, 2000. Certain of these facilities, used to support commercial paper
borrowings, are available for acquisitions and other corporate purposes and
require the maintenance of a fixed charges coverage ratio. The Company's credit
facilities include a $9.0 billion, 364-day revolving credit facility, entered
into in October 2000, in connection with the acquisition of Nabisco, and a term
revolving
31
<PAGE>
credit facility for $8.0 billion. The term revolving credit facility expires in
October 2002 and enables the Company to reclassify short-term debt on a
long-term basis. Approximately $7.0 billion of short-term borrowings that the
Company intends to refinance were reclassified as long-term debt. The Company
may continue to refinance long-term and short-term debt from time to time. The
nature and amount of the Company's long-term and short-term debt and the
proportionate amount of each can be expected to vary as a result of future
business requirements, market conditions and other factors.
The Company's credit ratings by Moody's at December 31, 2000 and 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 December 31, 2000
and 1999 were "A-1" in the commercial paper market and "A" for long-term debt
obligations.
As discussed in Note 15 of the notes to the consolidated financial
statements, 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), subject to adjustment for several factors, including
inflation, market share and industry volume: 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: 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 Master Settlement Agreement ("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 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 PM
International.
- - Equity and dividends: During 2000 and 1999, the Company repurchased 137.6
million and 96.6 million shares of its common stock, respectively, at a cost of
$3.6 billion and $3.3 billion, respectively. The repurchases were made under an
existing $8 billion authority that expires in November 2001. Since inception,
cumulative repurchases under the $8 billion authority have totaled 242.0 million
shares at an aggregate cost of $7.3 billion.
Dividends paid in 2000 and 1999 were $4.5 billion and $4.3 billion,
respectively, an increase of 3.7%, reflecting a higher dividend rate in 2000,
partially offset by a lower number of shares outstanding as a result of share
repurchases discussed above. During the third quarter of 2000, the Company's
Board of Directors approved a 10.4% increase in the quarterly dividend rate to
$0.53 per share. As a result, the annualized dividend rate increased to $2.12
from $1.92.
- - Cash and cash equivalents: Cash and cash equivalents were $937 million and
$5.1 billion at December 31, 2000 and 1999, respectively, the decrease being
largely attributable to the use of available cash to fund the acquisition of
Nabisco.
Market Risk
The Company is exposed to market risk, primarily related to foreign exchange
rates, commodity prices and interest rates. These exposures are actively
monitored by management. To manage 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, commodity price-sensitive and interest
rate-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 use derivative financial
instruments for speculative purposes.
- - Foreign exchange rates: The Company is exposed to foreign exchange
movements, primarily in European, Japanese and other Asian and Latin American
currencies. Consequently, it enters into various contracts, which change in
value as foreign currency exchange rates fluctuate, to preserve the value of
commitments and anticipated transactions. The Company uses foreign currency
option and forward contracts to hedge certain transaction exposures and
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 December 31, 2000 and 1999, the Company
had option and forward foreign currency exchange contracts, principally for the
Japanese yen, Swiss franc and the Euro, with an aggregate notional amount of
$5.8 billion and $3.8 billion, respectively, for both the purchase and/or sale
of foreign currencies.
32
<PAGE>
The Company also seeks to protect its foreign currency net asset exposure,
primarily the Swiss franc, through the use of foreign-currency denominated debt
or currency swap agreements. At December 31, 2000 and 1999, the notional amounts
of currency swap agreements aggregated $2.3 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 December 31,
2000 and 1999, the Company had net long commodity positions of $617 million and
$163 million, respectively. Unrealized gains or losses on net commodity
positions were immaterial at December 31, 2000 and 1999.
- - 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, 2000, the Company had interest rate swap agreements which converted $96
million of fixed rate debt to variable rate debt of which $23 million will
mature in 2003 and $73 million will mature in 2004. 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 December 31, 2000 and
1999, or the Company's results of operations for the three years ended December
31, 2000, 1999 and 1998.
--------------------
- - Value at Risk: The Company uses a value at risk ("VAR") computation to
estimate the potential one-day loss in the fair value of its interest
rate-sensitive financial instruments and to estimate the potential one-day loss
in pre-tax earnings of its foreign currency and commodity price-sensitive
derivative financial instruments. The VAR computation includes the Company's
debt; short-term investments; foreign currency forwards, swaps and options; and
commodity futures, forwards and options. Anticipated transactions, foreign
currency trade payables and receivables, and net investments in foreign
subsidiaries, which the foregoing instruments are intended to hedge, were
excluded from the computation.
The VAR estimates were made assuming normal market conditions, using a 95%
confidence interval. The Company used a "variance/co-variance" model to
determine the observed interrelationships between movements in interest rates
and various currencies. These interrelationships were determined by observing
interest rate and forward currency rate movements over the preceding quarter for
the calculation of VAR amounts at December 31, 2000 and 1999, and over each of
the four preceding quarters for the calculation of average VAR amounts during
each year. The values of foreign currency and commodity options do not change on
a one-to-one basis with the underlying currency or commodity, and were valued
accordingly in the VAR computation.
The estimated potential one-day loss in fair value of the Company's
interest rate-sensitive instruments, primarily debt, under normal market
conditions and the estimated potential one-day loss in pre-tax earnings from
foreign currency and commodity instruments under normal market conditions, as
calculated in the VAR model, were as follows:
<TABLE>
<CAPTION>
Pre-Tax Earnings Impact
-------------------------------------------------
At
(in millions) 12/31/00 Average High Low
================================================================================
<S> <C> <C> <C> <C>
Instruments sensitive to:
Foreign currency rates $21 $19 $31 $11
Commodity prices 9 8 9 7
================================================================================
<CAPTION>
Fair Value Impact
-------------------------------------------------
At
(in millions) 12/31/00 Average High Low
================================================================================
<S> <C> <C> <C> <C>
Instruments sensitive to:
Interest rates $63 $38 $63 $23
================================================================================
<CAPTION>
Pre-Tax Earnings Impact
-------------------------------------------------
At
(in millions) 12/31/99 Average High Low
================================================================================
<S> <C> <C> <C> <C>
Instruments sensitive to:
Foreign currency rates $41 $37 $44 $22
Commodity prices 13 9 13 5
================================================================================
<CAPTION>
Fair Value Impact
-------------------------------------------------
At
(in millions) 12/31/99 Average High Low
================================================================================
<S> <C> <C> <C> <C>
Instruments sensitive to:
Interest rates $33 $42 $54 $33
================================================================================
</TABLE>
The VAR computation is a risk analysis tool designed to statistically estimate
the maximum probable daily loss from adverse movements in interest rates,
foreign currency rates and commodity prices under normal market conditions. The
computation does not purport to represent actual losses in fair value or
earnings to be incurred by the Company, nor does it consider the effect of
favorable changes in market rates. The Company cannot predict actual future
movements in such market rates and does not present these VAR results to be
indicative of future movements in such market rates or to be representative of
any actual impact that future changes in market rates may have on its future
results of operations or financial position.
33
<PAGE>
New Accounting Standards
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which had an initial adoption date of
January 1, 2000. During 1999, the FASB postponed the required adoption date of
SFAS No. 133 until January 1, 2001. In addition, during 2000, the FASB issued
SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which amends the requirements of SFAS No. 133. These standards
require that all derivative financial instruments be recorded on consolidated
balance sheets at fair value as either assets or liabilities. 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 and
effective 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. Initial adoption of these new
standards on January 1, 2001 will have an insignificant impact on the Company's
consolidated financial position and results of operations. Since the impact of
SFAS No. 133 after adoption is dependent on future market rates and outstanding
derivative positions after January 1, 2001, the Company cannot determine the
impact that application will have on its financial position or results of
operations subsequent to January 1, 2001.
During 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14,
"Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the
recognition, measurement and statement of earnings classification for certain
sales incentives and will be effective in the second quarter of 2001. As a
result, certain items previously included in cost of sales and in marketing,
administration and research costs on the consolidated statements of earnings
will be recorded as a reduction of operating revenues. The Company has
determined that the impact of adoption or subsequent application of EITF Issue
No. 00-14 will not have a material effect on its consolidated financial position
or results of operations. Upon adoption, prior period amounts, which are not
expected to be significant, will be reclassified to conform to the new
requirements. In addition, the EITF issued EITF No. 00-10, "Accounting for
Shipping and Handling Fees and Costs." EITF No. 00-10 addresses the statement of
earnings classification of shipping and handling costs billed to customers and
was effective for the fourth quarter of 2000. EITF No. 00-10 did not have an
impact on the consolidated financial statements of the Company for any of the
years presented.
Contingencies
See Note 15 to the Consolidated Financial Statements for a discussion of certain
contingencies.
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or oral
forward-looking statements, including 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 and manufacturing levels, and to improve productivity. In addition, PM
International, Kraft Foods International and Kraft N.A. are subject to the
effects of foreign economies and the 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.
34
<PAGE>
Selected Financial Data -- Five-Year Review
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Operating revenues $ 80,356 $ 78,596 $ 74,391 $ 72,055 $ 69,204
United States export sales 4,354 5,046 6,005 6,705 6,476
Cost of sales 29,148 29,561 26,820 26,689 26,560
Federal excise taxes on products 4,309 3,252 3,438 3,596 3,544
Foreign excise taxes on products 12,771 13,593 13,140 12,345 11,107
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 14,679 13,490 9,977 11,663 11,769
Interest and other debt expense, net 719 795 890 1,052 1,086
Earnings before income taxes 13,960 12,695 9,087 10,611 10,683
Pre-tax profit margin 17.4% 16.2% 12.2% 14.7% 15.4%
Provision for income taxes 5,450 5,020 3,715 4,301 4,380
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings 8,510 7,675 5,372 6,310 6,303
Basic EPS 3.77 3.21 2.21 2.61 2.57
Diluted EPS 3.75 3.19 2.20 2.58 2.54
Dividends declared per share 2.02 1.84 1.68 1.60 1.47
Weighted average shares (millions)--Basic 2,260 2,393 2,429 2,420 2,456
Weighted average shares (millions)--Diluted 2,272 2,403 2,446 2,442 2,482
- -----------------------------------------------------------------------------------------------------------------------------
Capital expenditures 1,682 1,749 1,804 1,874 1,782
Depreciation 1,126 1,120 1,106 1,044 1,037
Property, plant and equipment, net (consumer products) 15,303 12,271 12,335 11,621 11,751
Inventories (consumer products) 8,765 9,028 9,445 9,039 9,002
Total assets 79,067 61,381 59,920 55,947 54,871
Total long-term debt 19,154 12,226 12,615 12,430 12,961
Total debt--consumer products 27,196 13,522 13,953 13,258 13,933
--financial services and real estate 1,926 946 709 845 1,307
- -----------------------------------------------------------------------------------------------------------------------------
Total deferred income taxes 4,750 3,751 3,638 3,382 3,336
Stockholders' equity 15,005 15,305 16,197 14,920 14,218
Common dividends declared as a % of Basic EPS 53.6% 57.3% 76.0% 61.3% 57.2%
Common dividends declared as a % of Diluted EPS 53.9% 57.7% 76.4% 62.0% 57.9%
Book value per common share outstanding 6.79 6.54 6.66 6.15 5.85
Market price per common share--high/low 45.94-18.69 55.56-21.25 59.50-34.75 48.13-36.00 39.67-28.54
- -----------------------------------------------------------------------------------------------------------------------------
Closing price of common share at year end 44.00 23.00 53.50 45.25 37.67
Price/earnings ratio at year end--Basic 12 7 24 17 15
Price/earnings ratio at year end--Diluted 12 7 24 18 15
Number of common shares outstanding at
year end (millions) 2,209 2,339 2,431 2,425 2,430
Number of employees 178,000 137,000 144,000 152,000 154,000
=============================================================================================================================
</TABLE>
See notes to the consolidated financial statements regarding acquisitions and
divestitures in 2000, 1999 and 1998; tobacco and other litigation settlement
charges in 1998 and 1997; 1999 and 1998 charges for employee separation
programs; 1999 charges for an international cigarette factory closure and a beer
asset write-down; and the impact of incremental revenues and income from
shipments in advance of the century date change.
35
<PAGE>
Consolidated Balance Sheets
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
at December 31,
2000 1999
<S> <C> <C>
Assets
Consumer products
Cash and cash equivalents $ 937 $ 5,100
Receivables (less allowances of $199 and $164) 5,019 4,313
Inventories:
Leaf tobacco 3,749 4,294
Other raw materials 1,721 1,794
Finished product 3,295 2,940
- ---------------------------------------------------------------------------------
8,765 9,028
Other current assets 2,517 2,454
- ---------------------------------------------------------------------------------
Total current assets 17,238 20,895
Property, plant and equipment, at cost:
Land and land improvements 784 633
Buildings and building equipment 6,255 5,436
Machinery and equipment 16,440 14,268
Construction in progress 1,427 1,262
- ---------------------------------------------------------------------------------
24,906 21,599
Less accumulated depreciation 9,603 9,328
- ---------------------------------------------------------------------------------
15,303 12,271
Goodwill and other intangible assets
(less accumulated amortization of $6,319 and $5,840) 33,090 16,879
Assets held for sale 276
Other assets 4,758 3,625
- ---------------------------------------------------------------------------------
Total consumer products assets 70,665 53,670
Financial services
Finance assets, net 8,118 7,527
Other assets 284 184
- ---------------------------------------------------------------------------------
Total financial services assets 8,402 7,711
- ---------------------------------------------------------------------------------
Total Assets $79,067 $61,381
================================================================================
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Liabilities
Consumer products
Short-term borrowings $ 3,166 $ 641
Current portion of long-term debt 5,775 1,601
Accounts payable 3,787 3,351
Accrued liabilities:
Marketing 3,082 2,756
Taxes, except income taxes 1,436 1,519
Employment costs 1,317 972
Settlement charges 2,724 2,320
Other 2,572 2,605
Income taxes 914 1,124
Dividends payable 1,176 1,128
- --------------------------------------------------------------------------------------------------------
Total current liabilities 25,949 18,017
Long-term debt 18,255 11,280
Deferred income taxes 1,827 1,214
Accrued postretirement health care costs 3,287 2,606
Other liabilities 7,317 6,853
- --------------------------------------------------------------------------------------------------------
Total consumer products liabilities 56,635 39,970
Financial services
Short-term borrowings 1,027
Long-term debt 899 946
Deferred income taxes 4,838 4,466
Other liabilities 663 694
- --------------------------------------------------------------------------------------------------------
Total financial services liabilities 7,427 6,106
- --------------------------------------------------------------------------------------------------------
Total liabilities 64,062 46,076
Contingencies (Note 15)
Stockholders' Equity
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) 935 935
Earnings reinvested in the business 33,481 29,556
Accumulated other comprehensive losses
(including currency translation of $2,864 and $2,056) (2,950) (2,108)
Cost of repurchased stock (597,064,937 and 467,441,576 shares) (16,461) (13,078)
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 15,005 15,305
- --------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 79,067 $ 61,381
========================================================================================================
</TABLE>
37
<PAGE>
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
for the years ended December 31,
2000 1999 1998
<S> <C> <C> <C>
Operating revenues $ 80,356 $ 78,596 $ 74,391
Cost of sales 29,148 29,561 26,820
Excise taxes on products 17,080 16,845 16,578
- ---------------------------------------------------------------------------------------------------
Gross profit 34,128 32,190 30,993
Marketing, administration and research costs 18,858 18,118 17,051
Settlement charges 3,381
Amortization of goodwill 591 582 584
- ---------------------------------------------------------------------------------------------------
Operating income 14,679 13,490 9,977
Interest and other debt expense, net 719 795 890
- ---------------------------------------------------------------------------------------------------
Earnings before income taxes 13,960 12,695 9,087
Provision for income taxes 5,450 5,020 3,715
- ---------------------------------------------------------------------------------------------------
Net earnings $ 8,510 $ 7,675 $ 5,372
===================================================================================================
Per share data:
Basic earnings per share $ 3.77 $ 3.21 $ 2.21
===================================================================================================
Diluted earnings per share $ 3.75 $ 3.19 $ 2.20
===================================================================================================
</TABLE>
Consolidated Statements of Cash Flows
(in millions of dollars)
<TABLE>
<CAPTION>
for the years ended December 31,
2000 1999 1998
<S> <C> <C> <C>
Cash Provided By (Used In) Operating Activities
Net earnings--Consumer products $ 8,345 $ 7,534 $ 5,255
--Financial services 165 141 117
- ---------------------------------------------------------------------------------------------------
Net earnings 8,510 7,675 5,372
Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Depreciation and amortization 1,717 1,702 1,690
Deferred income tax provision (benefit) 660 (156) 11
Gains on sales of businesses (274) (62)
Cash effects of changes, net of the effects from
acquired and divested companies:
Receivables, net 7 95 (352)
Inventories 741 (39) (192)
Accounts payable 84 122 (150)
Income taxes (178) 401 565
Accrued liabilities and other current assets (142) 1,343 254
Other (410) (17) 671
Financial services
Deferred income tax provision 346 300 265
Other (17) 11 (14)
- ---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,044 11,375 8,120
- ---------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
for the years ended December 31,
2000 1999 1998
<S> <C> <C> <C>
Cash Provided By (Used In) Investing Activities
Consumer products
Capital expenditures $ (1,682) $(1,749) $(1,804)
Purchase of Nabisco, net of acquired cash (15,159)
Purchase of other businesses, net of acquired cash (417) (522) (17)
Proceeds from sales of businesses 433 175 16
Other 28 37 (154)
Financial services
Investments in finance assets (865) (682) (736)
Proceeds from finance assets 156 59 141
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,506) (2,682) (2,554)
- -------------------------------------------------------------------------------------------------
Cash Provided By (Used In) Financing Activities
Consumer products
Net issuance of short-term borrowings 8,501 435 61
Long-term debt proceeds 3,110 1,339 2,065
Long-term debt repaid (1,702) (1,843) (1,616)
Financial services
Net issuance of short-term borrowings 1,027
Long-term debt proceeds 500
Long-term debt repaid (200) (178)
Repurchase of common stock (3,597) (3,329) (307)
Dividends paid (4,500) (4,338) (3,984)
Issuance of common stock 112 74 265
Other (293) (135) (200)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,658 (7,497) (3,894)
- -------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (359) (177) 127
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents:
(Decrease) increase (4,163) 1,019 1,799
Balance at beginning of year 5,100 4,081 2,282
- -------------------------------------------------------------------------------------------------
Balance at end of year $ 937 $ 5,100 $ 4,081
=================================================================================================
Cash paid: Interest--Consumer products $ 1,005 $ 1,086 $ 1,141
=================================================================================================
--Financial services $ 102 $ 75 $ 79
=================================================================================================
Income taxes $ 4,358 $ 4,308 $ 2,644
=================================================================================================
</TABLE>
See notes to consolidated financial statements
39
<PAGE>
Consolidated Statements of Stockholders' Equity
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Earnings (Losses)
-------------------------------
Earnings Currency Cost of Total
Common Reinvested in Translation Repurchased Stockholders'
Stock the Business Adjustments Other Total Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1998 $935 $24,924 $(1,109) $ -- $(1,109) $ (9,830) $14,920
Comprehensive earnings:
Net earnings 5,372 5,372
Other comprehensive earnings,
net of income taxes:
Currency translation
adjustments 28 28 28
Additional minimum
pension liability (25) (25) (25)
- -------------------------------------------------------------------------------------------------------------------------
Total other comprehensive earnings 3
- -------------------------------------------------------------------------------------------------------------------------
Total comprehensive earnings 5,375
- -------------------------------------------------------------------------------------------------------------------------
Exercise of stock options and issuance
of other stock awards 50 287 337
Cash dividends declared ($1.68 per share) (4,085) (4,085)
Stock repurchased (350) (350)
- -------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 935 26,261 (1,081) (25) (1,106) (9,893) 16,197
Comprehensive earnings:
Net earnings 7,675 7,675
Other comprehensive losses,
net of income taxes:
Currency translation
adjustments (975) (975) (975)
Additional minimum
pension liability (27) (27) (27)
- -------------------------------------------------------------------------------------------------------------------------
Total other comprehensive losses (1,002)
- -------------------------------------------------------------------------------------------------------------------------
Total comprehensive earnings 6,673
- -------------------------------------------------------------------------------------------------------------------------
Exercise of stock options and issuance
of other stock awards 13 115 128
Cash dividends declared ($1.84 per share) (4,393) (4,393)
Stock repurchased (3,300) (3,300)
- -------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 935 29,556 (2,056) (52) (2,108) (13,078) 15,305
Comprehensive earnings:
Net earnings 8,510 8,510
Other comprehensive losses,
net of income taxes:
Currency translation
adjustments (808) (808) (808)
Additional minimum
pension liability (34) (34) (34)
- -------------------------------------------------------------------------------------------------------------------------
Total other comprehensive losses (842)
- -------------------------------------------------------------------------------------------------------------------------
Total comprehensive earnings 7,668
- -------------------------------------------------------------------------------------------------------------------------
Exercise of stock options and issuance
of other stock awards (37) 217 180
Cash dividends declared ($2.02 per share) (4,548) (4,548)
Stock repurchased (3,600) (3,600)
- -------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2000 $935 $33,481 $(2,864) $(86) $(2,950) $(16,461) $15,005
=========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies:
- - Basis of presentation: The consolidated financial statements include the
Company and its subsidiaries. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the dates of the financial statements and the reported
amounts of operating revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Balance sheet accounts are segregated by two broad types of business.
Consumer products assets and liabilities are classified as either current or
non-current, whereas financial services assets and liabilities are unclassified,
in accordance with respective industry practices.
Certain prior years' amounts have been reclassified to conform with the
current year's presentation.
- - Cash and cash equivalents: Cash equivalents include demand deposits with
banks and all highly liquid investments with original maturities of three months
or less.
- - Inventories: Inventories are stated at the lower of cost or market. The
last-in, first-out ("LIFO") method is used to cost substantially all domestic
inventories. The cost of other inventories is principally determined by the
average cost method. It is a generally recognized industry practice to classify
leaf tobacco inventory as a current asset although part of such inventory,
because of the duration of the aging process, ordinarily would not be utilized
within one year.
- - Impairment of long-lived assets: The Company reviews long-lived assets for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. The Company
performs undiscounted operating cash flow analyses to determine if an impairment
exists. If an impairment is determined to exist, any related impairment loss is
calculated based on fair value. Impairment losses on assets to be disposed of,
if any, are based on the estimated proceeds to be received, less costs of
disposal.
- - Depreciation, amortization and goodwill valuation: Property, plant and
equipment are stated at historical cost and depreciated by the straight-line
method over the lives of the assets. Machinery and equipment are depreciated
over periods ranging from 3 to 20 years and buildings and building improvements
over periods up to 50 years. Goodwill and other intangible assets substantially
comprise brand names purchased through acquisitions. In consideration of the
long histories of these brands, goodwill and other intangible assets associated
with them are amortized on the straight-line method over 40 years. The Company
periodically evaluates the recoverability of its intangible assets and measures
any impairment by comparison with estimated undiscounted operating cash flows.
- - Advertising costs: Advertising costs are expensed as incurred.
- - Income taxes: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities, using enacted tax rates in effect for the year in
which the differences are expected to reverse.
- - Revenue recognition: The Company's consumer products businesses recognize
operating revenues upon shipment of goods when title and risk of loss passes to
customers. Staff Accounting Bulletin No. 101, "Revenue Recognition," issued by
the Securities and Exchange Commission, did not have an impact on the Company's
operating revenues for any of the years presented. For the Company's financial
services segment, income attributable to leveraged leases is initially recorded
as unearned income and subsequently recognized as finance lease revenue over the
terms of the respective leases at a constant after-tax rate of return on the
positive net investment. Income attributable to direct finance leases is
initially recorded as unearned income and subsequently recognized as finance
lease revenue over the terms of the respective leases at a constant pre-tax rate
of return on the net investment.
During 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14,
"Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the
recognition, measurement and statement of earnings classification for certain
sales incentives and will be effective in the second quarter of 2001. As a
result, certain items previously included in cost of sales and in marketing,
administration and research costs on the consolidated statement of earnings
will be recorded as a reduction of operating revenues. The Company has
determined that the impact of adoption or subsequent application of EITF Issue
No. 00-14 will not have a material effect on its consolidated financial
position or results of operations. Upon adoption, prior period amounts, which
are not expected to be significant, will be reclassified to conform to the new
requirements. In addition, the EITF issued EITF No. 00-10, "Accounting for
Shipping and Handling Fees and Costs." EITF No. 00-10 addresses the statement
of earnings classification of shipping and handling costs billed to customers
41
<PAGE>
and was effective for the fourth quarter of 2000. EITF No. 00-10 did not have an
impact on the consolidated financial statements of the Company for any of the
years presented.
- - Hedging instruments: The Company utilizes certain financial instruments to
manage its foreign currency, commodity and interest rate exposures. The Company
does not engage in trading or other speculative use of these financial
instruments. For a financial instrument to qualify as a hedge, the Company must
be exposed to price, currency or interest rate risk, and the financial
instrument must reduce the exposure and be designated as a hedge. Additionally,
for hedges of anticipated transactions, the significant characteristics and
expected terms of the anticipated transaction must be identified, and it must be
probable that the anticipated transaction will occur. Financial instruments
qualifying for hedge accounting must maintain a high correlation between the
hedging instrument and the item being hedged, both at inception and throughout
the hedged period.
The Company uses forward contracts, options and swap agreements to mitigate
its foreign currency exposure. The corresponding gains and losses on those
contracts are deferred and included in the basis of the underlying hedged
transactions when settled. Options are used to hedge anticipated transactions.
Option premiums are recorded generally as other current assets on the
consolidated balance sheets and amortized to interest and other debt expense,
net, over the lives of the related options. The intrinsic values of options are
recognized as adjustments to the related hedged items. If anticipated
transactions were not to occur, any gains or losses would be recognized in
earnings currently. Foreign currency and related interest rate swap agreements
are used to hedge certain foreign currency net investments. Realized and
unrealized gains and losses on foreign currency swap agreements that are
effective as hedges of net assets in foreign subsidiaries are offset against
currency translation adjustments as accumulated other comprehensive losses. The
interest differential to be paid or received under the currency and related
interest rate swap agreement is included in interest and other debt expense,
net. Gains and losses on terminated foreign currency swap agreements, if any,
are recorded in stockholders' equity as currency translation adjustments.
Commodity futures and forward contracts are used by the Company to procure
raw materials, primarily coffee, cocoa, sugar, milk, cheese, wheat and corn.
Commodity futures and options are also used to hedge the price of certain
commodities, primarily coffee and cocoa. Realized gains and losses on commodity
futures, forward contracts and options are deferred as a component of
inventories and are recognized when related raw material costs are charged to
cost of sales. If the anticipated transaction were not to occur, the gain or
loss would be recognized in earnings currently.
The Company uses interest rate swaps to hedge certain interest rate
exposures. The differential to be paid or received is accrued and recognized as
interest expense. Any premium paid or received is amortized on a straight-line
basis over the duration of the hedged instrument. If an interest rate swap
agreement is terminated prior to maturity, the realized gain or loss is
recognized over the remaining life of the agreement if the hedged amount remains
outstanding, or immediately if the underlying hedged exposure does not remain
outstanding. If the underlying exposure is terminated prior to the maturity of
the interest rate swap, the unrealized gain or loss on the related interest rate
swap is recognized in earnings currently.
During 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
had an initial adoption date of January 1, 2000. During 1999, the FASB postponed
the required adoption date of SFAS No. 133 until January 1, 2001. In addition,
during 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," which amends the requirements of
SFAS No. 133. These standards require that all derivative financial instruments
be recorded on consolidated balance sheets at fair value as either assets or
liabilities. 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 and effective 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. Initial adoption of
these new standards on January 1, 2001 will have an insignificant impact on the
Company's consolidated financial position and results of operations. Since the
impact of SFAS No. 133 after adoption is dependent on future market rates and
outstanding derivative positions, the Company cannot determine the impact that
application subsequent to January 1, 2001 will have on its financial position or
results of operations.
- - Stock-based compensation: The Company accounts for employee stock
compensation plans in accordance with the intrinsic value-based method permitted
by SFAS No. 123, "Accounting for Stock-Based Compensation," which does not
result in compensation cost.
- - Software costs: The Company capitalizes certain computer software and
software development costs incurred in connection with developing or obtaining
computer software for internal use in accordance with Statement of Position No.
98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which was adopted by the Company as of January 1,
1998. Capitalized software costs are amortized on a straight-line basis over the
estimated useful lives of the software, which do not exceed five years.
- - Foreign currency translation: The Company translates the results of
operations of its foreign subsidiaries using average exchange rates during each
period, whereas balance sheet accounts are translated using exchange rates at
the end of each period. Currency translation adjustments are recorded as a
component of stockholders' equity.
Note 2. Divestitures:
During 2000, the Company sold a French confectionery business for proceeds of
$251 million, on which a pre-tax gain of $139 million was recorded. In addition,
Miller Brewing Company ("Miller"), the Company's beer subsidiary, sold its
rights to Molson trademarks in the United States for proceeds of $131 million,
on which a pre-tax gain of $100 million was recorded. The aggregate proceeds
received in divestiture transactions in 2000, including the sale of
42
<PAGE>
several small international food, domestic food and beer businesses, were $433
million, on which the Company recorded pre-tax gains of $274 million.
During 1999, the Company sold several small international and domestic food
businesses. The aggregate proceeds received in these transactions were $175
million, on which the Company recorded pre-tax gains of $62 million.
The operating results of the businesses sold were not material to the
Company's consolidated operating results in any of the periods presented.
Pre-tax gains on these divestitures were included in marketing, administration
and research costs in the Company's consolidated statements of earnings.
Note 3. Acquisitions:
- - Nabisco: On December 11, 2000, the Company acquired all of the outstanding
shares of Nabisco Holdings Corp. ("Nabisco") for $55 per share in cash. The
purchase of the outstanding shares, retirement of employee stock options and
other payments totaled approximately $15.2 billion. In addition, the acquisition
included the assumption of approximately $4.0 billion of existing Nabisco debt.
The acquisition was financed by the Company through the issuance of $9.2 billion
of short-term obligations, $3.0 billion of short-term floating rate notes and
$3.0 billion of available cash. The acquisition has been accounted for as a
purchase. Nabisco's balance sheet has been consolidated with the Company as of
December 31, 2000; however, Nabisco's earnings subsequent to December 11, 2000
have not been included in the consolidated operating results of the Company
since such amounts were insignificant to consolidated operating results for the
year ended December 31, 2000. The Company's interest cost on borrowings
associated with acquiring Nabisco have been included in interest and other debt
expense, net, on the Company's consolidated statement of earnings for the year
ended December 31, 2000.
In order to comply with United States of America trade regulations governing
the acquisition, Nabisco sold its domestic dry packaged dessert and baking
powder businesses, as well as its intense mints and gum businesses in December
2000. Since these businesses were sold at fair value, no gain or loss related to
these sales was recorded in the Company's consolidated statement of earnings for
the year ended December 31, 2000. In addition, the Company has determined that
it will sell six additional Nabisco businesses that do not align strategically
with the Company's food operations. The estimated net realizable value of these
businesses, plus the estimated results of operations through anticipated sales
dates throughout 2001, total $276 million and have been segregated as assets
held for sale on the Company's consolidated balance sheet at December 31, 2000.
The excess of the purchase price over the estimated fair value of the net
assets purchased was approximately $16.8 billion and will be amortized over 40
years by the straight-line method. The allocation of excess purchase price is
based upon preliminary estimates and assumptions and is subject to revision when
appraisals and integration plans have been finalized. Accordingly, revisions to
the allocation, which may be significant, will be reported in a future period as
increases or decreases to amounts previously reported as goodwill, other
intangible assets (including trade names), deferred income taxes and
amortization of intangibles. At December 31, 2000, excess purchase price has
been allocated to reflect current estimates as follows:
<TABLE>
<CAPTION>
(in millions)
================================================================================
Increase
(Decrease)
to Excess
Purchase Price
================================================================================
<S> <C>
Purchase price $15,254
Historical value of assets acquired and
liabilities assumed (1,271)
- --------------------------------------------------------------------------------
Excess of purchase price over assets acquired
and liabilities assumed at the date of acquisition 16,525
Adjustments for allocation of purchase price:
Inventories (4)
Property, plant and equipment (45)
Assets held for sale (59)
Other intangibles (primarily workforce) (100)
Debt 70
Other, principally benefit plans 561
Deferred income taxes (176)
- --------------------------------------------------------------------------------
Unallocated excess purchase price at
December 31, 2000 $16,772
================================================================================
</TABLE>
In addition to the above, the Company is evaluating plans to close up to 30
additional Nabisco domestic and international facilities, pending the completion
of logistical studies. The closure of these facilities could result in
additional severance and other exit liabilities (and a corresponding increase to
excess purchase price) of $500 million to $600 million. These amounts will be
recorded on the Company's consolidated balance sheet as adjustments to the
excess purchase price when plans have been finalized and announced to employees.
The integration of Nabisco into the operations of Kraft Foods Inc.
("Kraft"), the Company's wholly-owned food subsidiary, may result in the closure
of several existing Kraft plants. These actions could result in charges of $200
million to $300 million, which will be recorded as expense in the Company's
consolidated statement of earnings in the period during which plans are
finalized and announced.
Had the acquisition of Nabisco occurred at the beginning of 2000 and 1999,
pro forma operating revenues, net earnings, basic earnings per share and diluted
earnings per share, after giving effect to the previously discussed preliminary
allocation of excess purchase price, Nabisco businesses sold or to be sold and
the interest expense on acquisition borrowings, would have been as follows for
the years ended December 31, 2000 and 1999:
<TABLE>
<CAPTION>
(in millions, except per share data, unaudited)
2000 1999
================================================================================
<S> <C> <C>
Operating revenues $88,503 $86,138
Net earnings 7,958 7,084
Basic earnings per share 3.52 2.96
Diluted earnings per share 3.50 2.95
================================================================================
</TABLE>
The pro forma results do not give effect to any synergies expected to result
from the merger of Nabisco's operations with those of Kraft. Accordingly, the
pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been consummated at the beginning of each
43
<PAGE>
year, nor are they necessarily indicative of future consolidated results.
The Nabisco condensed balance sheet data at December 31, 2000, including the
previously discussed preliminary allocations of excess purchase price, has been
included in the Company's consolidated balance sheet at December 31, 2000, as
follows:
<TABLE>
<CAPTION>
(in millions)
================================================================================
<S> <C>
Assets
Current assets $ 1,840
Property, plant and equipment 2,851
Goodwill 16,772
Other assets 909
- --------------------------------------------------------------------------------
Total assets $22,372
================================================================================
Liabilities
Current liabilities $ 2,242
Long-term debt 2,392
Other long-term liabilities 1,464
- --------------------------------------------------------------------------------
Total liabilities $ 6,098
================================================================================
</TABLE>
In 2001, Kraft plans to undertake an initial public offering ("IPO") of less
than 20% of its common stock. If completed as anticipated, the IPO proceeds will
be used to retire a portion of the debt incurred as a result of the acquisition
of Nabisco.
- - Other Acquisitions: During 2000, Kraft purchased the outstanding common
stock of Balance Bar Co., a maker of energy and nutrition snack products. In a
separate transaction, Kraft also acquired Boca Burger, Inc., a privately held
manufacturer and marketer of soy-based meat alternatives. The total cost of
these acquisitions was $358 million.
During 1999, Philip Morris International ("PM International"), the Company's
international tobacco subsidiary, increased its ownership interest in a
Portuguese tobacco company from 65% to 90% at a cost of $70 million. PM
International also increased its ownership interest in a Polish tobacco company
from 75% to 96% at a cost of $104 million.
During 1999, Miller purchased four trademarks from the Pabst Brewing Company
("Pabst") and the Stroh Brewery Company. Miller also agreed to increase its
contract manufacturing of Pabst products. In addition, Miller assumed ownership
of the Pabst brewery in Tumwater, Washington. The total cost of the four
trademarks and the brewery was $189 million.
During 1998, Philip Morris Incorporated ("PM Inc."), the Company's domestic
tobacco subsidiary, paid $150 million for options to purchase the voting and
non-voting common stock of a company (the "acquiree"), the sole assets of which
are three U.S. cigarette trademarks, L&M, Lark and Chesterfield. During 1999, PM
Inc. completed the acquisition. Including the $150 million paid in December
1998, the total acquisition price was approximately $300 million.
The effects of these and other smaller acquisitions were not material to the
Company's consolidated financial position or results of operations in any of the
periods presented.
Note 4. Inventories:
The cost of approximately 52% and 47% of inventories in 2000 and 1999,
respectively, was determined using the LIFO method. The stated LIFO amounts of
inventories were approximately $0.8 billion lower than the current cost of
inventories at December 31, 2000 and 1999.
Note 5. Short-Term Borrowings and Borrowing Arrangements:
At December 31, the Company's short-term borrowings and
related average interest rates consisted of the following:
<TABLE>
<CAPTION>
(in millions)
======================================================================================
2000 1999
======================================================================================
Average Average
Amount Year-End Amount Year-End
Outstanding Rate Outstanding Rate
=======================================================================================
<S> <C> <C> <C> <C>
Consumer products:
Bank loans $ 368 9.3% $676 8.8%
Commercial paper 9,805 6.7
Amount reclassified
as long-term debt (7,007) (35)
- ---------------------------------------------------------------------------------------
$ 3,166 $641
=======================================================================================
Financial services:
Commercial paper $ 1,027 6.6%
=======================================================================================
</TABLE>
The fair values of the Company's short-term borrowings at December 31, 2000 and
1999, based upon current market interest rates, approximate the amounts
disclosed above.
The Company and its subsidiaries maintain credit facilities with a number of
lending institutions, amounting to approximately $19.1 billion at December 31,
2000. Approximately $18.7 billion of these facilities were unused at December
31, 2000. Certain of these facilities, used to support commercial paper
borrowings, are available for acquisitions and other corporate purposes and
require the maintenance of a fixed charges coverage ratio. The Company's credit
facilities include a $9.0 billion, 364-day revolving credit facility, entered
into in October 2000, in connection with the acquisition of Nabisco, and a term
revolving credit facility for $8.0 billion. The term revolving credit facility
expires in October 2002 and enables the Company to reclassify short-term debt on
a long-term basis. Approximately $7.0 billion of short-term borrowings that the
Company intends to refinance were reclassified as long-term debt.
During 2001, Kraft intends to undertake an IPO of less than 20% of its
common stock. If completed as anticipated, the IPO proceeds from the sale of
Kraft stock will be used to retire a portion of the short-term borrowings used
to purchase Nabisco, some of which have been reclassified as long-term debt.
44
<PAGE>
Note 6. Long-Term Debt:
At December 31, 2000 and 1999, the Company's long-term debt consisted of the
following:
<TABLE>
<CAPTION>
(in millions)
2000 1999
===============================================================================
<S> <C> <C>
Consumer products:
Short-term borrowings, reclassified
as long-term debt $ 7,007 $ 35
Notes, 6.00% to 9.25% (average
effective rate 7.13%), due
through 2035 12,901 8,315
Debentures, 6.00% to 8.50%
(average effective rate 9.44%),
$1.6 billion face amount, due
through 2027 1,500 1,471
Foreign currency obligations:
Euro, 4.50% to 5.63%
(average effective rate 5.07%),
due through 2008 1,881 2,103
German mark, 5.63%, due 2002 143 319
Other foreign 193 278
Other 405 360
- -------------------------------------------------------------------------------
24,030 12,881
Less current portion of long-term debt (5,775) (1,601)
- -------------------------------------------------------------------------------
$18,255 $11,280
===============================================================================
Financial services:
Eurodollar bonds, 7.50%, due 2009 $ 497 $ 497
Foreign currency obligations:
French franc, 6.88%, due 2006 141 158
German mark, 6.50% and 5.38%
(average effective rate 5.89%),
due 2003 and 2004 261 291
- -------------------------------------------------------------------------------
$ 899 $ 946
===============================================================================
</TABLE>
Aggregate maturities of long-term debt, excluding short-term borrowings
reclassified as long-term debt, are as follows:
<TABLE>
<CAPTION>
Consumer Financial
(in millions) products services
===============================================================================
<S> <C> <C>
2001 $5,775
2002 1,749
2003 1,596 $119
2004 992 142
2005 1,805
2006-2010 3,716 638
2011-2015 643
Thereafter 821
===============================================================================
</TABLE>
Based on market quotes, where available, or interest rates currently available
to the Company for issuance of debt with similar terms and remaining maturities,
the aggregate fair value of consumer products and financial services long-term
debt, including the current portion of long-term debt, at December 31, 2000 and
1999, was $24.9 billion and $13.5 billion, respectively.
Note 7. Capital Stock:
Shares of authorized common stock are 12 billion; issued, repurchased and
outstanding were as follows:
<TABLE>
<CAPTION>
Shares Shares Net Shares
Issued Repurchased Outstanding
===============================================================================
<S> <C> <C> <C>
Balances,
January 1,
1998 2,805,961,317 (380,474,028) 2,425,487,289
Exercise of stock
options and
issuance of other
stock awards 11,501,286 11,501,286
Repurchased (6,454,000) (6,454,000)
- -------------------------------------------------------------------------------
Balances,
December 31,
1998 2,805,961,317 (375,426,742) 2,430,534,575
Exercise of stock
options and
issuance of other
stock awards 4,614,412 4,614,412
Repurchased (96,629,246) (96,629,246)
- -------------------------------------------------------------------------------
Balances,
December 31,
1999 2,805,961,317 (467,441,576) 2,338,519,741
Exercise of stock
options and
issuance of
other stock
awards 7,938,869 7,938,869
Repurchased (137,562,230) (137,562,230)
- -------------------------------------------------------------------------------
Balances,
December 31,
2000 2,805,961,317 (597,064,937) 2,208,896,380
===============================================================================
</TABLE>
At December 31, 2000, 269,011,330 shares of common stock were reserved for stock
options and other stock awards under the Company's stock plans, and 10 million
shares of Serial Preferred Stock, $1.00 par value, were authorized, none of
which have been issued.
Note 8. Stock Plans:
Under the Philip Morris 1997 Performance Incentive Plan (the "1997 Plan"), the
Company may grant to eligible employees stock options, stock appreciation
rights, restricted stock, reload options and other stock-based awards, as well
as cash-based annual and long-term incentive awards. Up to 120 million shares of
common stock may be issued under the 1997 Plan, of which no more than 36 million
shares may be awarded as restricted stock. Shares available to be granted under
the 1997 Plan at December 31, 2000 were 22,944,839.
45
<PAGE>
In 2000, the Company's Board of Directors adopted, and the stockholders
approved, the Philip Morris 2000 Performance Incentive Plan (the "2000 Plan").
The 2000 Plan is intended to replace the 1997 Plan when all shares available for
issuance under the 1997 Plan have been issued or are subject to outstanding
awards. No shares will be issued under the 2000 Plan until the remaining shares
under the 1997 Plan are used. Under the 2000 Plan, the Company may grant to
eligible employees stock options, stock appreciation rights, restricted stock,
reload options and other stock-based awards, as well as cash-based annual and
long-term incentive awards. Up to 110 million shares of common stock may be
issued under the 2000 Plan, of which no more than 27.5 million shares may be
awarded as restricted stock. Also in 2000, the Company's Board of Directors
adopted, and the stockholders approved, the 2000 Stock Compensation Plan for
Non-Employee Directors (the "2000 Directors Plan"). Under the 2000 Directors
Plan, only members of the Board of Directors who are not employees of the
Company or its subsidiaries are granted awards. Up to one million shares of
common stock may be awarded under the 2000 Directors Plan. Shares available to
be granted under the 2000 Plan and 2000 Directors Plan at December 31, 2000 were
110,000,000 and 874,693, respectively.
Stock options are granted at an exercise price of not less than fair value
on the date of the grant. Stock options granted under the 1997 Plan, the 2000
Plan or the 2000 Directors Plan (collectively, "the Plans") generally become
exercisable on the first anniversary of the grant date and have a maximum term
of ten years.
The Company applies the intrinsic value-based methodology in accounting for
the Plans. Accordingly, no compensation expense has been recognized other than
for restricted stock awards. Had compensation cost for stock option awards under
the Plans been determined by using the fair value at the grant date, the
Company's net earnings and basic and diluted earnings per share ("EPS") would
have been $8,389 million, $3.71 and $3.69, respectively, for the year ended
December 31, 2000; $7,582 million, $3.17 and $3.16, respectively, for the year
ended December 31, 1999; and $5,280 million, $2.17 and $2.16, respectively, for
the year ended December 31, 1998. The foregoing impact of compensation cost was
determined using a modified Black-Scholes methodology and the following
assumptions:
<TABLE>
<CAPTION>
Weighted
Average Expected
Risk-Free Expected Expected Dividend Fair Value at
Interest Rate Life Volatility Yield Grant Date
===================================================================================
<C> <C> <C> <C> <C> <C>
2000 6.57% 5 years 31.73% 8.98% $3.22
1999 5.81 5 26.06 4.41 8.21
1998 5.52 5 23.83 4.03 7.78
===================================================================================
</TABLE>
Option activity was as follows for the years ended December 31, 1998, 1999 and
2000:
<TABLE>
<CAPTION>
Weighted
Shares Average
Subject Exercise Options
to Option Price Exercisable
================================================================================
Balance at
<S> <C> <C> <C>
January 1, 1998 83,645,559 $29.13 67,827,399
Options granted 18,652,100 39.74
Options exercised (12,042,497) 22.56
Options canceled (3,051,498) 31.74
- --------------------------------------------------------------------------------
Balance at
December 31, 1998 87,203,664 32.21 68,864,594
Options granted 22,154,585 39.87
Options exercised (5,665,611) 20.37
Options canceled (3,386,670) 30.08
- --------------------------------------------------------------------------------
Balance at
December 31, 1999 100,305,968 34.65 78,423,023
Options granted 41,535,255 21.47
Options exercised (5,263,363) 21.16
Options canceled (3,578,922) 32.87
- --------------------------------------------------------------------------------
Balance at
December 31, 2000 132,998,938 31.11 92,266,885
================================================================================
</TABLE>
The weighted average exercise prices of options exercisable at December 31,
2000, 1999 and 1998 were $35.30, $33.19 and $30.21, respectively.
The following table summarizes the status of stock options outstanding and
exercisable as of December 31, 2000 by range of exercise price:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
================================================================================
<S> <C> <C> <C> <C> <C>
$16.35-$22.09 47,685,580 8 years $20.80 7,744,510 $17.99
24.52- 34.90 29,367,639 4 29.35 29,100,072 29.31
35.75- 40.00 41,998,194 7 39.81 41,474,778 39.84
41.62- 58.72 13,947,525 6 43.90 13,947,525 43.90
- --------------------------------------------------------------------------------
132,998,938 92,266,885
=========== ==========
</TABLE>
The Company may grant shares of restricted stock and rights to receive shares of
stock to eligible employees, giving them in most instances all of the rights of
stockholders, except that they may not sell, assign, pledge or otherwise
encumber such shares and rights. Such shares and rights are subject to
forfeiture if certain employment conditions are not met. During 2000, 1999 and
1998, the Company granted 3,473,270, 100,000 and 603,650 shares, respectively,
of restricted stock to eligible U.S.-based employees and also issued to eligible
non-U.S. employees rights to receive 1,717,640, 125,000 and 120,500 equivalent
shares, respectively. At December 31, 2000, restrictions on the stock, net of
forfeitures, lapse as follows: 2001 -- 62,500 shares; 2002 -- 6,363,060 shares;
2003 -- 289,250 shares; 2004 -- 126,000 shares; and 2005 and thereafter
- -- 417,000 shares.
The fair value of the restricted shares and rights at the date of grant is
amortized to expense ratably over the restriction period. The Company recorded
compensation expense related to restricted stock and other stock awards of $84
million, $9 million and $34 million for the years ended December 31, 2000, 1999
and 1998, respectively. The unamortized portion, which is reported as a
46
<PAGE>
reduction of earnings reinvested in the business, was $83 million and $47
million at December 31, 2000 and 1999, respectively.
Note 9. Earnings per Share:
Basic and diluted EPS were calculated using the following for the years ended
December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
(in millions)
================================================================================
2000 1999 1998
================================================================================
<S> <C> <C> <C>
Net earnings $8,510 $7,675 $5,372
================================================================================
Weighted average shares for
basic EPS 2,260 2,393 2,429
Plus incremental shares from
conversions:
Restricted stock and stock rights 4 2 1
Stock options 8 8 16
- --------------------------------------------------------------------------------
Weighted average shares for
diluted EPS 2,272 2,403 2,446
================================================================================
</TABLE>
In 2000, 1999, and 1998, options on 69 million, 47 million and 15 million shares
of common stock, respectively, were not included in the calculation of weighted
average shares for diluted EPS because the effect of their inclusion would be
antidilutive.
Note 10. Pre-tax Earnings and Provision for Income Taxes:
Pre-tax earnings and provision for income taxes consisted of the following
for the years ended December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
(in millions)
================================================================================
2000 1999 1998
================================================================================
<S> <C> <C> <C>
Pre-tax earnings:
United States $ 9,264 $ 8,495 $5,134
Outside United States 4,696 4,200 3,953
- --------------------------------------------------------------------------------
Total pre-tax earnings $13,960 $12,695 $9,087
================================================================================
Provision for income taxes:
United States federal:
Current $ 2,571 $ 2,810 $1,614
Deferred 736 280 171
- --------------------------------------------------------------------------------
3,307 3,090 1,785
State and local 552 485 350
- --------------------------------------------------------------------------------
Total United States 3,859 3,575 2,135
- --------------------------------------------------------------------------------
Outside United States:
Current 1,321 1,581 1,475
Deferred 270 (136) 105
- --------------------------------------------------------------------------------
Total outside
United States 1,591 1,445 1,580
- --------------------------------------------------------------------------------
Total provision for income taxes $ 5,450 $ 5,020 $3,715
================================================================================
</TABLE>
At December 31, 2000, applicable United States federal income taxes and foreign
withholding taxes have not been provided on approximately $4.7 billion of
accumulated earnings of foreign subsidiaries that are expected to be permanently
reinvested. If these amounts were not considered permanently reinvested,
additional deferred income taxes of approximately $242 million would have been
provided.
The effective income tax rate on pre-tax earnings differed from the U.S.
federal statutory rate for the following reasons for the years ended
December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
================================================================================
2000 1999 1998
================================================================================
<S> <C> <C> <C>
U.S. federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes,
net of federal tax benefit 2.6 2.5 2.5
Rate differences--foreign
operations (1.0) (0.3) (0.2)
Goodwill amortization 1.3 1.4 2.0
Other 1.1 0.9 1.6
- --------------------------------------------------------------------------------
Effective tax rate 39.0% 39.5% 40.9%
================================================================================
</TABLE>
The tax effects of temporary differences that gave rise to consumer products
deferred income tax assets and liabilities consisted of the following at
December 31, 2000 and 1999:
<TABLE>
<CAPTION>
================================================================================
2000 1999
================================================================================
<S> <C> <C>
Deferred income tax assets:
Accrued postretirement and
postemployment benefits $ 1,421 $ 1,200
Settlement charges 964 854
Other 591 959
- -------------------------------------------------------------------------------
Total deferred income tax assets 2,976 3,013
- -------------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment (2,260) (1,851)
Prepaid pension costs (628) (447)
- -------------------------------------------------------------------------------
Total deferred income tax liabilities (2,888) (2,298)
- -------------------------------------------------------------------------------
Net deferred income tax assets $ 88 $ 715
================================================================================
</TABLE>
Financial services deferred income tax liabilities are primarily
attributable to temporary differences from investments in finance leases.
Note 11. Segment Reporting:
The Company's products include cigarettes, food (consisting principally of
beverages, cheese, snacks, convenient meals and various packaged grocery
products) and beer. A subsidiary of the Company, Philip Morris Capital
Corporation, invests in leveraged and direct finance leases, other tax-oriented
financing transactions and third-party financings. These products and services
constitute the Company's reportable segments of domestic tobacco, international
tobacco, North American food, international food, beer and financial services.
The Company's management reviews operating companies income to evaluate
segment performance and allocate resources. Operating companies income for the
reportable segments excludes general corporate expenses, minority interest and
amortization of goodwill. Interest and other debt expense, net (consumer
products), and provision for income taxes are centrally managed at the corporate
level and, accordingly, such items are not presented by segment since they are
excluded from the measure of segment profitability reviewed by the Company's
management. The Company's assets are managed on a worldwide basis by major
products and, accordingly, asset information is reported for the tobacco, food,
beer and financial services segments. Goodwill and related amortization are
47
<PAGE>
principally attributable to the food businesses. Other assets consist primarily
of cash and cash equivalents. The accounting policies of the segments are the
same as those described in the Summary of Significant Accounting Policies.
Effective in 2000, managerial responsibility for the Company's food operations
in Mexico and Puerto Rico was transferred from the international food segment to
the North American food segment. Accordingly, all prior period amounts have
been reclassified to reflect the transfer.
Reportable segment data were as follows:
<TABLE>
<CPATION>
For the years ended December 31,
(in millions)
================================================================================
2000 1999 1998
================================================================================
<S> <C> <C> <C>
Operating revenues:
Domestic tobacco $22,658 $19,596 $15,310
International tobacco 26,374 27,506 27,390
North American food 18,461 17,897 17,640
International food 8,071 8,900 9,671
Beer 4,375 4,342 4,105
Financial services 417 355 275
- --------------------------------------------------------------------------------
Total operating revenues $80,356 $78,596 $74,391
================================================================================
Operating companies income:
Domestic tobacco $ 5,350 $ 4,865 $ 1,489
International tobacco 5,211 4,968 5,029
North American food 3,547 3,190 3,128
International food 1,208 1,063 1,054
Beer 650 511 451
Financial services 262 228 183
- --------------------------------------------------------------------------------
Total operating companies
income 16,228 14,825 11,334
Amortization of goodwill (591) (582) (584)
General corporate expenses (831) (627) (645)
Minority interest (127) (126) (128)
- --------------------------------------------------------------------------------
Total operating income 14,679 13,490 9,977
Interest and other debt
expense, net (719) (795) (890)
- --------------------------------------------------------------------------------
Total earnings before
income taxes $13,960 $12,695 $ 9,087
================================================================================
</TABLE>
During 1999, PM Inc. announced plans to phase out cigarette production capacity
at its Louisville, Kentucky, manufacturing plant by August 2000 (the "Louisville
Closure"). PM Inc. recorded pre-tax charges of $183 million during 1999. These
charges, which are in marketing, administration and research costs in the
consolidated statement of earnings for the domestic tobacco segment, included
enhanced severance, pension and postretirement benefits for approximately 1,500
hourly and salaried employees. Severance benefits, which were either paid in a
lump sum or as income protection payments over a period of time, commenced upon
termination of employment. Payments of enhanced pension and postretirement
benefits are being 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, were charged to
expense as incurred during the closing period. As of June 30, 2000, the facility
was closed. As of December 31, 2000, the remaining liability of approximately
$50 million is comprised of severance, substantially all of which will be paid
in the first six months of 2001 in accordance with the Company's plans. During
1998, PM Inc. recorded pre-tax charges of $319 million, principally for
voluntary separation, early retirement and severance programs. The 1998 charges
were primarily for enhanced pension and postretirement benefits for the
approximately 2,100 hourly and salaried employees at various operating locations
who elected to participate in the program. Benefit payments were made in
accordance with the provisions of the related pension and postretirement benefit
plans. Operating companies income for the domestic tobacco segment also included
pre-tax tobacco litigation settlement charges of $3,381 million for the year
ended December 31, 1998.
During 1999, Kraft Foods North America ("Kraft N.A.") 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 N.A. recorded a pre-tax charge of $157 million during 1999. This
charge was included in marketing, administration and research costs in the
consolidated statement of earnings for 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 were paid over a period
of time, commenced upon dates of termination that ranged from April 1999 to
March 2000. The program was completed during 2000. Salary and related benefit
costs of employees prior to the retirement or termination date were expensed as
incurred.
During 1999, PM International announced the closure of a cigarette factory
and the corresponding reduction of cigarette production capacity in Brazil.
Prior to the factory closure, existing employees were offered voluntary
dismissal benefits. These benefits were accepted by half of the approximately
1,000 employees at the facility. During the third quarter of 1999, the factory
was closed and the remaining employees were terminated. PM International
recorded a pre-tax charge of $136 million in marketing, administration and
research costs in the consolidated statement of earnings of the international
tobacco segment to write down the tobacco machinery and equipment no longer in
use and to recognize the cost of severance benefits. As of December 31, 2000,
the remaining liability of approximately $4 million is comprised principally of
severance.
Miller recorded a pre-tax charge of $29 million in marketing, administration
and research costs in the consolidated statement of earnings of the beer segment
in 1999 to write down the book value of three brewing facilities to their
estimated fair values. During 2000, one of the facilities was closed, while the
remaining two facilities were sold.
General corporate expenses for the year ended December 31, 1998 included
pre-tax charges of $116 million related to the settlement of shareholder
litigation and $18 million for separation programs covering approximately 100
hourly and salaried employees at the Company's corporate headquarters.
See Notes 2 and 3 regarding divestitures and acquisitions.
48
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
(in millions)
================================================================================
2000 1999 1998
================================================================================
<S> <C> <C> <C>
Depreciation expense:
Domestic tobacco $ 202 $ 212 $ 216
International tobacco 277 278 267
North American food 310 286 271
International food 189 205 223
Beer 118 114 108
- --------------------------------------------------------------------------------
1,096 1,095 1,085
Other 30 25 21
- --------------------------------------------------------------------------------
Total depreciation expense $ 1,126 $ 1,120 $ 1,106
================================================================================
Assets:
Tobacco $15,687 $16,241 $16,395
Food 52,071 30,336 31,391
Beer 1,751 1,769 1,503
Financial services 8,402 7,711 6,480
- --------------------------------------------------------------------------------
77,911 56,057 55,769
Other 1,156 5,324 4,151
- --------------------------------------------------------------------------------
Total assets $79,067 $61,381 $59,920
================================================================================
Capital expenditures:
Domestic tobacco $ 156 $ 122 $ 217
International tobacco 410 561 588
North American food 588 575 545
International food 318 285 296
Beer 135 165 129
- --------------------------------------------------------------------------------
1,607 1,708 1,775
Other 75 41 29
- --------------------------------------------------------------------------------
Total capital expenditures $ 1,682 $ 1,749 $ 1,804
================================================================================
</TABLE>
The Company's operations outside the United States, which are principally in the
tobacco and food businesses, are organized into geographic regions within each
segment, with Europe being the most significant. Total tobacco and food segment
revenues attributable to customers located in Germany, the Company's largest
European market, were $7.6 billion, $8.9 billion and $9.2 billion for the years
ended December 31, 2000, 1999 and 1998, respectively.
Geographic data for operating revenues and long-lived assets (which consist
of all financial services assets and non-current consumer products assets,
other than goodwill and other intangible assets) were as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
(in millions)
================================================================================
2000 1999 1998
================================================================================
<S> <C> <C> <C>
Operating revenues:
United States--domestic $43,951 $40,287 $35,432
--export 4,354 5,046 6,005
Europe 23,454 25,103 25,169
Other 8,597 8,160 7,785
- --------------------------------------------------------------------------------
Total operating revenues $80,356 $78,596 $74,391
================================================================================
Long-lived assets:
United States $21,314 $17,263 $15,616
Europe 4,020 4,143 4,159
Other 3,405 2,201 2,349
- --------------------------------------------------------------------------------
Total long-lived assets $28,739 $23,607 $22,124
================================================================================
</TABLE>
Note 12. Benefit Plans:
The Company and its subsidiaries sponsor noncontributory defined benefit
pension plans covering substantially all U.S. employees. Pension coverage for
employees of the Company's non-U.S. subsidiaries is provided, to the extent
deemed appropriate, through separate plans, many of which are governed by local
statutory requirements. In addition, the Company and its U.S. and Canadian
subsidiaries provide health care and other benefits to substantially all retired
employees. Health care benefits for retirees outside the United States and
Canada are generally covered through local government plans.
- - Pension Plans: Net pension cost (income) consisted of the following for
the years ended December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
(in millions) U.S. Plans Non-U.S. Plans
================================================================================
2000 1999 1998 2000 1999 1998
================================================================================
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 142 $ 152 $ 156 $ 93 $ 102 $ 91
Interest cost 455 436 406 157 162 165
Expected return on
plan assets (799) (766) (615) (175) (168) (150)
Amortization:
Net gain on
adoption of
SFAS No. 87 (22) (23) (24)
Unrecognized net
loss (gain) from
experience
differences (53) (22) (3) 3 (4)
Prior service cost 21 19 15 5 6 6
Termination,
settlement and
curtailment (34) 22 251
- --------------------------------------------------------------------------------
Net pension cost
(income) $(290) $(182) $ 189 $ 77 $ 105 $ 108
================================================================================
</TABLE>
During 2000, 1999 and 1998, employees left the Company under early retirement
and workforce reduction programs instituted in 1999 and 1998. This resulted in
settlement gains of $34 million in 2000, additional termination benefits of $128
million, net of settlement and curtailment gains of $106 million in 1999, and
additional termination benefits and curtailment losses of $279 million, net of
settlement gains of $28 million in 1998.
49
<PAGE>
The changes in benefit obligations and plan assets, as well as the funded
status of the Company's pension plans at December 31, 2000 and 1999, were as
follows:
<TABLE>
<CAPTION>
(in millions) U.S. Plans Non-U.S. Plans
================================================================================
2000 1999 2000 1999
================================================================================
<S> <C> <C> <C> <C>
Benefit obligation at
January 1 $5,795 $6,220 $3,037 $3,201
Service cost 142 152 93 102
Interest cost 455 436 157 162
Benefits paid (464) (693) (138) (155)
Acquisitions 1,463 236
Termination, settlement
and curtailment 11 210
Actuarial (gains) losses 175 (597) 66 (34)
Currency (301) (272)
Other 25 67 33 33
- --------------------------------------------------------------------------------
Benefit obligation at
December 31 7,602 5,795 3,183 3,037
- --------------------------------------------------------------------------------
Fair value of plan assets at
January 1 9,621 8,703 2,372 2,248
Actual return on plan
assets (350) 1,240 220 252
Contributions 333 309 58 88
Benefits paid (480) (649) (107) (112)
Acquisitions 1,226 265
Currency (192) (194)
Actuarial gains (losses) (8) 18 60 90
- --------------------------------------------------------------------------------
Fair value of plan assets at
December 31 10,342 9,621 2,676 2,372
- --------------------------------------------------------------------------------
Excess (deficit) of plan
assets versus benefit
obligations at
December 31 2,740 3,826 (507) (665)
Unrecognized actuarial
gains (1,167) (2,573) (145) (92)
Unrecognized prior
service cost 152 148 46 37
Unrecognized net
transition obligation (11) (34) 9 10
- --------------------------------------------------------------------------------
Net prepaid pension asset
(liability) $1,714 $1,367 $ (597) $ (710)
================================================================================
</TABLE>
The combined U.S. and non-U.S. pension plans resulted in a net prepaid pension
asset of $1.1 billion and $657 million at December 31, 2000 and 1999,
respectively. These amounts were recognized in the Company's consolidated
balance sheets at December 31, 2000 and 1999, as other assets of $2.6 billion
and $2.2 billion, respectively, for those plans in which plan assets exceeded
their accumulated benefit obligations, and as other liabilities of $1.5 billion
in each year, for those plans in which the accumulated benefit obligations
exceeded their plan assets.
For U.S. plans with accumulated benefit obligations in excess of plan
assets, the projected benefit obligation, accumulated benefit obligation and
fair value of plan assets were $1,485 million, $1,283 million and $926 million,
respectively, as of December 31, 2000, and $305 million, $242 million and $25
million, respectively, as of December 31, 1999. For non-U.S. plans with
accumulated benefit obligations in excess of plan assets, the projected benefit
obligation, accumulated benefit obligation and fair value of plan assets were
$895 million, $804 million and $49 million, respectively, as of December 31,
2000, and $1,020 million, $917 million and $97 million, respectively, as of
December 31, 1999.
The following weighted-average assumptions were used to determine the
Company's obligations under the plans:
<TABLE>
<CAPTION>
U.S. Plans Non-U.S. Plans
================================================================================
2000 1999 2000 1999
================================================================================
<S> <C> <C> <C> <C>
Discount rate 7.75% 7.75% 5.52% 5.58%
Expected rate of return on
plan assets 9.00 9.00 7.93 7.95
Rate of compensation
increase 4.50 4.50 3.81 3.71
================================================================================
</TABLE>
The Company and certain of its subsidiaries sponsor deferred profit-sharing
plans covering certain salaried, non-union and union employees. Contributions
and costs are determined generally as a percentage of pre-tax earnings, as
defined by the plans. Certain other subsidiaries of the Company also maintain
defined contribution plans. Amounts charged to expense for defined contribution
plans totaled $211 million, $198 million and $201 million in 2000, 1999 and
1998, respectively.
- - Postretirement Benefit Plans: Net postretirement health care costs
consisted of the following for the years ended December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
(in millions)
================================================================================
2000 1999 1998
================================================================================
<S> <C> <C> <C>
Service cost $ 51 $ 56 $ 56
Interest cost 199 188 182
Amortization:
Unrecognized net gain from
experience differences (8) (3) (3)
Unrecognized prior service cost (12) (12) (12)
Other expense 23 30
- --------------------------------------------------------------------------------
Net postretirement health
care costs $230 $252 $253
================================================================================
</TABLE>
During 1999 and 1998, the Company instituted early retirement and workforce
reduction programs. These actions resulted in curtailment losses of $23 million
in 1999 and additional postretirement health care costs of $20 million and
curtailment losses of $10 million in 1998, all of which are included in other
expense above.
50
<PAGE>
The Company's postretirement health care plans are not funded. The changes
in the benefit obligations of the plans at December 31, 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
(in millions)
2000 1999
==============================================================================
<S> <C> <C>
Accumulated postretirement benefit obligation
at January 1 $2,529 $2,771
Service cost 51 56
Interest cost 199 188
Benefits paid (161) (142)
Acquisitions 633
Termination, settlement and curtailment 45
Plan amendments 2 (8)
Actuarial losses (gains) 70 (381)
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
at December 31 3,323 2,529
Unrecognized actuarial gains 41 159
Unrecognized prior service cost 76 90
- ------------------------------------------------------------------------------
Accrued postretirement health care costs $3,440 $2,778
==============================================================================
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for U.S. plans was 7.0% in 1999, 6.5% in 2000
and 6.0% in 2001, gradually declining to 5.0% by the year 2003 and remaining at
that level thereafter. For Canadian plans, the assumed health care cost trend
rate was 9.0% in 1999, 8.0% in 2000 and 7.0% in 2001, gradually declining to
4.0% by the year 2004 and remaining at that level thereafter. A one-percentage-
point increase in the assumed health care cost trend rates for each year would
increase the accumulated postretirement benefit obligation as of December 31,
2000, and postretirement health care cost (service cost and interest cost) for
the year then ended by approximately 9.4% and 12.0%, respectively. A
one-percentage-point decrease in the assumed health care cost trend rates for
each year would decrease the accumulated postretirement benefit obligation as of
December 31, 2000, and postretirement health care cost (service cost and
interest cost) for the year then ended by approximately 7.7% and 9.6%,
respectively.
The accumulated postretirement benefit obligations for U.S. plans at
December 31, 2000 and 1999, were determined using assumed discount rates of
7.75%. The accumulated postretirement benefit obligations for Canadian plans at
December 31, 2000 and 1999, were determined using assumed discount rates of
7.0%.
- - Postemployment Benefit Plans: The Company and certain of its affiliates
sponsor postemployment benefit plans covering substantially all salaried and
certain hourly employees. The cost of these plans is charged to expense over the
working life of the covered employees. Net postemployment costs consisted of the
following for the years ended December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
(in millions)
2000 1999 1998
================================================================================
<S> <C> <C> <C>
Service cost $ 26 $ 24 $25
Amortization of unrecognized
net loss 6 2 5
Other expense 161 30
- --------------------------------------------------------------------------------
Net postemployment costs $ 32 $187 $60
================================================================================
</TABLE>
The Company instituted workforce reduction programs in its tobacco and North
American food operations in 1999 and in its domestic tobacco operations in 1998.
These actions resulted in incremental postemployment costs, which are shown as
other expense above.
The Company's postemployment plans are not funded. The changes in the
benefit obligations of the plans at December 31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
(in millions)
2000 1999
================================================================================
<S> <C> <C>
Accumulated benefit obligation at January 1 $ 638 $ 602
Service cost 26 24
Benefits paid (161) (149)
Acquisitions 74
Actuarial losses 79
Other expense 161
- --------------------------------------------------------------------------------
Accumulated benefit obligation at December 31 656 638
Unrecognized actuarial gains (losses) (89) 5
- --------------------------------------------------------------------------------
Accrued postemployment costs $ 567 $ 643
================================================================================
</TABLE>
The accumulated benefit obligation was determined using an assumed ultimate
annual turnover rate of 0.3% in 2000 and 1999, assumed compensation cost
increases of 4.5% in 2000 and 1999, and assumed benefits as defined in the
respective plans. Postemployment costs arising from actions that offer employees
benefits in excess of those specified in the respective plans are charged to
expense when incurred.
Note 13. Additional Information:
<TABLE>
<CAPTION>
For the years ended December 31,
(in millions)
2000 1999 1998
<S> <C> <C> <C>
================================================================================
Research and
development expense $ 538 $ 522 $ 506
================================================================================
Advertising expense $2,353 $2,301 $2,416
================================================================================
Interest and other debt
expense, net:
Interest expense $1,078 $1,100 $1,144
Interest income (359) (305) (254)
- --------------------------------------------------------------------------------
$ 719 $ 795 $ 890
================================================================================
Interest expense of financial
services operations included
in cost of sales $ 96 $ 89 $ 77
================================================================================
Rent expense $ 441 $ 467 $ 429
================================================================================
</TABLE>
Note 14. Financial Instruments:
- - Derivative financial instruments: The Company operates internationally, with
manufacturing and sales facilities in various locations around the world.
Derivative financial instruments are used by the Company for purposes other than
trading, principally to reduce exposures to market risks resulting from
fluctuations in interest rates and foreign exchange rates by creating offsetting
exposures. The Company is not a party to leveraged derivatives.
The Company has foreign currency and related interest rate swap agreements
that were executed to reduce the Company's borrowing costs and serve as hedges
of the Company's net assets in foreign subsidiaries, principally those
denominated in
51
<PAGE>
Swiss francs. At December 31, 2000 and 1999, the aggregate notional principal
amounts of those agreements were $2.4 billion and $3.4 billion, respectively.
Aggregate maturities at December 31, 2000 were as follows (in millions): 2002,
$148; 2003, $146; 2004, $229; 2006, $839; and 2008, $1,010. The local currency
notional amount, which is used to calculate interest payments that are exchanged
over the life of the swap transaction, is equal to the amount of foreign
currency or dollar principal to be exchanged at maturity.
Forward foreign exchange contracts and foreign currency options are used by
the Company to reduce the effect of fluctuating foreign currencies on foreign
currency denominated intercompany and third-party transactions. At December 31,
2000 and 1999, the Company had option and forward foreign exchange contracts,
principally for the Japanese yen, Swiss franc and the Euro, with an aggregate
notional amount of $5.8 billion and $3.8 billion, respectively, for both the
purchase and/or sale of foreign currencies.
- - Credit exposure and credit risk: The Company is exposed to credit loss in
the event of nonperformance by counterparties. However, the Company does not
anticipate nonperformance, and such exposure was not material at December 31,
2000.
- - Fair value: The aggregate fair value, based on market quotes, of the
Company's total debt at December 31, 2000 was $29.1 billion, approximating its
carrying value. The aggregate fair value of the Company's total debt at December
31, 1999 was $14.1 billion as compared with its carrying value of $14.5 billion.
The carrying values of the foreign currency and related interest rate swap
agreements, the forward foreign currency contracts and the currency option
contracts, which did not differ significantly from their fair values, were not
material.
See Notes 5 and 6 for additional disclosures of fair value for short-term
borrowings and long-term debt.
Note 15. Contingencies:
Legal proceedings covering a wide range of matters are pending or threatened in
various United States and foreign jurisdictions against the Company, its
subsidiaries and affiliates, including PM Inc., PM International and their
respective indemnitees. Various types of claims are raised in these proceedings,
including product liability, consumer protection, antitrust, tax, patent
infringement, employment matters, claims for contribution and claims of
competitors and distributors.
Overview of Tobacco-Related Litigation
- - Types and Number of Cases: Pending claims related to tobacco products
generally fall within the following categories: (i) smoking and health cases
alleging personal injury brought on behalf of individual plaintiffs, (ii)
smoking and health cases primarily alleging personal injury and purporting to be
brought on behalf of a class of individual plaintiffs, including cases brought
pursuant to a 1997 settlement agreement involving claims by flight attendants
alleging injury from exposure to environmental tobacco smoke ("ETS") in aircraft
cabins, (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. Other
tobacco-related litigation includes 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 and suits by foreign governments seeking to
recover damages for taxes lost as a result of the allegedly illegal importation
of cigarettes into their jurisdictions. 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. In July 2000, a
jury in a Florida smoking and health class action returned a punitive damages
award of approximately $74 billion against PM Inc. (See discussion of the Engle
case below.) Plaintiffs' theories of recovery and the defenses raised in the
smoking and health and health care cost recovery cases are discussed below.
As of December 31, 2000, there were approximately 1,500 smoking and health
cases filed and served on behalf of individual plaintiffs in the United States
against PM Inc. and, in some instances, the Company, compared with approximately
380 such cases on December 31, 1999, and approximately 510 such cases on
December 31, 1998. Approximately 1,200 of these cases are pending before a
single West Virginia state court in a consolidated proceeding. Approximately
1,100 of the West Virginia cases were filed during the third quarter of 2000. An
estimated 20 of the individual cases involve allegations of various personal
injuries allegedly related to exposure to ETS. In addition, approximately 3,085
additional individual cases are pending in Florida by current and former flight
attendants claiming personal injuries allegedly related to ETS. The flight
attendants allege that they are 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 December 31, 2000, there were an estimated 36 smoking and health
putative class actions pending in the United States against PM Inc. and, in some
cases, the Company (including eight that involve allegations of various personal
injuries related to exposure to ETS), compared with approximately 50 such cases
on December 31, 1999, and approximately 60 such cases on December 31, 1998. Some
of these actions purport to constitute statewide class actions and were filed
after May 1996, when the United States Court of Appeals for the Fifth Circuit,
in the Castano case, reversed a federal district court's certification of a
purported nationwide class action on behalf of persons who were allegedly
"addicted" to tobacco products.
As of December 31, 2000, there were an estimated 52 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 60 such cases pending on December 31, 1999, and 140 such cases on
December 31, 1998.
There are also a number of tobacco-related actions pending outside the
United States against PM International and its affiliates and subsidiaries,
including an estimated 68 smoking and health cases brought on behalf of
individuals (Argentina (48), Australia (1), Brazil (9), Canada (1), Germany (3),
Hong Kong (1), Ireland (1), Israel (1), Japan (1), the Philippines (1), and
Poland (1)), compared with approximately 55 such cases on December 31, 1999 and
27 such cases on December 31, 1998. In addition, there
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<PAGE>
are 9 smoking and health putative class actions pending outside the United
States (Brazil (3), Canada (4), and Israel (2)), compared with 10 such cases on
December 31, 1999. In addition, health care cost recovery actions have been
brought in Israel, the Marshall Islands, the Province of 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), Honduras, Kyrgyzstan, Nicaragua (dismissed, as
discussed below), the Province of Ontario, Canada (dismissed, as discussed
below), Panama, the Russian Federation, Tajikistan, Thailand (voluntarily
dismissed), Ukraine (dismissed, as discussed below), Venezuela, and seven
Brazilian states.
- - Federal Government's Lawsuit: In 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 ("MCRA"), the
Medicare Secondary Payer ("MSP") 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.
moved to dismiss this lawsuit on numerous grounds, including that the statutes
invoked by the government do not provide a basis for the relief sought. In
September 2000, the trial court dismissed the government's MCRA and MSP claims,
but permitted discovery to proceed on the government's claims for equitable
relief under RICO. In October 2000, the government moved for reconsideration of
the trial court's order to the extent that it dismissed the MCRA claims for
health care costs paid pursuant to government health benefit programs other than
Medicare and the Federal Employees Health Benefits Act. The motion remains
pending. Trial is scheduled for July 2003, although trial dates are subject to
change. The Company and PM Inc. believe that they have a number of valid
defenses to the lawsuit and will continue to vigorously defend it.
- - Recent Industry Trial Results: There have been several jury verdicts in
tobacco-related litigation during the past two years. In July 2000, the jury in
the Engle smoking and health class action in Florida returned a verdict
assessing punitive damages totaling approximately $145 billion against all
defendants in the case, including approximately $74 billion against PM Inc. (See
"Engle Trial," below.)
In January 2001, a mistrial was declared in a case in New York in which an
asbestos manufacturers' personal injury settlement trust sought contribution or
reimbursement from cigarette manufacturers, including PM Inc., 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. In January 2001, a
New York jury returned a verdict in favor of the defendants, including PM Inc.,
in an individual smoking and health case.
In October 2000, a Florida jury awarded the plaintiff in an individual
smoking and health case $200,000 in compensatory damages against another
cigarette manufacturer; in December 2000, the trial court vacated the jury's
verdict and granted the defendants' motion for a new trial. In July 2000, a
Mississippi jury returned a verdict in favor of another cigarette manufacturer
in an individual smoking and health case. Plaintiffs' post-trial motions
challenging the verdict are currently pending. In June 2000, a New York jury
returned a verdict in favor of all defendants, including PM Inc., in another
individual smoking and health case, and plaintiffs have appealed the verdict. In
March 2000, a California jury 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. is appealing the
verdict and damages award.
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 the plaintiff and defendants. Under Tennessee's system of
modified comparative fault, because the jury found plaintiff's fault equal to
that of defendant's, 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 damages 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 damages 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.
In December 1999, a French court, in an action brought on behalf of a
deceased smoker, found that another cigarette manufacturer had a duty to warn
him about risks associated with smoking prior to 1976, when the French
government required warning labels on cigarette packs, and failed to do so. The
court did not determine causation or liability, which shall be considered in
future proceedings. Neither the Company nor its affiliates are parties to this
action.
- - Engle Trial: Verdicts have been returned and judgment has been entered
against PM Inc. and other defendants in the first two phases of this three-phase
smoking and health class action
53
<PAGE>
trial in Florida. 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 trial concerning 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 that defendants were negligent and engaged in extreme
and outrageous conduct or acted with reckless disregard with the intent to
inflict emotional distress.
During phase two of the trial, 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. In April 2000, the jury determined liability against the
defendants and awarded $12.7 million in compensatory damages to the three named
plaintiffs.
In July 2000, the same jury returned a verdict assessing punitive damages
on a lump sum basis for the entire class totaling approximately $145 billion
against the various defendants in the case, including approximately $74 billion
severally against PM Inc. PM Inc. believes that the punitive damages award was
determined improperly and that it should ultimately be set aside on any one of
numerous grounds. Included among these grounds are the following: under
applicable law, (i) defendants are entitled to have liability and damages for
each plaintiff tried by the same jury, an impossibility due to the jury's
dismissal; (ii) punitive damages cannot be assessed before the jury determines
entitlement to, and the amount of, compensatory damages for all class members;
(iii) punitive damages must bear a reasonable relationship to compensatory
damages, a determination that cannot be made before compensatory damages are
assessed for all class members; and (iv) punitive damages can "punish" but
cannot "destroy" the defendant. In March 2000, at the request of the Florida
legislature, the Attorney General of Florida issued an advisory legal opinion
stating that "Florida law is clear that compensatory damages must be determined
prior to an award of punitive damages" in cases such as Engle. As noted above,
compensatory damages for all but three members of the class have not been
determined.
Following the verdict in the second phase of the trial, the jury was
dismissed, notwithstanding that liability and compensatory damages for all but
three class members have not yet been determined. According to the trial plan,
phase three of the trial 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.
It is unclear how the trial plan will be further implemented. The trial
plan provides that the punitive damages award should be standard as to each
class member and acknowledges that the actual size of the class will not be
known until the last class member's case has withstood appeal, i.e., the
punitive damages amount would be divided equally among those plaintiffs who, in
addition to the successful phase two plaintiffs, are ultimately successful in
phase three of the trial and in any appeal.
Following the jury's punitive damages verdict in July, the Engle trial
judge scheduled a hearing on numerous pending phase one and phase two motions,
including defendants' challenges of various rulings made by the judge and the
jury's verdicts on compensatory and punitive damages. Prior to the commencement
of the hearing, defendants removed the case to federal district court following
the intervention application of a union health fund that raised federal issues
in the case. In November 2000, the federal district court remanded the case to
state court on the grounds that the removal was premature. An appeal of the
district court's order is pending in the federal appellate court.
The trial judge in the state court, without a hearing, then immediately
denied the defendants' post-trial motions and entered judgment on the
compensatory and punitive damages awarded by the jury. PM Inc. and the Company
believe that the entry of judgment by the trial court is unconstitutional and
violates Florida law. PM Inc. has filed an appeal with respect to the entry of
judgment, class certification and numerous other reversible errors that have
occurred during the trial. PM Inc. has also posted a $100 million bond to stay
execution of the judgment with respect to the $74 billion in punitive damages
that has been awarded against it. The bond was posted pursuant to legislation
that was enacted in Florida in May 2000 that limits the size of the bond that
must be posted in order to stay execution of a judgment for punitive damages in
a certified class action to no more than $100 million, regardless of the amount
of punitive damages ("bond cap legislation"). Plaintiffs have indicated that
they believe the bond cap legislation is unconstitutional and may seek to
challenge the $100 million bond. If the bond were found to be invalid, it would
be commercially impossible for PM Inc. to post a bond in the full amount of the
judgment and, absent appellate relief, PM Inc. would not be able to stay any
attempted execution of the judgment in Florida. PM Inc. and the Company will
take all appropriate steps to seek to prevent this worst-case scenario from
occurring and believe these efforts should be successful.
In other developments, in August 1999, the trial judge denied a motion
filed by PM Inc. and other defendants to disqualify the judge. The motion
asserted, among other things, that the trial judge was required to disqualify
himself because he is a former smoker who has a serious medical condition of a
type that the plaintiffs claim, and the jury has 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 Appeals denied defendants' petition to disqualify the trial
judge. 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, and in May 2000 the writ of certiorari was denied.
PM Inc. and the Company remain of the view that the Engle case should not
have been certified as a class action. The 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. As
indicated above, PM Inc. has filed an appeal challenging the class certification
and the compensatory and punitive damages awards, as well
54
<PAGE>
as numerous other reversible errors that it believes occurred during the trial
to date.
- - Pending and Upcoming Trials: In January 2001, the court granted defendants'
motion for a mistrial in a smoking and health class action in West Virginia in
which PM Inc. is a defendant, and in which plaintiffs seek creation of a trust
fund to pay the costs of monitoring the medical conditions of members of the
purported class to detect possible smoking-related illnesses; retrial of the
case is expected to begin in the first quarter of 2001. Additional cases against
PM Inc. and, in some instances, the Company, are scheduled for trial through the
end of 2001, including three health care cost recovery actions; one asbestos
contribution case; two purported smoking and health class actions and a
purported Lights/Ultra Lights class action (discussed below); and an estimated
20 other individual smoking and health cases, including a consolidated trial of
individual smoking and health cases scheduled to begin in June 2001 in West
Virginia. In addition, approximately 40 cases involving flight attendants'
claims for damages from ETS are currently scheduled for trial during 2001. Cases
against other tobacco companies are also scheduled for trial through the end of
2001. Trial dates, however, are subject to change.
- - Litigation Settlements: In November 1998, PM Inc. and certain other United
States tobacco product manufacturers entered into the Master Settlement
Agreement (the "MSA") with 46 states, the District of Columbia, the Commonwealth
of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the
Northern Marianas to settle asserted and unasserted health care cost recovery
and other claims. PM Inc. and certain other United States tobacco product
manufacturers had previously settled similar claims brought by Mississippi,
Florida, Texas and Minnesota (together with the MSA, the "State Settlement
Agreements") and an ETS smoking and health class action brought on behalf of
airline flight attendants. The State Settlement Agreements and certain ancillary
agreements are filed as exhibits to various of the Company's reports filed with
the Securities and Exchange Commission, and such agreements and the ETS
settlement are discussed in detail therein. To date, the MSA has received final
judicial approval in 51 of the 52 settling jurisdictions.
The State 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 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 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 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, volumes, results of operations, cash
flows or financial position of PM Inc. and the Company in future periods. The
degree of the adverse impact will depend, among other things, on the rates of
decline in United States cigarette sales in the premium and discount segments,
PM Inc.'s share of the domestic premium and discount cigarette segments, and the
effect of any resulting cost advantage of manufacturers not subject to the MSA
and the other State Settlement Agreements. Manufacturers representing almost all
domestic shipments in 1998 have agreed to become subject to the terms of the
MSA.
Certain litigation has arisen, challenging the validity of the MSA and
alleging violations of the antitrust laws.
In April 1999, a putative class action was filed in federal district court
on behalf of all firms that directly buy cigarettes in the United States from
defendant tobacco manufacturers. The complaint alleges violation of antitrust
law, based in part on the MSA. Plaintiffs seek treble damages computed as three
times the difference between current prices and the price plaintiffs would have
paid for cigarettes in the absence of an alleged conspiracy to restrain and
monopolize trade in the domestic cigarette market, together with attorneys'
fees. Plaintiffs also seek injunctive relief against certain aspects of the MSA.
In March 2000, the court granted defendants' motion to dismiss the complaint and
plaintiffs have appealed. Plaintiffs' appeal of the dismissal is pending before
the federal appellate court.
Since June 1999, a putative class action brought on behalf of certain
Native American tribes and other suits challenging the validity of the MSA have
been filed against PM Inc., and in certain instances, the Company. Plaintiffs in
these cases allege that by entering into the MSA, defendants have violated
plaintiffs' constitutional rights or antitrust laws. The case brought on behalf
of the Native American tribes was dismissed by the trial court, and the tribes
have appealed.
A description of the smoking and health litigation, health care cost
recovery litigation and certain other proceedings
55
<PAGE>
pending against the Company and/or its subsidiaries and affiliates follows.
Smoking and Health Litigation
Plaintiffs' allegations of liability in smoking and health cases are based on
various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, breach of special duty, conspiracy, concert of
action, violations of deceptive trade practice laws and consumer protection
statutes, and claims under the federal and state RICO statutes. In certain of
these cases, plaintiffs claim that cigarette smoking exacerbated the injuries
caused by their exposure to asbestos. Plaintiffs in the smoking and health
actions seek various forms of relief, including compensatory and punitive
damages, treble/multiple damages and other statutory damages and penalties,
creation of medical monitoring and smoking cessation funds, disgorgement of
profits, and injunctive and equitable relief. Defenses raised in these cases
include lack of proximate cause, assumption of the risk, comparative fault
and/or contributory negligence, statutes of limitations and preemption by the
Federal Cigarette Labeling and Advertising Act.
In May 1996, the United States Court of Appeals for the Fifth Circuit held
in the Castano case that a class consisting of all "addicted" smokers nationwide
did not meet the standards and requirements of the federal rules governing class
actions. Since this class decertification, lawyers for plaintiffs have filed
numerous putative smoking and health class action suits in various state and
federal courts. In general, these cases purport to be brought on behalf of
residents of a particular state or states (although a few cases purport to be
nationwide in scope) and raise "addiction" claims similar to those raised in the
Castano case and, in many cases, claims of physical injury as well. As of
December 31, 2000, smoking and health putative class actions were pending in
Alabama, California, Florida, Hawaii, Illinois, Indiana, Iowa, Louisiana,
Massachusetts, Michigan, Missouri, Nevada, New Jersey, New Mexico, New York,
North Carolina, Pennsylvania, Tennessee, Texas, Utah and West Virginia, as well
as in Australia, Brazil, Canada and Israel. Class certification has been denied
or reversed by courts in 24 smoking and health class actions involving PM Inc.
in Arkansas, California (1), the District of Columbia, Illinois, Kansas,
Louisiana, Maryland, Michigan, Minnesota, New Jersey (6), New York (2), Ohio,
Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin, while
classes remain certified in the Engle case in Florida (discussed above), a
medical monitoring case in Louisiana, a medical monitoring case in West Virginia
(discussed above) and a case in California. Some of the decisions denying the
plaintiffs' motions for class certification 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.
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, multiple
damages and other statutory damages and penalties, injunctions prohibiting
alleged marketing and sales to minors, disclosure of research, disgorgement of
profits, funding of anti-smoking programs, disclosure of nicotine yields, and
payment of attorney and expert witness fees.
The claims asserted in these health care cost recovery actions include the
equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs'
payment of health care costs allegedly attributable to smoking, the equitable
claim of indemnity, common law claims of negligence, strict liability, breach of
express and implied warranty, violation of a voluntary undertaking or special
duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims
under federal and state statutes governing consumer fraud, antitrust, deceptive
trade practices and false advertising, and claims under federal and state RICO
statutes.
Defenses raised include lack of proximate cause, remoteness of injury,
failure to state a valid claim, lack of benefit, adequate remedy at law,
"unclean hands" (namely, that plaintiffs cannot obtain equitable relief because
they participated in, and benefited from, the sale of cigarettes), lack of
antitrust standing and injury, federal preemption, lack of statutory authority
to bring suit and statute of limitations. In addition, defendants argue that
they should be entitled to "set off" any alleged damages to the extent the
plaintiff benefits economically from the sale of cigarettes through the receipt
of excise taxes or otherwise. Defendants also argue that these cases are
improper because plaintiffs must proceed under principles of subrogation and
assignment. Under traditional theories of recovery, a payor of medical costs
(such as an insurer) can seek recovery of health care costs from a third party
solely by "standing in the shoes" of the injured party. Defendants argue that
plaintiffs should be required to bring any actions as subrogees of individual
health care recipients and should be subject to all defenses available against
the injured party.
Excluding the cases covered by the MSA, as of December 31, 2000, there were
an estimated 52 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," in 1999, the U.S. government filed a health care cost recovery action
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, the Province of
British Columbia, Canada and France and, in the United States, by Bolivia,
Ecuador, Guatemala, Honduras, Kyrgyzstan, Nicaragua, the Province of Ontario,
Canada, Panama, the Russian Federation, Tajikistan, Thailand (voluntarily
dismissed), Ukraine, Venezuela and the Brazilian states of Espirito Santo,
Goias, Mato Grosso do Sul, Piaui, Rio de Janeiro, Sao Paulo and Tocantins. The
actions brought by Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the
Province of Ontario, Panama, the Russian Federation, Ukraine, Venezuela and the
Brazilian states of Espirito Santo, Goias, Mato Grosso do Sul and Tocantins were
consolidated for pre-trial purposes and
56
<PAGE>
transferred to the United States District Court for the District of Columbia. As
described below, the court has dismissed the claims of Guatemala, Nicaragua, the
Province of Ontario and Ukraine. The court remanded the Venezuela, Ecuador,
Espirito Santo and Goias cases to state court in Florida. Other entities have
stated that they are considering filing health care cost recovery actions.
Seven federal circuit courts of appeals, for the Second, Third, Fifth,
Seventh, Eighth, Ninth and Eleventh Circuits, relying primarily on grounds that
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 refused to consider plaintiffs' appeals
from the cases decided by the Courts of Appeals for the Second, Third and Ninth
Circuits.
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 district court for the District of
Columbia dismissed a lawsuit filed by Guatemala, ruling that the claimed
injuries were too remote. 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 Courts of Appeals for the District
of Columbia Circuit. In August 2000, the federal district court for the District
of Columbia dismissed the claims of the Province of Ontario, and the Province
has appealed. 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 was 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 funds seeking reimbursement of health care expenditures allegedly
caused by tobacco products. Defendants are appealing this decision. In June
2000, the federal district court in Rhode Island dismissed a suit filed by a
union, finding that the plaintiffs' claims were too remote to permit recovery.
Certain Other Tobacco-Related Litigation
- - Asbestos Contribution Cases: As of December 31, 2000, 14 suits had been
filed by former asbestos manufacturers, asbestos manufacturers' personal injury
settlement trusts and an insurance company against domestic tobacco
manufacturers, including PM Inc. and others. Ten of these cases are pending.
These cases seek, among other things, contribution or reimbursement for amounts
expended in connection with the defense and payment of asbestos claims that were
allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of
these cases also seek punitive damages. The aggregate amounts claimed in these
cases range into the billions of dollars. In January 2001, a mistrial was
declared in an asbestos contribution case in New York. Trial in another of these
cases is currently scheduled to begin in New York during the second quarter of
2001.
- - Lights/Ultra Lights Cases: As of December 31, 2000, there were 11 putative
class actions pending against PM Inc. and the Company, in Arizona, Florida,
Illinois, Massachusetts, Missouri, New Jersey, New York, Ohio, Pennsylvania and
Tennessee, 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. Trial in one purported
class action is scheduled for November 2001.
- - 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 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. Trial on the
claims of ten plaintiffs, which was set for trial in November 2000, has been
continued without a new trial date being set, and the court heard PM Inc.'s
motion for summary judgment on those claims in November 2000. The claims of
remaining plaintiffs have been stayed pending disposition of the ten claims
previously 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 alleged violations of California's Business
and Professions Code regarding unfair and fraudulent business practices.
Plaintiffs sought statutory penalties, injunctions barring the sale of
cigarettes or requiring issuance of appropriate warnings, restitution,
disgorgement of profits and other relief. Defendants' motion for summary
judgment was granted in part, and plaintiffs' "Proposition 65" claims were
dismissed. In August 2000, the parties to one of the cases entered into a
settlement agreement, which was expressly conditioned upon a finding by
57
<PAGE>
the California Attorney General that the settlement was in the public interest.
The Attorney General made that finding in October 2000. The parties to the
remaining action entered into a separate settlement agreement in October 2000.
The two settlement agreements, which together require PM Inc. to pay
approximately $245,000 to the plaintiffs as costs, collectively resolve all
claims that were, or could have been, brought in these two actions. In November
2000, the court granted defendants' motion seeking approval of both settlements
and entry of a final judgment in both cases.
- - Tobacco Price Cases: As of December 31, 2000, there were 40 putative class
actions pending against PM Inc. and other domestic tobacco manufacturers as well
as, in certain instances, the Company and PM International alleging that the
defendants conspired to fix cigarette prices in violation of antitrust laws.
Seven of the putative class actions were filed in various federal district
courts by direct purchasers of tobacco products and the remaining 33 were filed
in 15 states and the District of Columbia by retail purchasers of tobacco
products. The eight federal class actions have been consolidated before a single
federal district court; in November 2000, the court hearing the consolidated
cases granted in part and denied in part defendants' motion to dismiss and to
strike portions of the consolidated complaint.
- - Tobacco Growers' Case: In February 2000, a lawsuit was filed on behalf of a
purported class of tobacco growers and quota-holders. An amended complaint was
filed in May 2000, and a second amended complaint was filed in August 2000. The
second amended complaint alleges that cigarette manufacturers, including PM
Inc., violated antitrust laws by bid-rigging and allocating purchases at tobacco
auctions and by conspiring to undermine the tobacco quota and price support
system administered by the federal government. In October 2000, defendants filed
motions to dismiss the second amended complaint and to transfer the case, and
plaintiffs filed a motion for class certification. In November 2000, the court
granted defendants' motion to transfer the case to the United States District
Court for the Middle District of North Carolina. In December 2000, plaintiffs
filed a third amended complaint that purports to add tobacco leaf buyers as
defendants.
- - Cigarette Importation Cases: As of December 31, 2000, Ecuador, the European
Community, and various Departments of Colombia have filed suits in the United
States against the Company and certain of its subsidiaries, including PM Inc.
and PM International, and other cigarette manufacturers and their affiliates,
alleging that defendants illegally imported cigarettes into the plaintiff
jurisdictions in an effort to evade taxes. The claims asserted in these cases
include negligence, negligent misrepresentation, unjust enrichment, violations
of RICO and its state-law equivalents and conspiracy. Plaintiffs in these cases
seek actual damages, treble damages and undisclosed injunctive relief. Ecuador's
lawsuit has not been served.
- - Consolidated Putative Punitive Damages Cases: In September 2000, a putative
class action was filed in the federal district court in the Eastern District of
New York that purports to consolidate punitive damages claims in ten
tobacco-related actions currently pending in the federal district court in the
Eastern Districts of New York and Pennsylvania. In November 2000, the court
hearing this case indicated that, in its view, it appears likely that plaintiffs
will be able to demonstrate a basis for certification of an opt-out compensatory
damages class and a non-opt-out punitive damages class. In December 2000,
plaintiffs filed an amended complaint and a motion for class certification. A
hearing on plaintiffs' motion for class certification is scheduled for March
2001.
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 appellate court
reversed the trial court's decision to dismiss the case, and the case is
currently pending in the trial court. In the other of those cases, in December
2000, the court reversed the trial court's decision to dismiss the case, and
defendants have sought a rehearing in the court of appeals. 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 $3.2 billion in interest and penalties has been assessed. The
Company anticipates that value-added and income tax assessments may also be
received with respect to subsequent years. All of the assessments are being
vigorously contested. To date, the Italian administrative tax court in Milan has
overturned 184 of the assessments. The decisions to overturn 154 assessments
have been appealed by the tax authorities to the regional appellate court in
Milan. To date, the regional appellate court has rejected 51 of the appeals
filed by the tax authorities. The tax authorities have appealed 31 of the 51
decisions of the regional appellate court to the Italian Supreme Court. The
remaining 20 decisions are expected to be appealed as well. 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. In December 2000, the Milan prosecutor took certain
procedural steps that may indicate his intention to recommend that charges be
pursued against certain of these present and former officers and directors. 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.
-------------------
58
<PAGE>
It is not possible to predict the outcome of the litigation pending against
the Company and its subsidiaries. Litigation is subject to many uncertainties.
Unfavorable verdicts awarding compensatory and punitive damages have been
returned in the Engle smoking and health class action trial, and judgment has
been entered against PM Inc. It is possible that additional cases could be
decided unfavorably and that there could be further adverse developments in the
Engle case. 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 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, as well as valid bases for appeal of adverse verdicts
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.
Note 16. Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
(in millions, except per share data) 2000 Quarters
1st 2nd 3rd 4th
================================================================================
<S> <C> <C> <C> <C>
Operating revenues $20,040 $20,844 $20,058 $19,414
================================================================================
Gross profit $ 8,287 $ 8,906 $ 8,486 $ 8,449
================================================================================
Net earnings $ 2,009 $ 2,171 $ 2,319 $ 2,011
================================================================================
Per share data:
Basic EPS $ 0.87 $ 0.96 $ 1.04 $ 0.91
================================================================================
Diluted EPS $ 0.87 $ 0.95 $ 1.03 $ 0.90
================================================================================
Dividends declared $ 0.48 $ 0.48 $ 0.53 $ 0.53
================================================================================
Market price--high $ 24.63 $ 28.75 $ 34.00 $ 45.94
--low $ 18.69 $ 20.38 $ 23.00 $ 29.56
================================================================================
<CAPTION>
(in millions, except per share data) 1999 Quarters
1st 2nd 3rd 4th
================================================================================
<S> <C> <C> <C> <C>
Operating revenues $19,497 $19,810 $19,878 $19,411
================================================================================
Gross profit $ 7,874 $ 8,080 $ 8,041 $ 8,195
================================================================================
Net earnings $ 1,787 $ 2,030 $ 2,001 $ 1,857
================================================================================
Per share data:
Basic EPS $ 0.74 $ 0.84 $ 0.84 $ 0.79
================================================================================
Diluted EPS $ 0.73 $ 0.84 $ 0.84 $ 0.79
================================================================================
Dividends declared $ 0.44 $ 0.44 $ 0.48 $ 0.48
================================================================================
Market price--high $ 55.56 $ 43.00 $ 41.19 $ 35.50
--low $ 34.00 $ 33.13 $ 33.81 $ 21.25
================================================================================
</TABLE>
Basic and diluted EPS are computed independently for each of the periods
presented. Accordingly, the sum of the quarterly earnings per share amounts may
not agree to the total for the year.
During 2000, the Company recorded a $139 million pre-tax gain related to
the sale of a French confectionery business in the third quarter and a $100
million pre-tax gain related to the sale of beer rights in the fourth quarter.
During 1999, the Company recorded pre-tax charges primarily for voluntary
early retirement and separation programs ("VERS"), a factory closure and related
capacity reduction in Brazil and asset impairments in the beer segment as
follows:
<TABLE>
<CAPTION>
(in millions) 1999 Quarters
1st 2nd 3rd 4th
================================================================================
<S> <C> <C> <C> <C>
VERS $287 $45 $ 8
Brazil factory closure 136
Beer asset impairments $29
- --------------------------------------------------------------------------------
$287 $45 $144 $29
================================================================================
</TABLE>
--------------
The principal stock exchange, on which the Company's common stock (par
value $0.33 1/3 per share) is listed, is the New York Stock Exchange. At January
31, 2001, there were approximately 135,600 holders of record of the Company's
common stock.
59
<PAGE>
Report of Independent Accountants
================================================================================
To the Board of Directors and Stockholders of
Philip Morris Companies Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, stockholders' equity and cash flows present
fairly, in all material respects, the consolidated financial position of Philip
Morris Companies Inc. and its subsidiaries (the "Company") at December 31, 2000
and 1999, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 29, 2001
Company Report on Financial Statements
================================================================================
The consolidated financial statements and all related financial information
herein are the responsibility of the Company. The financial statements, which
include amounts based on judgments, have been prepared in accordance with
generally accepted accounting principles. Other financial information in the
annual report is consistent with that in the financial statements.
The Company maintains a system of internal controls that it believes
provides reasonable assurance that transactions are executed in accordance with
management's authorization and properly recorded, that assets are safeguarded,
and that accountability for assets is maintained. The system of internal
controls is characterized by a control-oriented environment within the Company,
which includes written policies and procedures, careful selection and training
of personnel, and audits by a professional staff of internal auditors.
PricewaterhouseCoopers LLP, independent accountants, have audited and
reported on the Company's consolidated financial statements. Their audits were
performed in accordance with generally accepted auditing standards.
The Audit Committee of the Board of Directors, composed of six
non-management directors, meets periodically with PricewaterhouseCoopers LLP,
the Company's internal auditors and management representatives to review
internal accounting control, auditing and financial reporting matters. Both
PricewaterhouseCoopers LLP and the internal auditors have unrestricted access to
the Audit Committee and may meet with it without management representatives
being present.
60
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>EXHIBIT 21
<TEXT>
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE COMPANY
Certain active subsidiaries of the Company and their subsidiaries as of
December 31, 2000, are listed below. The names of certain subsidiaries, which
considered in the aggregate would not constitute a significant subsidiary, have
been omitted.
<TABLE>
<CAPTION>
State or
Country of
Name Organization
- ---- ------------
<C> <C>
20th Century Denmark Limited ......................................................... Liberia
A/S Maarud ........................................................................... Norway
AB Estrella .......................................................................... Sweden
AB Kraft Foods Lietuva ............................................................... Lithuania
AGF SP, Inc. ......................................................................... Japan
Airco IHC, Inc. ...................................................................... Delaware
Ajinomoto General Foods, Inc. ........................................................ Japan
Aktieselskabet FMD af 11. juni 1920 .................................................. Denmark
Aktieselskabet M Af 2. januar 1992 ................................................... Denmark
Balance Bar Company .................................................................. Delaware
Beech-Nut Life Savers (Panama) S.A.................................................... Panama
Beijing Kraft Food Corporation Limited ............................................... China
Beijing Nabisco Food Company Ltd. .................................................... China
Boca Foods Company ................................................................... Delaware
Branded Restaurant Group Inc. ........................................................ Delaware
Burlington Foods, Inc. ............................................................... Delaware
C.A. Tabacalera Nacional ............................................................. Venezuela
Cafe GRAND'MERE S.A. ................................................................. France
Callard & Bowser-Suchard, Inc. ....................................................... Delaware
Canale S.A. .......................................................................... Argentina
Capri Sun, Inc. ...................................................................... Delaware
Celis Brewery, Inc. ................................................................. Texas
Chrysalis Technologies Incorporated .................................................. Virginia
Churny Company, Inc. ................................................................. Delaware
Compania Venezolana de Conservas C.A. ................................................ Venezuela
Cote d'Or Italia S.r.l. .............................................................. Italy
Covenco Holding C.A. ................................................................. Venezuela
Dart Resorts Inc. .................................................................... Delaware
Dely, S.A. ........................................................................... Guatemala
Distribuidora Pan Americana, S.A. .................................................... Panama
Dong Suh Foods Corporation ........................................................... Korea
Dong Suh Oil & Fats Co., Ltd. ........................................................ Korea
El Gallito Industrial, S.A. .......................................................... Costa Rica
Establecimiento Modelo Terrabusi S.A. ................................................ Argentina
Estrella A/S ......................................................................... Denmark
f6 Cigarettenfabrik Dresden GmbH ..................................................... Germany
Fattorie Osella S.p.A. ............................................................... Italy
Fleischmann International, Inc. ...................................................... Delaware
Fleischmann Nabisco Uruguay S.A....................................................... Uruguay
Fleischmann Peruana Inc. ............................................................. Delaware
Foster's USA, LLC .................................................................... Delaware
Franklin Baker Company of the Philippines ............................................ Philippines
FTR Holding S.A. ..................................................................... Switzerland
Fulmer Corporation Limited ........................................................... Bahamas
Gelatinas Ecuatoriana S.A. ........................................................... Ecuador
General Foods Credit Corporation ..................................................... Delaware
General Foods Credit Investors No. 1 Corporation ..................................... Delaware
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
- ---- ------------
<S> <C>
General Foods Credit Investors No. 2 Corporation ..................................... Delaware
General Foods Credit Investors No. 3 Corporation ..................................... Delaware
General Foods Foreign Sales Corporation .............................................. Virgin Islands (U.S.)
Gevaliarosteriet AB .................................................................. Sweden
Godfrey Phillips (Malaysia) Sdn. Bhd. ................................................ Malaysia
Grant Holdings, Inc. ................................................................. Pennsylvania
Grant Transit Co. .................................................................... Delaware
Grundstucksgemeinschaft Kraft Foods .................................................. Germany
HAG GF AG ............................................................................ Germany
HAG-Coffex ........................................................................... France
Hervin Holdings, Inc. ................................................................ Delaware
HNB Investment Corp. ................................................................. Delaware
Industria e Comercio de Produtos Alimenticios Cerqueirense Ltda. ..................... Brazil
Industrias Alimenticias Maguary Ltda. ................................................ Brazil
Iracema Industrias de Caju Ltda. ..................................................... Brazil
Jacob Leinenkugel Brewing Company, Inc. .............................................. Wisconsin
Jacobs Suchard Alimentos do Brasil Ltda. ............................................. Brazil
Jacobs Suchard Figaro a.s. ........................................................... Slovak Republic
JSC Philip Morris Ukraine ............................................................ Ukraine
Jupiter Produtos Alimenticios Ltda. .................................................. Brazil
KFI - USLLC I ....................................................................... Delaware
KFI - USLLC II ...................................................................... Delaware
KFI - USLLC III ..................................................................... Delaware
KJS Limited .......................................................................... Hong Kong
Kraft Canada Inc. .................................................................... Canada
Kraft Food Ingredients Corp. ......................................................... Delaware
Kraft Foods AS ....................................................................... Norway
Kraft Foods (Australia) Limited ...................................................... Australia
Kraft Foods Belgium S.A. ............................................................. Belgium
Kraft Foods Bulgaria AD .............................................................. Bulgaria
Kraft Foods Central & Eastern Europe Service B.V. .................................... Netherlands
Kraft Foods CR s.r.o. ................................................................ Czech Republic
Kraft Foods Danmark ApS .............................................................. Denmark
Kraft Foods Danmark Holding A/S ...................................................... Denmark
Kraft Foods de Mexico S.A. de C.V. ................................................... Mexico
Kraft Foods Deutschland GmbH & Co. KG ................................................ Germany
Kraft Foods Deutschland Holding GmbH ................................................. Germany
Kraft Foods Egypt LLC ................................................................ Egypt
Kraft Foods Espana, S.A. ............................................................. Spain
Kraft Foods France ................................................................... France
Kraft Foods Hellas S.A. .............................................................. Greece
Kraft Foods Holding (Europa) GmbH ................................................... Switzerland
Kraft Foods Holdings, Inc. ........................................................... Delaware
Kraft Foods Hors Domicile............................................................. France
Kraft Foods Hungaria Kft. ............................................................ Hungary
Kraft Foods, Inc. .................................................................... Delaware
Kraft Foods International, Inc. ...................................................... Delaware
Kraft Foods Ireland Limited .......................................................... Ireland
Kraft Foods Italia S.p.A. ............................................................ Italy
Kraft Foods Laverune ................................................................. France
Kraft Foods Limited .................................................................. Australia
Kraft Foods Limited (Asia) ........................................................... Hong Kong
Kraft Foods Manufacturing Corporation ................................................ Delaware
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
- ---- ------------
<S> <C>
Kraft Foods Manufacturing GmbH & Co. KG .............................................. Germany
Kraft Foods Namur S.A. ............................................................... Belgium
Kraft Foods Nederland B.V. ........................................................... Netherlands
Kraft Foods (New Zealand) Limited .................................................... New Zealand
Kraft Foods Norge AS ................................................................. Norway
Kraft Foods Oesterreich GmbH.......................................................... Austria
Kraft Foods (Philippines), Inc. ...................................................... Philippines
Kraft Foods Polska Sp.z o.o. ......................................................... Poland
Kraft Foods Portugal Produtos Alimentares Lda. ....................................... Portugal
Kraft Foods Produktion GmbH .......................................................... Germany
Kraft Foods (Puerto Rico), Inc. ...................................................... Puerto Rico
Kraft Foods R & D, Inc. .............................................................. Delaware
Kraft Foods Romania SA ............................................................... Romania
Kraft Foods Schweiz AG ............................................................... Switzerland
Kraft Foods Schweiz Holding AG ....................................................... Switzerland
Kraft Foods (Singapore) Pte Ltd ...................................................... Singapore
Kraft Foods Strasbourg ............................................................... France
Kraft Foods Taiwan Limited............................................................ Taiwan
Kraft Foods (Thailand) Limited ....................................................... Thailand
Kraft Foods UK Limited ............................................................... United Kingdom
Kraft Foods Ukraina Open Joint Stock Company ......................................... Ukraine
Kraft Guangtong Food Company, Limited ................................................ China
Kraft Holdings Virginia Inc. ......................................................... Virginia
Kraft Jacobs Suchard (Australia) Pty. Ltd. ........................................... Australia
Kraft Jacobs Suchard Reims ........................................................... France
Kraft Jacobs Suchard Service AG (Switzerland) ........................................ Switzerland
Kraft Japan, K.K. .................................................................... Japan
Kraft Korea Inc. ..................................................................... Korea, Republic of
Kraft Lacta Suchard Brasil, S.A. ..................................................... Brazil
Kraft Pizza Company .................................................................. Delaware
Kraft Suchard Argentina, S.A. ........................................................ Argentina
Kraft Suchard Uruguay, S.A. .......................................................... Uruguay
Kraft Sverige AB ..................................................................... Sweden
Kraft Tianmei Food (Tianjin) Co., Ltd. ............................................... China
Kraftsa Kraft Sabanci Gida Pazarlama ve Tic. A.S...................................... Turkey
Krema Limited ........................................................................ Ireland
La Loire Investment Corp. ............................................................ Delaware
La Seine Investment Corp. ............................................................ Delaware
Landers y Cia, S.A. .................................................................. Colombia
Le Rhone Investment Corp. ............................................................ Delaware
Leite Gloria do Nordeste S.A. ........................................................ Brazil
Marsa Kraft Jacobs Suchard Sabanci Gida Sanayi ve Ticaret A.S. ....................... Turkey
Martlet Importing Co. Inc. ........................................................... New York
Massalin Particulares S.A. ........................................................... Argentina
MEX Holdings, Ltd. ................................................................... Delaware
Michigan Investment Corp. ............................................................ Delaware
Miller Brewing 1855, Inc. ............................................................ Delaware
Miller Brewing Company ............................................................... Wisconsin
Mirabell Salzburger Confiserie-und Bisquit GmbH ...................................... Austria
NABEC, S.A. .......................................................................... Ecuador
Nabisco Argentina S.A. ............................................................... Argentina
Nabisco Biscuit Manufacturing (Midwest), Inc. ........................................ Delaware
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
- ---- ------------
<S> <C>
Nabisco Biscuit Manufacturing (West), Inc. ........................................... Delaware
Nabisco Brands Company ............................................................... Delaware
Nabisco Brands Holdings Denmark Limited .............................................. Liberia
Nabisco Caribbean Export, Inc. ....................................................... Delaware
Nabisco (China) Limited .............................................................. China
Nabisco de Nicaragua, S.A. ........................................................... Nicaragua
Nabisco Direct, Inc. ................................................................. Delaware
Nabisco Dominicana, S.A............................................................... Dom. Repub.
Nabisco England IHC, Inc. ............................................................ Delaware
Nabisco Enterprises IHC, Inc. ........................................................ Delaware
Nabisco Euro Holdings Ltd. ........................................................... Cayman Islands
Nabisco Food (Suzhou) Co. Ltd. ....................................................... China
Nabisco Group Ltd. ................................................................... Delaware
Nabisco Holdings Corp. ............................................................... Delaware
Nabisco Holdings I B.V. .............................................................. Netherlands
Nabisco Holdings IHC, Inc. ........................................................... Delaware
Nabisco Holdings II B.V. ............................................................. Netherlands
Nabisco Hong Kong Limited ............................................................ Hong Kong
Nabisco, Inc. ........................................................................ New Jersey
Nabisco International Limited ........................................................ Nevada
Nabisco International M.E./Africa L.L.C. ............................................. Dubai, U.A.E.
Nabisco International Market Development Group, Inc. ................................. Delaware
Nabisco International, Inc. .......................................................... Delaware
Nabisco International, S.A. .......................................................... Panama
Nabisco Investments, Inc. ............................................................ Delaware
Nabisco (Jamaica) Limited ............................................................ Jamaica
Nabisco Music Ventures, Inc. ......................................................... Delaware
Nabisco Peru S.A. .................................................................... Peru
Nabisco Philippines, Inc. ............................................................ Philippines
Nabisco Royal Argentina LLC .......................................................... Delaware
Nabisco Royal Chile Limitada ......................................................... Chile
Nabisco Royal de Honduras, S.A. ...................................................... Honduras
Nabisco Royal del Ecuador, S.A. ...................................................... Ecuador
Nabisco Royal Panama, S.A. ........................................................... Panama
Nabisco South Africa (Proprietary) Limited ........................................... South Africa
Nabisco Taiwan Corporation ........................................................... Taiwan
Nabisco Technology Company ........................................................... Delaware
Nabisco (Thailand) Limited ........................................................... Thailand
Nabisco Trading AG ................................................................... Switzerland
Nabisco Venezuela, C.A................................................................ Venezuela
OAO Philip Morris Kuban .............................................................. Russia
OJSS Philip Morris Kazakhstan ........................................................ Kazakhstan
Oy Estrella AB ....................................................................... Finland
Oy Kraft Foods Finland Ab ............................................................ Finland
P.M. Beverage Holdings, Inc. ......................................................... Delaware
P.T. Kraft Ultrajaya Indonesia ....................................................... Indonesia
Pavlides S.A. ........................................................................ Greece
Phenix Leasing Corporation ........................................................... Delaware
Phenix Management Corporation ........................................................ Delaware
Philip Morris (Malaysia) Sdn. Bhd. ................................................... Malaysia
Philip Morris (Thailand) Ltd. ........................................................ Delaware
Philip Morris Asia Limited ........................................................... Hong Kong
Philip Morris Belgium S.A. ........................................................... Belgium
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
- ---- ------------
<S> <C>
Philip Morris Brasil S.A. ............................................................ Delaware
Philip Morris Capital Corporation .................................................... Delaware
Philip Morris Capital (Ireland) Limited .............................................. Ireland
Philip Morris Corporate Services Inc. ................................................ Delaware
Philip Morris CR a.s. ................................................................ Czech Republic
Philip Morris Duty Free Inc. ......................................................... Delaware
Philip Morris Europe S.A. ............................................................ Switzerland
Philip Morris Finance Europe B.V. .................................................... Netherlands
Philip Morris France S.A.S. .......................................................... France
Philip Morris G.m.b.H. ............................................................... Germany
Philip Morris Hellas A.E.B.E. ........................................................ Greece
Philip Morris Holland B.V. ........................................................... Netherlands
Philip Morris Hungary Cigarette Manufacturing and Trading Ltd. ....................... Hungary
Philip Morris Incorporated ........................................................... Virginia
Philip Morris International Finance Corporation ...................................... Delaware
Philip Morris International Inc. ..................................................... Delaware
Philip Morris Kabushiki Kaisha ....................................................... Japan
Philip Morris Korea C.H. ............................................................. Korea
Philip Morris Latin America Inc. ..................................................... Delaware
Philip Morris Limited ................................................................ Australia
Philip Morris Ljubljana d.o.o. ....................................................... Slovenia
Philip Morris Management Corp. ....................................................... New York
Philip Morris Mexico S.A. de C.V. .................................................... Mexico
Philip Morris Philippines Inc. ....................................................... Philippines
Philip Morris Polska S.A. ............................................................ Poland
Philip Morris Products Inc. .......................................................... Virginia
Philip Morris Products S.A. ......................................................... Switzerland
Philip Morris Reunion s.a.r.l. ....................................................... Le Reunion
Philip Morris Romania S.R.L. ......................................................... Romania
Philip Morris SA, Philip Morris Sabanci Pazarlama ve Satis A.S. ...................... Turkey
Philip Morris Sales & Marketing Ltd. ................................................. Russia
Philip Morris Singapore Pte. Ltd. .................................................... Singapore
Philip Morris Slovakia s.r.o. ........................................................ Slovak Republic
Philip Morris Spain S.A. ............................................................. Spain
Philip Morris World Trade S.A. ....................................................... Switzerland
PHILSA Philip Morris Sabanci Sigara ve Tutunculuk Sanayi ve Ticaret A.S. ............. Turkey
PMCC Investors No. 1 Corporation ..................................................... Delaware
PMCC Investors No. 2 Corporation ..................................................... Delaware
PMCC Investors No. 3 Corporation ..................................................... Delaware
PMCC Investors No. 4 Corporation ..................................................... Delaware
PMCC Leasing Corporation ............................................................. Delaware
Posto Apolo Ltda. .................................................................... Brazil
Productos Confitados Salvavidas de Guatemala, S.A. ................................... Guatemala
Produtos Alimenticios Fleischmann e Royal Ltda. ...................................... Brazil
Produtos Alimenticios Pilar Ltda. .................................................... Brazil
Produtos Alimenticios Royal S.A. ..................................................... Costa Rica
PT Nabisco Foods ..................................................................... Indonesia
Riespri, S.A. ........................................................................ Spain
Roskill Cartage and Storage Limited .................................................. New Zealand
Royal Productos Alimenticios C.A...................................................... Venezuela
San Dionisio Realty Corporation ...................................................... Philippines
SB Leasing Inc. ...................................................................... Delaware
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
- ---- ------------
<S> <C>
Seven Seas Foods, Inc. ............................................................... Delaware
Stella D'oro Biscuit Co., Inc. ....................................................... New York
Suchard Limited ...................................................................... United Kingdom
Suchard Schokolade Ges. mbH Bludenz .................................................. Austria
Superior AgResource, Inc. ............................................................ Delaware
Tabacalera Centroamericana S.A. ...................................................... Guatemala
Tabacalera Costarricense S.A. ........................................................ Costa Rica
Tabaqueira, S.A. ..................................................................... Portugal
Taloca AG ............................................................................ Switzerland
Taloca Ltda. ......................................................................... Brazil
Tevalca Holding C.A. ................................................................. Venezuela
The Fleischmann Corporation .......................................................... Delaware
The Hervin Company ................................................................... Oregon
The Kenco Coffee Company Limited ..................................................... United Kingdom
Trademarks LLC........................................................................ Delaware
Transapolo-Transportes Rodoviarios Apolo Ltda. ....................................... Brazil
UAB Philip Morris Lietuva ............................................................ Lithuania
Vict. Th. Engwall & Co., Inc. ........................................................ Delaware
Votesor BV ........................................................................... Netherlands
West Indies Yeast Company Limited .................................................... Jamaica
Wolverine Investment Corp. ........................................................... Delaware
Yili-Nabisco Biscuit & Food Company Limited .......................................... China
ZAO Philip Morris Izhora ............................................................. Russia
ZAO Philip Morris Neva ............................................................... Russia
</TABLE>
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>EXHIBIT 23
<TEXT>
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Post-Effective
Amendment No. 13 to the registration statement of Philip Morris Companies Inc.
(the "Company") on Form S-14 (File No. 2-96149) and in the Company's
registration statements on Form S-3 (File No. 333-35143) and Form S-8 (File
Nos. 333-28631, 333-20747, 333-16127, 33-1479, 33-10218, 33-13210, 33-14561,
33-37115, 33-40110, 33-48781, 33-59109, 33-63975, 33-63977, 333-43478 and
333-43484) of our report dated January 29, 2001 relating to the financial
statements, which appears in the Annual Report to Shareholders, which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated January 29, 2001 relating to
the financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 29, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>EXHIBIT 24
<TEXT>
<PAGE>
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles
R. Wall, or any one or more of them, her true and lawful attorney, for her and
in her name, place and stead, to execute, by manual or facsimile signature,
electronic transmission or otherwise, the Annual Report on Form 10-K of the
Company for the year ended December 31, 2000 and any amendments or supplements
to said Annual Report and to cause the same to be filed with the Securities and
Exchange Commission, together with any exhibits, financial statements and
schedules included or to be incorporated by reference therein, hereby granting
to said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite or desirable to be done in and about the premises
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things which said attorneys
may do or cause to be done by virtue of these Present.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal
this 28th day of February, 2001.
/s/ ELIZABETH E. BAILEY
----------------------------------
Elizabeth E. Bailey
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles
R. Wall, or any one or more of them, his true and lawful attorney, for him and
in his name, place and stead, to execute, by manual or facsimile signature,
electronic transmission or otherwise, the Annual Report on Form 10-K of the
Company for the year ended December 31, 2000 and any amendments or supplements
to said Annual Report and to cause the same to be filed with the Securities and
Exchange Commission, together with any exhibits, financial statements and
schedules included or to be incorporated by reference therein, hereby granting
to said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite or desirable to be done in and about the premises
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things which said attorneys
may do or cause to be done by virtue of these Present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 28th day of February, 2001.
/s/ HAROLD BROWN
---------------------------------
Harold Brown
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles
R. Wall, or any one or more of them, her true and lawful attorney, for her and
in her name, place and stead, to execute, by manual or facsimile signature,
electronic transmission or otherwise, the Annual Report on Form 10-K of the
Company for the year ended December 31, 2000 and any amendments or supplements
to said Annual Report and to cause the same to be filed with the Securities and
Exchange Commission, together with any exhibits, financial statements and
schedules included or to be incorporated by reference therein, hereby granting
to said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite or desirable to be done in and about the premises
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things which said attorneys
may do or cause to be done by virtue of these Present.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal
this 28th day of February, 2001.
/s/ JANE EVANS
--------------------------------
Jane Evans
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles
R. Wall, or any one or more of them, his true and lawful attorney, for him and
in his name, place and stead, to execute, by manual or facsimile signature,
electronic transmission or otherwise, the Annual Report on Form 10-K of the
Company for the year ended December 31, 2000 and any amendments or supplements
to said Annual Report and to cause the same to be filed with the Securities and
Exchange Commission, together with any exhibits, financial statements and
schedules included or to be incorporated by reference therein, hereby granting
to said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite or desirable to be done in and about the premises
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things which said attorneys
may do or cause to be done by virtue of these Present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 28th day of February, 2001.
/s/ J. DUDLEY FISHBURN
---------------------------------------
J. Dudley Fishburn
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles
R. Wall, or any one or more of them, her true and lawful attorney, for her and
in her name, place and stead, to execute, by manual or facsimile signature,
electronic transmission or otherwise, the Annual Report on Form 10-K of the
Company for the year ended December 31, 2000 and any amendments or supplements
to said Annual Report and to cause the same to be filed with the Securities and
Exchange Commission, together with any exhibits, financial statements and
schedules included or to be incorporated by reference therein, hereby granting
to said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite or desirable to be done in and about the premises
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things which said attorneys
may do or cause to be done by virtue of these Present.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal
this 28th day of February, 2001.
/s/ BILLIE JEAN KING
------------------------------
Billie Jean King
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles
R. Wall, or any one or more of them, his true and lawful attorney, for him and
in his name, place and stead, to execute, by manual or facsimile signature,
electronic transmission or otherwise, the Annual Report on Form 10-K of the
Company for the year ended December 31, 2000 and any amendments or supplements
to said Annual Report and to cause the same to be filed with the Securities and
Exchange Commission, together with any exhibits, financial statements and
schedules included or to be incorporated by reference therein, hereby granting
to said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite or desirable to be done in and about the premises
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things which said attorneys
may do or cause to be done by virtue of these Present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 28th day of February, 2001.
/s/ ROBERT E.R. HUNTLEY
-----------------------------------------
Robert E.R. Huntley
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles
R. Wall, or any one or more of them, his true and lawful attorney, for him and
in his name, place and stead, to execute, by manual or facsimile signature,
electronic transmission or otherwise, the Annual Report on Form 10-K of the
Company for the year ended December 31, 2000 and any amendments or supplements
to said Annual Report and to cause the same to be filed with the Securities and
Exchange Commission, together with any exhibits, financial statements and
schedules included or to be incorporated by reference therein, hereby granting
to said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite or desirable to be done in and about the premises
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things which said attorneys
may do or cause to be done by virtue of these Present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 28th day of February, 2001.
/s/ JOHN D. NICHOLS
----------------------------------
John D. Nichols
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles
R. Wall, or any one or more of them, his true and lawful attorney, for him and
in his name, place and stead, to execute, by manual or facsimile signature,
electronic transmission or otherwise, the Annual Report on Form 10-K of the
Company for the year ended December 31, 2000 and any amendments or supplements
to said Annual Report and to cause the same to be filed with the Securities and
Exchange Commission, together with any exhibits, financial statements and
schedules included or to be incorporated by reference therein, hereby granting
to said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite or desirable to be done in and about the premises
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things which said attorneys
may do or cause to be done by virtue of these Present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 28th day of February, 2001.
/s/ LUCIO A. NOTO
------------------------------------------
Lucio A. Noto
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles
R. Wall, or any one or more of them, his true and lawful attorney, for him and
in his name, place and stead, to execute, by manual or facsimile signature,
electronic transmission or otherwise, the Annual Report on Form 10-K of the
Company for the year ended December 31, 2000 and any amendments or supplements
to said Annual Report and to cause the same to be filed with the Securities and
Exchange Commission, together with any exhibits, financial statements and
schedules included or to be incorporated by reference therein, hereby granting
to said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite or desirable to be done in and about the premises
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things which said attorneys
may do or cause to be done by virtue of these Present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 28th day of February, 2001.
/s/ JOHN S. REED
-------------------------------
John S. Reed
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles
R. Wall, or any one or more of them, his true and lawful attorney, for him and
in his name, place and stead, to execute, by manual or facsimile signature,
electronic transmission or otherwise, the Annual Report on Form 10-K of the
Company for the year ended December 31, 2000 and any amendments or supplements
to said Annual Report and to cause the same to be filed with the Securities and
Exchange Commission, together with any exhibits, financial statements and
schedules included or to be incorporated by reference therein, hereby granting
to said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite or desirable to be done in and about the premises
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things which said attorneys
may do or cause to be done by virtue of these Present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 28th day of February, 2001.
/s/ CARLOS SLIM HELU
-----------------------------------
Carlos Slim Helu
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles
R. Wall, or any one or more of them, his true and lawful attorney, for him and
in his name, place and stead, to execute, by manual or facsimile signature,
electronic transmission or otherwise, the Annual Report on Form 10-K of the
Company for the year ended December 31, 2000 and any amendments or supplements
to said Annual Report and to cause the same to be filed with the Securities and
Exchange Commission, together with any exhibits, financial statements and
schedules included or to be incorporated by reference therein, hereby granting
to said attorneys full power and authority to do and perform all and every act
and thing whatsoever requisite or desirable to be done in and about the premises
as fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all acts and things which said attorneys
may do or cause to be done by virtue of these Present.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
this 28th day of February, 2001.
/s/ STEPHEN M. WOLF
-------------------------------
Stephen M. Wolf
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>7
<FILENAME>0007.txt
<DESCRIPTION>EXHIBIT 99.1
<TEXT>
<PAGE>
Exhibit 99.1
CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS
As described in Item 3 of this Annual Report on Form 10-K and Note 15 to the
Company's Consolidated Financial Statements included as Exhibit 13 hereto,
there are legal proceedings covering a wide range of matters pending in various
U.S. and foreign jurisdictions against the Company, its subsidiaries and
affiliates, including PM Inc. and Philip Morris International, and their
respective indemnitees. Various types of claims are raised in these proceedings,
including product liability, consumer protection, antitrust, tax, patent
infringement, employment matters, claims for contribution and claims of
competitors and distributors. Pending claims related to tobacco products
generally fall within the following categories: (i) smoking and health cases
alleging personal injury brought on behalf of individual plaintiffs, (ii)
smoking and health cases alleging personal injury and purporting to be brought
on behalf of a class of individual plaintiffs, (iii) health care cost recovery
cases brought by governmental and non-governmental plaintiffs seeking
reimbursement for health care expenditures allegedly caused by cigarette smoking
and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other
tobacco-related litigation includes 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 and suits by foreign governments seeking to
recover damages for taxes lost as a result of the allegedly illegal importation
of cigarettes into their jurisdictions. Governmental plaintiffs in the health
care cost recovery actions include the federal government, various cities and
counties in the United States and certain foreign governmental entities.
Non-governmental plaintiffs in these cases include union health and welfare
trust funds ("unions"), Native American tribes, insurers and self-insurers,
taxpayers and others.
The following lists certain of the pending claims included in these categories
and certain other pending claims. Certain developments in these cases since
November 1, 2000 are also described.
SMOKING AND HEALTH LITIGATION
The following lists the consolidated individual smoking and health cases as well
as smoking and health class actions pending against PM Inc. and, in some cases,
the Company and/or its other subsidiaries and affiliates, including PMI, as of
February 15, 2001, and describes certain developments in these cases since
November 1, 2000.
Consolidated Individual Smoking and Health Cases
In Re Tobacco Litigation (Individual Personal Injury cases), Circuit Court of
Ohio County, West Virginia, consolidated January 11, 2000. In West Virginia all
smoking and health cases alleging personal injury have been transferred to the
state's Mass Litigation Panel. The transferred cases include individual cases
and putative class actions. A case management order has been issued which
provides that all pending individual cases as well as cases filed in or
transferred to the court by September 8, 2000 are to be included in a single
consolidated trial. Approximately 1,200 individual cases have been filed. The
trial court's order provides for the trial to be conducted in two phases. The
issues to be tried in phase one are "general liability issues common to all
defendants including, if appropriate, defective product theory, negligence
theory, warranty theory; and any other theories supported by pretrial
development" as well as entitlement to punitive damages and a punitive damages
multiplier. Pursuant to the court's order, the individual claims of the
plaintiffs whose cases have been consolidated will be tried on an individual
basis or "in reasonably sized trial groups" during the second phase of the
trial. Trial is scheduled for June 2001.
Flight Attendant Litigation
The settlement agreement entered into in the case of Broin, et al. v. Philip
Morris Companies Inc., et al., permitted members of the class to bring
individual suits as to their alleged injuries. As of February 15, 2001,
1
<PAGE>
approximately 3,065 of these suits were pending in the Circuit Court of Dade
County, Florida against PM Inc. and three other cigarette manufacturers. In
October 2000, the court held that the flight attendants will not be required
to prove the substantive liability elements of their claims for negligence,
strict liability and breach of implied warranty in order to recover damages,
if any. The court further ruled that the trials of these suits are to address
whether the plaintiffs' alleged injuries were caused by their exposure to
environmental tobacco smoke and, if so, the amount of damages to be awarded.
To date, 25 such cases were scheduled for trial during 2001.
Domestic Class Actions
Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Eleventh
Judicial Circuit, Dade County, Florida, filed May 5, 1994. See Item 3. Legal
Proceedings, for a discussion of this case.
Norton, et al. v. RJR Nabisco Holdings Corporation, et al., Superior Court,
Madison County, Indiana, filed May 3, 1996.
Richardson, et al. v. Philip Morris Incorporated, et al., Circuit Court,
Baltimore City, Maryland, filed May 24, 1996. The court granted plaintiffs'
motion for class certification in February 1998 and defendants appealed. In May
2000, the Maryland Court of Appeals reversed the trial court's ruling and
ordered the class decertified. PM Inc. filed a stipulation of dismissal in
March 2001.
Scott, et al. v. The American Tobacco Company, et al., District Court, Orleans
Parish, Louisiana, filed May 24, 1996. Plaintiffs have been granted class
certification on behalf of Louisiana cigarette smokers seeking the creation of a
trust fund to pay the costs of monitoring the medical conditions of members of
the purported class. Trial is scheduled for June 2001.
Lyons, et al. v. The American Tobacco Company, et al., United States District
Court, Southern District, Alabama, filed August 8, 1996. In January 2001, the
court granted the parties' joint motion to dismiss the case without prejudice.
Connor, et al. v. The American Tobacco Company, et al., Second Judicial District
Court, Bernalillo County, New Mexico, filed October 10, 1996.
In Re Tobacco Litigation (Medical Monitoring cases) (formerly McCune, et al. v.
The American Tobacco Company, et al.), Circuit Court, Ohio County, West
Virginia, filed January 31, 1997. A mistrial was declared in January 2001. In
March 2001, the court denied the defendants' motion to decertify the class and
scheduled a retrial of the case for September 2001.
Muncie (formerly Ingle and formerly Woods), et al. v. Philip Morris
Incorporated, et al., Circuit Court, McDowell County, West Virginia, filed
February 4, 1997.
Canter (formerly Peterson), et al. v. The American Tobacco Company, et al.,
Circuit Court, First Circuit, Hawaii, filed February 6, 1997.
Selcer, et al. v. R.J. Reynolds Tobacco Company, et al., United States District
Court, Nevada, filed March 3, 1997. In January 2001, the Nevada Supreme Court
found that Nevada common law does not recognize the medical monitoring cause of
action sought by plaintiffs. In February 2001, the United States Court of
Appeals for the Ninth Circuit dismissed plaintiffs' motion for leave to appeal
the Nevada Supreme Court's ruling.
2
<PAGE>
Geiger, et al. v. The American Tobacco Company, et al., Supreme Court, Queens
County, New York, filed April 30, 1997. In October 1999, plaintiffs appealed the
trial court's denial of their class certification motion. In February 2001, the
New York Court of Appeals dismissed plaintiffs' motion for leave to appeal the
denial of class certification.
Cole, et al. v. The Tobacco Institute, Inc., et al., United States District
Court, Eastern District, Texarkana Division, Texas, filed May 5, 1997. In May
2000, the trial court granted defendants' motion for judgment on the pleadings.
Plaintiffs filed a notice of appeal to the United States Court of Appeals for
the Fifth Circuit.
Anderson, et al. v. The American Tobacco Company, Inc., et al., United States
District Court, Eastern District, Tennessee, filed May 23, 1997.
Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San
Diego County, California, filed June 10, 1997. In April 2000, the court denied
plaintiffs' motion for class certification. In February 2001, the court
permitted plaintiffs to file a second motion for class certification.
Fitz (formerly Brammer), et al. v. R.J. Reynolds Tobacco Company, et al.,
United States District Court, Southern District, Iowa, filed June 20, 1997.
Guillory (formerly Denberg), et al. v. American Brands, Inc., et al., United
States District Court, Northern District, Illinois, filed July 7, 1997. In
March 2001, this suit was dismissed.
Nwanze, et al. v. Philip Morris Companies Inc., et al., United States District
Court, Southern District, New York, filed September 29, 1997. In June 2000, the
court granted defendants' motion to dismiss the complaint for failure to state a
claim. Plaintiffs appealed to United States Court of Appeals for the Second
Circuit.
Badillo, et al. v. The American Tobacco Company, et al., United States District
Court, Nevada, filed October 8, 1997. In September 2000, the Nevada Supreme
Court heard arguments on the questions of state law certified to it by the
district court. In January 2001, the Nevada Supreme Court found that
Nevada common law does not recognize the medical monitoring cause of action
sought by plaintiffs.
Young, et al. v. The American Tobacco Company, et al., Civil District Court,
Orleans Parish, Louisiana, filed November 12, 1997.
Aksamit, et al. v. Brown & Williamson Tobacco Corporation, et al., United States
District Court, South Carolina, filed November 20, 1997. In December 2000, the
court denied plaintiffs' motion for class certification.
Jackson, et al. v. Philip Morris Incorporated, et al., United States District
Court, Central District, Utah, filed February 13, 1998.
Parsons, et al. v. A C & S, Inc., et al., Circuit Court, Kanawha County, West
Virginia, filed February 27, 1998.
Basik (formerly Mendys), et al. v. Lorillard Tobacco Company, et al., United
States District Court, Northern District, Illinois, filed March 17, 1998. In
February 2001, the court dismissed the case.
Daniels, et al. v. Philip Morris Companies Inc., et al., Superior Court, San
Diego County, California, filed April 2, 1998. In September 2000, the court
agreed to reconsider its earlier ruling denying plaintiffs' motion for class
certification, and in November 2000, the court granted the plaintiffs' motion
for class certification on behalf of
3
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minor California residents who smoked at least one cigarette between April 1994
and December 1999. Trial is scheduled for March 2002. Defendants filed a writ
with the court of appeals challenging the trial court's class certification
ruling and the writ was denied. Defendants recently sought review by the
California Supreme Court.
Christensen, et al. v. Philip Morris Companies Inc., et al., United States
District Court, Nevada, file