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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950123-02-002676.txt : 20020415
<SEC-HEADER>0000950123-02-002676.hdr.sgml : 20020415
ACCESSION NUMBER: 0000950123-02-002676
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 9
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020319
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: 1934 Act
SEC FILE NUMBER: 001-08940
FILM NUMBER: 02578949
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>y58476e10-k405.txt
<DESCRIPTION>PHILIP MORRIS COMPANIES INC.
<TEXT>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-8940
---------------------
PHILIP MORRIS COMPANIES INC.
(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>
---------------------
Registrant's telephone number, including area code: 917-663-5000
Securities registered pursuant to Section 12(b) of the Act:
<Table>
<Caption>
Title of each class Name of each exchange 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, 2002, was approximately $113 billion. At such date,
there were 2,147,303,822 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, 2001 (the "2001 Annual Report"), are incorporated in Part I,
Part II and Part IV hereof and made a part hereof. Portions of the registrant's
definitive proxy statement for use in connection with its annual meeting of
shareholders to be held on April 25, 2002, filed with the Securities and
Exchange Commission on March 18, 2002, are incorporated in Part III hereof and
made a part hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
Item 1. Businesses.
(a) General Development of Business
General
Philip Morris Companies Inc., through its wholly-owned subsidiaries, Philip
Morris Incorporated, Philip Morris International Inc. and Miller Brewing
Company, and its majority-owned (83.9%) subsidiary, Kraft Foods Inc., is engaged
in the manufacture and sale of various consumer products, including cigarettes,
foods and beverages, and beer. Philip Morris Capital Corporation, another
wholly-owned subsidiary, is primarily engaged in leasing activities. As used
herein, unless the context indicates otherwise, the term "Company" means Philip
Morris Companies Inc., its wholly-owned subsidiaries and its majority-owned
subsidiary. The Company is the largest consumer packaged goods company in the
world.* During November 2001, the Company announced that it would ask
stockholders at its next annual meeting of stockholders in April 2002 to approve
changing the Company's name from Philip Morris Companies Inc. to Altria Group,
Inc.
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") 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., together with its subsidiaries ("Kraft"), is engaged in
the manufacture and sale of branded foods and beverages in the United States,
Canada, Europe, the Middle East and Africa, Latin America and Asia Pacific.
Kraft conducts its global business through its subsidiaries: Kraft Foods North
America, Inc. ("Kraft Foods North America") and Kraft Foods International, Inc.
("Kraft Foods International"). Kraft has operations in 68 countries and sells
its products in more than 145 countries.
Prior to June 13, 2001, Kraft was a wholly-owned subsidiary of the Company.
On June 13, 2001, Kraft completed an initial public offering ("IPO") of
280,000,000 shares of its Class A common stock at a price of $31.00 per share.
The Company owns approximately 83.9% of the outstanding shares of Kraft's
capital stock through the Company's ownership of 49.5% of Kraft's Class A common
stock and 100% of Kraft's Class B common stock. Kraft's Class A common stock has
one vote per share while Kraft's Class B common stock has ten votes per share.
Therefore, the Company holds 97.7% of the combined voting power of Kraft's
outstanding common stock.
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. Except for minimum net worth requirements, the
Company's principal wholly-owned and majority-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.
- ---------------
* References to the Company's competitive ranking in its various businesses are
based on sales data or, in the case of cigarettes and beer, shipments, unless
otherwise indicated.
1
<PAGE>
(b) Financial Information About Industry Segments
The Company's reportable 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, 2001, 2000 and 1999) are set forth in
Note 12 to the Company's consolidated financial statements ("Note 12") and are
incorporated herein by reference to the 2001 Annual Report.
The relative percentages of operating companies income attributable to each
reportable segment were as follows:
<Table>
<Caption>
2001 2000 1999
----- ----- -----
<S> <C> <C> <C>
Domestic tobacco...................................... 30.1% 33.0% 32.8%
International tobacco................................. 30.9 32.1 33.5
North American food................................... 27.4 21.9 21.5
International food.................................... 7.1 7.4 7.2
Beer.................................................. 2.8 4.0 3.5
Financial services.................................... 1.7 1.6 1.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</Table>
(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 207.1 billion units in 2001, a
decrease of 2.3% from 2000. PM Inc. accounted for 51.0% of the domestic
cigarette industry's total shipments in 2001 (an increase of 0.5 share points
over 2000). The domestic industry's cigarette shipments decreased by 3.2% in
2001. PM Inc.'s and the industry's volume decrease during 2001 was primarily a
result of wholesalers' decisions to reduce inventory at the end of 2001 in
advance of the January 1, 2002 increase in the federal excise tax rate. In
contrast, wholesalers had decided to rebuild their inventories during 2000 after
the January 1, 2000 federal excise tax rate increase. PM Inc. estimates that
after adjusting for changes in trade inventories, domestic industry volume
declined approximately 1.0% to 2.0% in 2001. 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>
2001..................................... 406.3 207.1 51.0
2000..................................... 419.8 211.9 50.5
1999..................................... 419.3 208.2 49.6
</Table>
- ---------------
* Source: Management Science Associates.
2
<PAGE>
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 157.8 billion units in 2001 (down 0.3% from
2000), equating to 38.8% of the domestic market (up 1.1 share points over 2000).
In 2001 and 2000, the premium and discount segments accounted for
approximately 74% and 26%, respectively, of domestic cigarette industry volume.
PM Inc.'s share of the premium segment was 61.6% in 2001, an increase of 1.0
share points over 2000. Shipments of premium cigarettes accounted for 89.3% of
PM Inc.'s 2001 volume, up from 88.2% in 2000. In 2001, industry shipments within
the discount category declined 4.5% from 2000 levels; PM Inc.'s 2001 shipments
within this category decreased 11.0%, resulting in a share of 20.9% of the
discount category (down 1.6 share points from 2000).
PM Inc. cannot predict future changes 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.
As set forth in Note 16 to the Company's consolidated financial statements
("Note 16"), which is incorporated herein by reference to the 2001 Annual
Report, on May 7, 2001, the trial court in the Engle class action approved a
stipulation and agreed order among PM Inc., certain other defendants and the
plaintiffs providing that the execution or enforcement of the punitive damages
component of the judgment in that case will remain stayed through the completion
of all judicial review. As a result of the stipulation, PM Inc. placed $500
million into a separate interest-bearing escrow account that, regardless of the
outcome of the appeal, will be paid to the court and the court will determine
how to allocate or distribute it consistent with the Florida Rules of Civil
Procedure. As a result, the Company has recorded a $500 million pre-tax charge
in marketing, administration and research costs in the consolidated statement of
earnings of the domestic tobacco segment for the year ended December 31, 2001.
In July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow
account, which will be returned to PM Inc. should it prevail in its appeal of
the case. The $1.2 billion escrow account is included in the December 31, 2001
consolidated balance sheet as other assets. Interest income on the $1.2 billion
escrow account is paid to PM Inc. quarterly and is being recorded as earned in
the Company's consolidated statement of earnings.
International Tobacco Products
Philip Morris International's total cigarette shipments increased 4.1% in
2001 to 698.9 billion units. Comparisons to 2000 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 3.5% over 2000. 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 14.1% in 2001,
up from 13.8% in 2000. Philip Morris International estimates that international
cigarette market shipments were approximately 4.8 trillion units in 2001, a
slight increase over 2000. Philip Morris International's leading
brands--Marlboro, L&M, Philip Morris, Bond Street, Chesterfield, Parliament,
Lark, Merit and Virginia Slims--collectively accounted for approximately 10.8%
of the international cigarette market, up from 10.6% in 2000. Shipments of
Philip Morris International's principal brand, Marlboro, decreased 0.4% in 2001,
and represented more than 6% of the international cigarette market in 2001 and
2000.
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 60
markets, including Argentina, Australia, Austria, Belgium, the Czech Republic,
Finland, France, Germany, Greece, Hong Kong, Hungary, Israel, Italy, Japan,
Malaysia,
3
<PAGE>
Mexico, the Netherlands, Poland, Portugal, Russia, Ukraine, Saudi Arabia,
Singapore, Spain, Switzerland and Turkey.
In 2001, Philip Morris International continued to invest in and expand its
international manufacturing base, including significant investments in
facilities located in Germany, the Netherlands, the Philippines, Poland,
Portugal, Russia and Ukraine.
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 sell their tobacco products worldwide to distributors, wholesalers,
retailers and state-owned enterprises and other customers.
The market for tobacco products is highly competitive, characterized by
brand recognition and loyalty, with product quality, price, marketing and
packaging constituting the significant methods of competition. Promotional
activities include, in certain instances and where permitted by law, allowances,
the distribution of incentive items, price reductions and other discounts. The
tobacco products of the Company's subsidiaries, affiliates and their licensees
are advertised and promoted through various media, although television and radio
advertising of cigarettes is prohibited in the United States and is prohibited
or restricted in many other countries. In addition, as discussed below under
Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and
Smoking--State Settlement Agreements, PM Inc. and other domestic tobacco
manufacturers have agreed to other marketing restrictions in the United States
as part of the settlements of state health care cost recovery actions.
In the United States, PM Inc. purchases burley and flue-cured leaf tobaccos
of various grades and styles. In 2000, PM Inc. began a pilot partnering program
with burley tobacco growers and extended the program to flue-cured tobacco
growers in 2001. Under the terms of the program, PM Inc. agrees to purchase all
of the tobacco that participating growers may sell without penalty under the
federal tobacco program. PM Inc. continues to purchase the balance of its United
States tobacco requirements at auction and through other sources.
Tobacco production in the United States is subject to government controls,
including the tobacco-price support and production control programs administered
by the United States Department of Agriculture (the "USDA"). Oriental,
flue-cured and burley tobaccos are also purchased outside the United States.
Tobacco production outside the United States is subject to a variety of controls
and external factors, which may include tobacco subsidies and tobacco production
control programs. All of those controls and programs in the United States and
internationally may substantially affect market prices for tobacco.
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 certain jury verdicts against
PM Inc., including a $74 billion punitive damages verdict in the Engle smoking
and health class action case discussed in Note 16 and punitive damages awards in
individual smoking and health cases discussed in Note 16; the civil lawsuit
filed by the United States federal government against various cigarette
manufacturers and others discussed in Note 16; 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
4
<PAGE>
United States related to the settlement of certain tobacco litigation; actual
and proposed excise tax increases in the United States and foreign markets;
diversion into the United States market of products intended for sale outside
the United States; governmental investigations; actual and proposed requirements
regarding the use and 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
jurisdictions inside and outside the United 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. In general, such taxes have been increasing. The United States federal
excise tax on cigarettes is currently $0.39 per pack of 20 cigarettes. In the
United States, state and local sales and excise taxes vary considerably and,
when combined with sales taxes, local taxes and the current federal excise tax,
may be as high as $2.00 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 significant increases in excise and
other cigarette-related taxes have been proposed or enacted at the state and
local levels within the United States and in many jurisdictions outside the
United States. In the European Union (the "EU"), taxes on cigarettes vary
considerably and currently may be as high as the equivalent of $4.88 per pack on
the most popular brands. In Germany, where total tax on cigarettes is currently
equivalent to $1.96 per pack on the most popular brands, the excise tax is
scheduled to increase by approximately the equivalent of $0.17 per pack by
January 2003.
In the opinion of PM Inc. and Philip Morris International, increases in
excise and similar taxes have had an adverse impact on sales of cigarettes. Any
future increases, the extent of which cannot be predicted, could result in
volume declines for the cigarette industry, including PM Inc. and Philip Morris
International, and might cause sales to shift from the premium segment to the
discount segment.
Tar and Nicotine Test Methods and Brand Descriptors: Jurisdictions around
the world have questioned the utility of standardized test methods to measure
tar and nicotine yields of cigarettes. In September 1997, the United States
Federal Trade Commission ("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 ("HHS") 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.
In November 2001, the National Cancer Institute issued a report as a part of
HHS' response to the FTC's request. The report concluded, among other things,
that because there was no meaningful difference in smoke exposure or risk to
smokers between cigarettes with different machine-measured tar and nicotine
yields, the marketing of low yield cigarettes was deceptive. Similarly, public
health officials in other countries and the EU have questioned the relevance of
the related International Standards Organisation's test method for measuring
tar, nicotine and carbon monoxide yields. The EU Commission has been directed to
establish a committee to address, among other things, alternative methods for
measuring tar, nicotine and carbon monoxide yields. In addition, public health
authorities in the United States, the EU, Brazil and other countries have called
for the prohibition of or passed legislation prohibiting the use of brand
descriptors such as "Lights" and "Ultra Lights." Brazil banned the use of
descriptors in January 2002. In the United States, as of February 15, 2002,
there were 11 putative class actions pending against PM Inc. and the Company in
which plaintiffs allege, among other things, that the use of the terms "Lights"
and/or "Ultra Lights," constitutes deceptive and unfair trade practices.
5
<PAGE>
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 the 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: Jurisdictions inside and outside the United
States have enacted or proposed legislation or regulations that would require
cigarette manufacturers to disclose the ingredients used in the manufacture of
cigarettes, and in certain cases, to provide toxicological information
supporting the use of ingredients. In the United States, the Commonwealth of
Massachusetts has enacted legislation to require cigarette manufacturers to
report the flavorings and other ingredients used in each brand-style of
cigarettes sold in 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, and defendants
appealed. In October 2001, the United States Court of Appeals for the First
Circuit reversed the district court's decision, holding that the Massachusetts
disclosure statute does not constitute an impermissible taking of private
property. In November 2001, the First Circuit granted the cigarette
manufacturers' petition for rehearing en banc and withdrew the prior opinion.
The First Circuit, sitting en banc, heard oral argument in January 2002. The
ultimate outcome of this lawsuit cannot be predicted. Similar legislation has
been enacted or proposed in other states and in jurisdictions outside the United
States, including the EU. Under the EU product directive described below,
tobacco companies must disclose the use of, and provide toxicological
information about, all ingredients by October 2002. Philip Morris International
has voluntarily disclosed the ingredients in its brands in a number of EU member
states and in other countries. Other jurisdictions have also enacted or proposed
legislation that would require the submission of toxicological information about
ingredients and would permit governments to prohibit their use.
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.
6
<PAGE>
It is the policy of each of PM Inc. and Philip Morris International to
support a single, consistent public health message on the role played by
cigarette smoking in the development of diseases in smokers, and on smoking and
addiction. It is also their policy in relation to these issues and the health
effects of exposure to ETS to defer to the judgment of public health authorities
as to the text of health warning messages that will best serve the public
interest.
In 1999, PM Inc. and Philip Morris International 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 Philip Morris 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. The web sites advise smokers, and those considering
smoking, to rely on the messages of public health authorities in making all
smoking-related decisions.
The sites also state that government agencies have concluded that ETS
causes diseases--including lung cancer and heart disease--in nonsmokers. PM Inc.
and Philip Morris 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 Philip Morris
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 and its member states are negotiating 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 or prohibit 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 warning requirements including the use of pictorial or graphic
images; 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 Philip Morris 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 the
United States 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 HHS 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. In
2001, the EU issued a directive on tobacco product regulation that, among other
things, reduces maximum permitted levels of tar, nicotine and carbon monoxide
yields to 10, 1 and 10 milligrams, respectively, requires manufacturers to
disclose ingredients and toxicological data on ingredients, requires health
warnings on the front of a pack that cover at least 30% of the front panel and
14 rotational warnings that cover no less than 40% of the back panel, requires
the health warnings to be surrounded by a black border, requires the printing of
tar, nicotine and carbon monoxide numbers on the side panel of the pack at a
minimum size of 10% of the side panel, and as described above, prohibits the use
of
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texts, names, trademarks and figurative or other signs suggesting that a
particular tobacco product is less harmful than others. The EU's member states
are in the process of drafting and adopting legislation that will implement the
provisions of the directive. The European Commission is also considering a new
directive that would further restrict tobacco marketing and advertising in the
EU. Tobacco control legislation addressing the manufacture, marketing and sale
of tobacco products has been proposed in numerous other jurisdictions.
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 is being considered in
other states and localities and at the federal level, as well as in
jurisdictions outside the United States.
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., Philip Morris International and the Company could
be materially adversely affected.
Governmental Investigations: From time to time, the Company is subject to
governmental investigations on a range of matters. During 2001, the competition
authorities in Italy and Turkey initiated separate investigations into business
activities among participants in the cigarette markets of those countries. The
order initiating the Italian investigation named the Company and certain of its
affiliates as well as all other parties purportedly engaged in the sale of
cigarettes in Italy, including the Italian state tobacco monopoly. The Turkish
investigation is directed at one of the Company's Turkish affiliates and another
cigarette manufacturer. Also in 2001, authorities in Australia initiated an
investigation into the use of descriptors, alleging that their use was false and
misleading. The investigation is directed at one of the Company's Australian
affiliates and other cigarette manufacturers. While it is not possible to
predict the outcome of these governmental investigations, the Company and its
affiliates believe they have meritorious responses to the matters being
investigated. They are cooperating with the investigations and are prepared to
vigorously contest any findings of unlawful conduct that may result from the
investigations.
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 PM Inc. and the Company. (See Note 16 for a
discussion of such litigation.)
State Settlement Agreements: As discussed in Note 16, 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.
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Food Products
Acquisitions and Divestitures
Kraft has made a number of acquisitions and divestitures during the past
three years.
On December 11, 2000, the Company, through Kraft, acquired all of the
outstanding shares of Nabisco Holdings Corp. ("Nabisco") for $55 per share in
cash. The aggregate cost to purchase Nabisco's outstanding shares, retire
employee stock options and other payments, was approximately $15.2 billion. In
addition, the acquisition of Nabisco included the assumption of approximately
$4.0 billion of existing Nabisco debt. For a discussion of the Nabisco
acquisition, see Note 4 to the Company's consolidated financial statements which
is incorporated herein by reference to the 2001 Annual Report.
The integration of Nabisco into Kraft has continued throughout 2001. The
closure of a number of Nabisco domestic and international facilities resulted in
severance and other exit costs of $379 million, which are included in the
adjustments for the allocation of purchase price. The closures will result in
the termination of approximately 7,500 employees and will require total cash
payments of $373 million, of which approximately $74 million has been spent
through December 31, 2001. Substantially all of the closures will be completed
by the end of 2002.
The integration of Nabisco into the operations of Kraft will also result in
the closure or reconfiguration of several existing Kraft facilities. The
aggregate charges to the Company's consolidated statement of earnings to close
or reconfigure its facilities and integrate Nabisco are estimated to be in the
range of $200 million to $300 million. During 2001, the Company incurred pre-tax
integration costs of $53 million for site reconfigurations and other
consolidation programs in the United States. In October 2001, Kraft announced
that it was offering a voluntary retirement program to certain salaried
employees in the United States. The program is expected to terminate
approximately 750 employees and will result in an estimated pre-tax charge of
approximately $140 million upon final employee acceptance in the first quarter
of 2002. This pre-tax charge is part of the previously discussed $200 million to
$300 million in pre-tax charges related to the integration of Nabisco.
By combining Nabisco's operations with the operations of Kraft, the Company
achieved net cost synergies of over $100 million in 2001 and expects to generate
cumulative net cost synergies of $300 million in 2002, $475 million in 2003 and
ongoing annual cost savings of $600 million thereafter.
During 2001, Kraft Foods International purchased coffee businesses in
Romania, Morocco and Bulgaria and also acquired confectionery businesses in
Russia and Poland. During 2001, Kraft Foods International sold a few small food
businesses and Kraft Foods North America sold one small food business. During
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.
The impact of these acquisitions and divestitures, excluding Nabisco, has
not had a material effect on the Company's results of operations.
North American Food
Kraft Foods North America's principal brands span five consumer sectors and
include the following:
Snacks: Oreo, Chips Ahoy!, Newtons, Nilla, Nutter Butter, Stella
D'Oro and SnackWell's cookies; Ritz, Premium, Triscuit, Wheat Thins,
Cheese Nips, Better Cheddars, Honey Maid Grahams and Teddy Grahams
crackers; Planters nuts and salty snacks; Life Savers, Creme Savers,
Altoids, Gummi Savers and Fruit Snacks sugar confectionery products;
Terry's and Toblerone
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chocolate confectionery products; Handi-Snacks two-compartment snacks;
Balance Bar nutrition and energy snacks; and Jell-O refrigerated gelatin
and pudding snacks and Handi-Snacks shelf-stable pudding snacks.
Beverages: Maxwell House, General Foods International Coffees,
Starbucks, Yuban, Sanka, Nabob and Gevalia coffees; Capri Sun, Tang,
Kool-Aid 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; Shake 'N Bake coatings; and Milk-Bone
pet snacks.
Convenient Meals: DiGiorno, Tombstone, Jack's, California Pizza
Kitchen and Delissio frozen pizzas; Kraft macaroni & cheese dinners;
Taco Bell, It's Pasta Anytime and Stove Top Oven Classics meal kits;
Lunchables lunch combinations; Oscar Mayer and Louis Rich cold cuts,
hot dogs and bacon; Boca soy-based meat alternatives; Stove Top
stuffing mix; and Minute rice.
International Food
Kraft Foods International's principal brands within the five consumer
sectors include the following:
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 Lux
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, Maxim, Maxwell House, Dadak, Onko
and Nova Brasilia coffees; Suchard Express, O'Boy, and Kaba chocolate
drinks; Tang, Clight, Kool-Aid, Royal, Verao, Fresh, Frisco,
Q-Refres-Ko and Ki-Suco powdered soft drinks; and Maguary juice
concentrate.
Cheese: Philadelphia cream cheese; Kraft Sottilette, Dairylea,
El Caserio and Invernizzi cheeses; Kraft and Eden process cheeses; and
Cheese Whiz process cheese spread.
Grocery: Kraft spoonable and pourable salad dressings; Miracel
Whip spoonable dressing; Royal dry packaged desserts; Kraft and ETA
peanut butters; and Vegemite yeast spread.
Convenient Meals: Lunchables lunch combinations; Kraft macaroni
& cheese dinners; Kraft and Miracoli pasta dinners and sauces; and
Simmenthal canned meats.
Distribution, Competition and Raw Materials
Kraft Foods North America's products are generally sold to supermarket
chains, wholesalers, supercenters, 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 as well as outdoor media such as
billboards 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
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food products primarily in the same manner and also engage the services of
independent sales offices and agents.
Kraft is subject to competitive conditions in all aspects of its business.
Competitors include large national and international companies and numerous
local and regional companies. Some of its competitors may have different profit
objectives and some international competitors may be less susceptible to
currency exchange rates. In addition, certain of its international competitors
benefit from government subsidies. Its food products also compete with generic
products and private-label products of food retailers, wholesalers and
cooperatives. Kraft competes primarily on the basis of product quality, 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 is a major purchaser of milk, cheese, nuts, green coffee beans,
cocoa, corn products, wheat, rice, pork, poultry, beef, vegetable oil, and sugar
and other sweeteners. It also uses significant quantities of glass, plastic and
cardboard to package its products. Kraft continuously monitors worldwide supply
and cost trends of these commodities to enable Kraft to take appropriate action
to obtain ingredients and packaging needed for production.
Kraft purchases a substantial portion of its milk requirements from
independent agricultural cooperatives and individual producers, and a
substantial portion of its 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 2001,
dairy commodity costs in the United States on average have been higher than the
levels seen in 2000.
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 2001 were
lower than in 2000.
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 2001 were higher than in 2000.
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 uses hedging techniques to minimize the
impact of price fluctuations in its principal raw materials. Kraft does not
fully hedge against changes in commodity prices and these strategies may not
protect Kraft from increases in specific raw material costs.
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
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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 EU relating to
labeling, packaging, food content, pricing, marketing and advertising and
related areas.
The EU 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.
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,
Henry Weinhard'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 acquired brands, Henry
Weinhard's, Olde English 800, Mickey's and Hamm's during the second quarter of
1999. In connection with this acquisition, Miller entered into a
contract-brewing arrangement with Pabst whereby Miller brews a majority of
Pabst's beer and malt beverage brands for sale to Pabst.
Miller's total shipment volume (which excludes international shipments of
Miller products by other brewers under license and contract-brewing
arrangements) of 40.6 million barrels for 2001 decreased 4.6% from 2000. Export
shipments increased 3.9%. Domestic shipments of 39.6 million barrels decreased
4.8% from 2000 due to higher pricing, discontinued brands (primarily Molson) and
Miller's continuing efforts to reduce distributor inventories. Miller's
estimated market share of the United States malt beverage industry (based on
shipments, including exports) was 19.7% in 2001, down from 20.7% in 2000.
Excluding the impact of businesses divested since the beginning of 2000,
wholesalers' sales of Miller's products to retailers in 2001 decreased 2.5% from
2000. Domestic shipments of premium/near premium-priced brands in 2001 increased
1.2 percentage points to 79.8% of total domestic shipments due primarily to
higher shipments in Miller High Life franchise and Foster's brands.
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>
2001............... 206,200 40,563 19.7
2000............... 205,628 42,532 20.7
1999............... 204,593 44,175 21.6
</Table>
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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's business has lost market share in 2001 and 2000 and Miller
has instituted actions to increase the equity of its brands and focus on premium
brands with the highest growth potential. These actions include an emphasis on
advertising and promotion of its premium brands, streamlining contract brewing
operations, exiting certain licenses to brew brands for domestic distribution,
reducing inventory on hand at distributors and pursuing opportunities in the
growing flavored malt beverages category. Late in 2001 and early in 2002, Miller
entered agreements with Skyy Spirits LLC, Allied Domecq PLC and Brown-Forman
Corporation to launch a range of new flavored malt beverages. The flavored malt
beverage category is the fastest growing segment in the wine, beer and spirits
industry. The agreement with Skyy Spirits will introduce Skyy Blue(TM), a
flavored malt beverage with a citrus flavor. The agreement with Allied Domecq
will introduce Citrone(TM) and Diablo(TM) flavored malt beverages based on
Allied Domecq's Stolichnaya(TM) vodka and Sauza(TM) tequila brands,
respectively. The agreement with Brown-Forman will introduce a flavored malt
beverage based on Brown-Forman's Jack Daniel's(TM) brand. 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 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") is primarily engaged in leasing
activities. Total assets of PMCC were $8.9 billion at December 31, 2001, up from
$8.4 billion at December 31, 2000, reflecting an increase in net finance assets.
PMCC's finance asset portfolio includes leases in the following investment
categories: aircraft, electrical power, real estate, manufacturing, surface
transportation and energy industries. Finance assets, net, represents lease
receivables and estimated residual values of underlying assets under lease,
reduced by non-recourse debt (which is collateralized by the assets under lease
and lease receivables) and unearned income.
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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, 2001, the Company employed approximately 175,000 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 2001, subsidiaries (or former subsidiaries) of the
Company were involved in approximately 105 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.
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," "anticipates," "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. The food industry continues to be subject to the possibility
that consumers could lose confidence in the safety and quality of certain food
products. Each of the Company's consumer products
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subsidiaries is subject to intense competition, changes in consumer preferences,
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; 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, currency movements and fluctuations in levels of
customer inventories. 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 35 of
the 2001 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
12.
Subsidiaries of the Company export tobacco and tobacco-related products,
coffee products, grocery products, cheese, processed meats and beer. In 2001,
the value of all exports from the United States by these subsidiaries amounted
to approximately $4 billion.
Item 2. Properties.
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 54 cigarette or component
manufacturing facilities in 31 countries outside the United States, including
cigarette manufacturing facilities in Bergen Op Zoom, the Netherlands and in
Berlin, Germany.
Food Products
Kraft has 218 manufacturing and processing facilities, 74 of which are
located in the United States. Outside the United States, Kraft has 144
manufacturing and processing facilities located in 47 countries. Kraft owns 205
and leases 13 of these facilities. In addition, Kraft has 459 distribution
centers and depots, of which 105 are located outside the United States. Kraft
owns 91 distribution centers and depots, with the remainder being leased.
The integration of Nabisco into the operations of the Company has resulted
in the closure of seven Nabisco facilities during 2001. During 2002, the Company
anticipates closing seven additional Nabisco 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.
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General
The plants and properties owned and operated by the Company's subsidiaries
are maintained in good condition and are believed to be suitable and adequate
for present needs.
Item 3. Legal Proceedings.
Legal proceedings covering a wide range of matters are pending or
threatened in various United States and foreign jurisdictions against the
Company, its subsidiaries and affiliates, including PM Inc. and Philip Morris
International, as well as 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 class action suits alleging that the use of
the terms "Lights" and "Ultra Lights" constitutes deceptive and unfair trade
practices, suits by foreign governments seeking to recover damages for taxes
lost as a result of the allegedly illegal importation of cigarettes into their
jurisdictions, 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 various antitrust suits. 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 recovery and
certain other actions pending as of February 15, 2002, and discusses certain
developments in such cases since November 13, 2001.
As of February 15, 2002 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
1,500 such cases on December 31, 2000, and approximately 380 such cases on
December 31, 1999. In certain jurisdictions, individual smoking and health cases
have been aggregated for trial in a single proceeding; the largest such
proceeding aggregates 1,250 cases in West Virginia and is currently scheduled
for trial in September 2002. An estimated ten of the individual cases involve
allegations of various personal injuries allegedly related to exposure to ETS.
In addition, approximately 2,835 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, 2002, there were an estimated 25 smoking and health
purported class actions pending in the United States against PM Inc. and, in
some cases, the Company (including four that involve allegations of various
personal injuries related to exposure to ETS), compared with approximately 36
such cases on December 31, 2000, and approximately 50 such cases on December 31,
1999. Some of these actions purport to
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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, 2002, there were an estimated 47 health care cost
recovery actions, including the suit discussed below under "Federal Government's
Lawsuit," filed by the United States government, pending in the United States
against PM Inc. and, in some instances, the Company, compared with approximately
52 such cases pending on December 31, 2000, and 60 such cases on December 31,
1999. In addition, health care cost recovery actions are pending in Israel, the
Marshall Islands, the Province of British Columbia, Canada, France (in a case
brought by a local agency of the French social security health insurance
system), and Spain.
There are also a number of other tobacco-related actions pending outside
the United States against Philip Morris International and its affiliates and
subsidiaries, including an estimated 65 smoking and health cases brought on
behalf of individuals (Argentina (40), Brazil (15), Czech Republic (1), Ireland
(1), Israel (2), Italy (1), Japan (1), the Philippines (1), Scotland (1), and
Spain (2)), compared with approximately 68 such cases on December 31, 2000, and
55 such cases on December 31, 1999. In addition, as of February 15, 2002, there
were ten smoking and health putative class actions pending outside the United
States (Brazil (2), Canada (3), Israel (1), and Spain (4)), compared with nine
such cases on December 31, 2000, and ten such cases on December 31, 1999.
Pending and Upcoming Trials
Trials are currently underway in individual smoking and health cases in
Oregon and Rhode Island in which PM Inc. is a defendant. Trial is also currently
underway in Louisiana in a smoking and health class action in which PM Inc. is a
defendant and in which plaintiffs seek the creation of funds to pay for medical
monitoring and smoking cessation programs.
Additional cases against PM Inc. and, in some instances, the Company, are
scheduled for trial through the end of 2002, including two purported smoking and
health class actions and a case in West Virginia that aggregates 1,250
individual smoking and health cases, the Retail Leaders Case (discussed below),
and an estimated 14 individual smoking and health cases, including four trials
scheduled to begin in May 2002 in California (2) and Florida (2). In addition,
17 cases involving flight attendants' claims for personal injuries from ETS are
currently scheduled for trial during 2002, including six trials scheduled to
begin in April 2002 and four scheduled to begin in May 2002. Cases against other
tobacco companies are also scheduled for trial through the end of 2002. Trial
dates, however, are subject to change.
Recent Industry Trial Results
In recent years, several jury verdicts have been returned in
tobacco-related litigation.
In February 2002, in an individual smoking and health case involving
another cigarette manufacturer, a Kansas jury awarded plaintiff $198,000 in
actual damages and also found that punitive damages should be awarded. The
amount of punitive damages has not yet been set.
In December 2001, in an individual smoking and health case involving
another cigarette manufacturer, a Florida jury awarded a smoker $165,000 in
damages, and defendant has filed post-trial motions challenging the verdict. In
November 2001, a West Virginia jury returned a verdict in favor of defendants,
including PM Inc., in a smoking and health class action in which plaintiffs
sought the creation of a fund to pay for medical monitoring of class members. In
January 2002, the court denied plaintiffs' motion for a new trial. In October
2001, an Ohio jury returned a verdict in favor of all defendants, including PM
Inc., in an individual smoking and health case, and plaintiff has filed
post-trial motions seeking a new trial. In June 2001, a California jury awarded
a smoker with lung cancer approximately $5.5 million in compensatory damages,
and $3 billion in punitive damages against PM Inc. In August 2001, the court
reduced the punitive damages award to
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$100 million, and PM Inc. and plaintiff have appealed. In June 2001, a New York
jury awarded $6.8 million in compensatory damages against PM Inc. and a total of
$11 million against four other defendants to a Blue Cross and Blue Shield plan
seeking reimbursement of health care expenditures allegedly caused by tobacco
products. In February 2002, the court awarded plaintiff approximately $38
million for attorneys' fees. Defendants, including PM Inc., have appealed. In
May 2001, a New Jersey jury returned a verdict in favor of defendants, including
PM Inc., in an individual smoking and health case. In April 2001, a Florida jury
returned a verdict in favor of defendants, including PM Inc., in an individual
smoking and health case brought by a flight attendant claiming personal injuries
from ETS. Plaintiff's post-trial motions challenging the jury's verdict were
denied in October 2001, and plaintiff has appealed. In February and March 2001,
juries in individual smoking and health cases in South Carolina and Texas
returned verdicts in favor of other cigarette manufacturers. In January 2001, a
mistrial was declared in a case in New York in which an asbestos manufacturer's
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, and in June 2001, the trust announced
that it would not retry the case. 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, 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 Class Action," below.)
In July 2000, a Mississippi jury returned a verdict in favor of defendant
in an individual smoking and health case against another cigarette manufacturer.
Plaintiffs' post-trial motions challenging the verdict were denied, and
plaintiffs have appealed. 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 appealed. In September 2001, the appellate court
dismissed plaintiffs' appeal. 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 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 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 and defendants to
be equally at fault, 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. The court reduced the punitive damages award to
$32 million, and PM Inc. has appealed the verdict and damages award. 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 court reduced
the punitive damages award to $25 million, and PM Inc. appealed. In November
2001, a California district court of appeals affirmed the trial court's ruling;
PM Inc. has appealed to the California Supreme Court, which accepted the appeal
in January 2002.
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
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determine causation or liability, which were considered in subsequent
proceedings. In September 2001, a French appellate court ruled in favor of
defendant and dismissed plaintiff's claim.
Engle Class Action
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
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.
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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 had previously indicated that they believe the bond cap
legislation is unconstitutional and might 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. In May 2001, the
trial court approved a stipulation (the "Stipulation") among PM Inc., certain
other defendants, plaintiffs and the plaintiff class that provides that
execution or enforcement of the punitive damages component of the Engle judgment
will remain stayed against PM Inc. and the other participating defendants
through the completion of all judicial review. As a result of the Stipulation
and in addition to the $100 million bond it previously posted, PM Inc. placed
$1.2 billion into an interest-bearing escrow account for the benefit of the
Engle class. Should PM Inc. prevail in its appeal of the case, both amounts are
to be returned to PM Inc. PM Inc. also placed an additional $500 million into a
separate interest-bearing escrow account for the benefit of the Engle class. If
PM Inc. prevails in its appeal, this amount will be paid to the court, and the
court will determine how to allocate or distribute it consistent with the
Florida Rules of Civil Procedure. In connection with the Stipulation, the
Company recorded a $500 million pre-tax charge in its consolidated statement of
earnings for the quarter ended March 31, 2001.
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. 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.
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
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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, 2002, smoking and health putative class actions were pending in
Alabama, California, Florida, Illinois, Indiana, Iowa, Louisiana, Michigan,
Missouri, Nevada, New Mexico, New York, North Carolina, Ohio, Oregon, Tennessee,
Texas, Utah, West Virginia and the District of Columbia, as well as in Brazil,
Canada, Israel and Spain. Class certification has been denied or reversed by
courts in 29 smoking and health class actions involving PM Inc. in Arkansas, the
District of Columbia, Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan,
Minnesota, Nevada (4), 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), two cases in
California and in a case in Louisiana in which plaintiffs seek the creation of
funds to pay for medical monitoring and smoking cessation programs for class
members. Some of the decisions denying or granting 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. In November
2001, in the first medical monitoring class action case to go to trial, a West
Virginia jury returned a verdict in favor of all defendants, including PM Inc.;
in January 2002, the trial court denied plaintiffs' motion for a new trial.
Health Care Cost Recovery Litigation
Overview
In certain 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. 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, additional disclosure of nicotine
yields, and payment of attorney and expert witness fees. Certain of the health
care cost recovery cases purport to be brought on behalf of a class of
plaintiffs.
The claims asserted in the 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,
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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.
Although there have been some decisions to the contrary, most courts that
have decided motions in these cases have dismissed all or most of the claims
against the industry. In addition, eight federal circuit courts of appeals, the
Second, Third, Fifth, Seventh, Eighth, Ninth, Eleventh and District of Columbia
circuits, as well as California and Tennessee intermediate appellate courts,
relying primarily on grounds that plaintiffs' claims were too remote, have
affirmed dismissals of, or reversed trial courts that had refused to dismiss,
health care cost recovery actions. The United States Supreme Court has refused
to consider plaintiffs' appeals from the cases decided by the courts of appeals
for the Second, Third, Ninth and District of Columbia circuits.
As of February 15, 2002, there were an estimated 47 health care cost
recovery cases pending in the United States against PM Inc., and in some
instances, the Company, including the case filed by the United States
government, which is discussed below under "Federal Government's Lawsuit."
The cases brought in the United States include actions brought by Belize,
Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario,
Canada, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 11
Brazilian states, 11 Brazilian cities and a group of Argentine unions. The
actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the
Province of Ontario, Panama, the Russian Federation, Tajikistan, Ukraine,
Venezuela, 10 Brazilian states and 11 Brazilian cities were consolidated for
pre-trial purposes and transferred to the United States District Court for the
District of Columbia. The court has remanded the cases of Venezuela, Ecuador and
two Brazilian states to state court in Florida, and defendants appealed to the
United States Court of Appeals for the District of Columbia Circuit. Subsequent
to remand, the Ecuador case was voluntarily dismissed. In November 2001, the
cases brought by Venezuela and the Brazilian state of Espirito Santo were
dismissed, and Venezuela has appealed. The district court dismissed the cases
brought by Guatemala, Nicaragua, Ukraine, and the Province of Ontario, and
plaintiffs appealed. In May 2001, the United States Court of Appeals for the
District of Columbia Circuit affirmed the district court's dismissals of the
cases brought by Guatemala, Nicaragua and Ukraine, and in October 2001, the
United States Supreme Court refused to consider plaintiffs' appeal. In November
2001, the Province of Ontario voluntarily dismissed its appeal. In January 2001,
the Superior Court of the District of Columbia dismissed the suit brought by the
Argentine unions. In addition to cases brought in the United States, health care
cost recovery actions have also been brought in Israel, the Marshall Islands,
the Province of British Columbia, Canada and France, and other entities have
stated that they are considering filing such actions.
In March 1999, in the first health care cost recovery case to go to trial,
an Ohio jury returned a verdict in favor of defendants on all counts. In June
2001, a New York jury returned a verdict awarding $6.83 million in compensatory
damages against PM Inc. and a total of $11 million against four other defendants
in a health care cost recovery action brought by a Blue Cross and Blue Shield
plan. In February 2002, the court awarded plaintiff approximately $38 million
for attorneys' fees. Defendants, including PM Inc., have appealed.
Settlements of Health Care Cost Recovery Litigation
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, 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
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Minnesota (together with the MSA, the "State Settlement Agreements"). The MSA
has received final judicial approval in all 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 annual payments of $250 million through 2003. 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 relative share of the settling manufacturers' domestic cigarette
shipments, including roll-your-own cigarettes, in the year preceding that in
which the payment is due. 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)
Tobacco Products -- Taxes, Legislation, Regulation and Other Matters Regarding
Tobacco and Smoking.
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 (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.
Certain litigation, described in Exhibit 99.1, has arisen challenging the
validity of the MSA and alleging violations of antitrust laws.
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 PM Inc. and the Company, 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 what it alleges
to be equitable and declaratory relief, including disgorgement, an injunction
prohibiting certain actions by the defendants, and a
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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. PM Inc. and the Company 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 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. In February 2001, the government filed an amended complaint
attempting to replead the MSP claims. In July 2001, the court denied the
government's motion for reconsideration of the dismissal of the MCRA claims and
dismissed the government's amended MSP claims. Trial of the case is currently
scheduled for July 2003.
In June 2001, representatives of the Department of Justice invited the
defendants, including PM Inc. and the Company, to participate in settlement
discussions. A meeting with representatives of the Department of Justice was
held in July 2001. PM Inc. and the Company cannot predict whether discussions
will continue or the outcome of any such discussions. The Company and PM Inc.
believe that they have a number of valid defenses to the lawsuit and will
continue to vigorously defend it.
Certain Other Tobacco-Related Litigation
Lights/Ultra Lights Cases: As of February 15, 2002, there were 11 putative
class actions pending against PM Inc. and the Company in California, Florida,
Illinois, Massachusetts, Minnesota, Missouri, New Jersey, Ohio (2), Tennessee
and West Virginia 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. Plaintiffs in
these cases allege, among other things, that the use of the terms "Lights"
and/or "Ultra Lights" constitutes deceptive and unfair trade practices, and seek
injunctive and equitable relief, including restitution. In February 2002, a
Florida court certified a class. In November 2001, plaintiffs voluntarily
dismissed a case in Pennsylvania, and in October 2001, a Massachusetts court
certified a statewide class. In February 2001, an Illinois court also certified
a class, and trial in this case is scheduled for January 2003. During the first
quarter of 2001, plaintiffs voluntarily dismissed cases in Florida and New York.
In July 2001, an Arizona court refused to certify a class, and that case has
been voluntarily dismissed.
Cigarette Importation Cases: As of February 15, 2002, the European
Community and ten member states, various Departments of Colombia, Ecuador,
Belize and Honduras had filed suits in the United States against the Company and
certain of its subsidiaries, including PM Inc. and Philip Morris International,
and other cigarette manufacturers and their affiliates, alleging that defendants
sold to distributors cigarettes that would be illegally imported into the
plaintiff jurisdictions in an effort to evade taxes. The claims asserted in
these cases include negligence, negligent misrepresentation, fraud, 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. In February 2002, the courts granted defendants' motions to
dismiss all of the actions. In the Colombia and European Community actions,
however, the RICO and fraud claims predicated on money laundering claims were
dismissed without prejudice. In October 2001, the United States Court of Appeals
for the Second Circuit affirmed the dismissal of a cigarette importation case
filed against another cigarette manufacturer and in March 2002, plaintiff in
that case petitioned the United States Supreme Court for further review.
Asbestos Contribution Cases: As of February 15, 2002, an estimated 13
suits were pending on behalf of former asbestos manufacturers and affiliated
entities against domestic tobacco manufacturers, including PM Inc. 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.
24
<PAGE>
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 May 2001, the court denied
plaintiffs' motion alleging that PM Inc. had violated the preliminary
injunction. In July 2001, one plaintiff filed a motion to modify and expand the
preliminary injunction. The motion was denied in December 2001. In October 2001,
PM Inc. moved for summary judgment dismissing all of plaintiffs' claims. Trial
is scheduled for May 2002.
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. In August 2001,
the court granted PM Inc.'s motion for summary judgment and dismissed, with
prejudice, the claims of ten plaintiffs. In October 2001, the court certified
its decision for appeal to the United States Court of Appeals for the Sixth
Circuit following the stipulation of all plaintiffs that the district court's
dismissal would, if affirmed, be binding on all plaintiffs.
Tobacco Price Cases: As of February 15, 2002, there were 36 putative class
actions pending against PM Inc. and other domestic tobacco manufacturers, as
well as, in certain instances, the Company and Philip Morris International,
alleging that 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 29 were filed in 14 states and the District of Columbia by retail
purchasers of tobacco products. In November 2001, the court granted plaintiffs'
motion for class certification and denied defendant's motion to dismiss in a
case pending in state court in Kansas. In November 2001, the court denied
plaintiffs' motion for class certification in a case pending in state court in
Minnesota. In the State of Michigan, plaintiffs' motion for class certification
is pending. 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 portions of the consolidated complaint. The
court has certified a class of plaintiffs who made direct purchases between
February 1996 and February 2000. In June 2001, the court granted defendants'
motion to dismiss the fraudulent concealment allegations in the complaint. In
February 2002, defendants moved for summary judgment dismissing plaintiffs'
claims. 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 defendants, 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 program 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. In March 2001, the leaf
buyer defendants filed a motion to dismiss the
25
<PAGE>
case. In June 2001, the manufacturing and leaf buyer defendants filed a joint
memorandum in opposition to plaintiffs' motion for class certification. In July
2001, the court denied the manufacturer and leaf buyer defendants' motions to
dismiss the case.
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 in March 2001.
Certain Other Actions
National Cheese Exchange Cases: Since 1996, seven putative class actions
have been filed by various dairy farmers 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 unspecified treble damages. Two of the
actions were voluntarily dismissed by plaintiffs after class certification was
denied. Three cases were consolidated in state court in Wisconsin, and in
November 1999, the court granted Kraft's motion for summary judgment. In June
2001, the Wisconsin Court of Appeals affirmed the trial court's ruling. In
October 2001, the Wisconsin Supreme Court granted plaintiffs' petition for
further review. Kraft's motion to dismiss was granted in a case pending in the
United States District Court for the Central District of California. The United
States Court of Appeals for the Ninth Circuit reversed and remanded the case for
further proceedings. A case in Illinois state court has been settled and
dismissed. No classes have been certified in any of the cases.
Italian Tax Matters: One hundred ninety-four tax assessments alleging the
nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1996 and
income taxes for the years 1987 to 1996) have been served upon certain
affiliates of the Company, including six new assessments (for the year 1996),
which were served in October and December 2001. The aggregate amount of alleged
unpaid taxes assessed to date is the euro equivalent of $2.1 billion. In
addition, the euro 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 188 of the assessments. The decisions to overturn 185
assessments have been appealed by the tax authorities to the regional appellate
court in Milan. To date, the regional appellate court has rejected 72 of the
appeals filed by the tax authorities. The tax authorities have appealed 45 of
the 72 decisions of the regional appellate court to the Italian Supreme Court,
and a hearing on these cases was held in December 2001. Six of the 51 decisions
were not appealed and are now final. In March 2002, the Italian Supreme Court
rejected 12 of the 45 appeals and these 12 cases are now final. Also in March
2002, the Italian Supreme Court vacated the decisions of the regional appellate
court in 16 of the cases and remanded these cases back to the regional appellate
court for further hearings on the merits. 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.
------------------------
26
<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 against PM Inc.
have been returned in the Engle smoking and health class action, several
individual smoking and health cases and a health care cost recovery case and are
being appealed. It is possible that there could be further adverse developments
in these cases and that additional cases could be decided unfavorably. An
unfavorable outcome or settlement of a pending smoking and health or health care
cost recovery case could encourage the commencement of additional similar
litigation. There have also been a number of adverse legislative, regulatory,
political and other developments concerning cigarette smoking and the tobacco
industry that have received widespread media attention. These developments may
negatively affect the perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending litigation, and
may prompt the commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of pending tobacco-related
litigation, and the Company has not provided any amounts in the consolidated
financial statements for unfavorable outcomes, if any. 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 16 for a description of certain pending legal
proceedings. Reference is also made to Exhibit 99.1 to this Form 10-K for a list
of pending smoking and health class actions, health care cost recovery actions,
and certain other actions, and for a description of certain developments in such
proceedings; and Exhibit 99.2 for a schedule of the smoking and health class
actions, consolidated individual smoking and health case and Retail Leaders
Case, which are currently scheduled for trial through 2002. Copies of Note 16
and Exhibits 99.1 and 99.2 are available upon written request to the Corporate
Secretary, Philip Morris Companies Inc., 120 Park Avenue, New York, NY 10017.
27
<PAGE>
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,
2002:
<Table>
<Caption>
Name Office Age
- ---- ------ ---
<S> <C> <C>
Geoffrey C. Bible.................... Chairman of the Board and Chief Executive Officer 64
John D. Bowlin....................... President and Chief Executive Officer of Miller Brewing 51
Company
Bruce S. Brown....................... Vice President, Corporate Taxes 62
Louis C. Camilleri................... Senior Vice President and Chief Financial Officer(1) 47
Nancy J. De Lisi..................... Vice President, Finance and Treasurer 51
Roger K. Deromedi.................... Co-Chief Executive Officer of Kraft Foods Inc.; and 48
President and Chief Executive Officer of Kraft Foods
International, Inc.
David I. Greenberg................... Senior Vice President and Chief Compliance Officer 47
Betsy D. Holden...................... Co-Chief Executive Officer of Kraft Foods Inc.; and 46
President and Chief Executive Officer of Kraft Foods
North America, Inc.
G. Penn Holsenbeck................... Vice President, Associate General Counsel and Corporate 55
Secretary
John R. Nelson....................... President and Chief Executive Officer of Philip Morris 49
International Inc.
Steven C. Parrish.................... Senior Vice President, Corporate Affairs 51
Timothy A. Sompolski................. Senior Vice President, Human Resources and 49
Administration
Michael E. Szymanczyk................ President and Chief Executive Officer of Philip Morris 53
Incorporated
Joseph A. Tiesi...................... Vice President and Controller 43
Charles R. Wall...................... Senior Vice President and General Counsel 56
William H. Webb...................... Vice Chairman and Chief Operating Officer 62
</Table>
All of the above-mentioned officers have been employed by the Company in
various capacities during the past five years.
(1) In January 2002, the Board of Directors announced its intention to elect
Louis C. Camilleri as President and Chief Executive Officer of the Company,
following the Annual Stockholders' Meeting.
28
<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 2001 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 1997-2001 appearing under the caption
"Selected Financial Data" on page 36 of the 2001 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" ("MD&A") on pages 20 to 35 of the 2001
Annual Report and made a part hereof.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information called for by this Item is hereby incorporated by reference
to the paragraphs in the MD&A captioned "Market Risk" and "Value at Risk" on
pages 33 to 34 of the 2001 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 2001 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.
None.
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 and
Related Stockholder Matters.
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 25, 2002, filed with the Securities and Exchange Commission on
March 18, 2002, and, except as indicated therein, made a part hereof.
29
<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 2001
Annual Report Annual Report
Page Page
------------- -------------
<S> <C> <C>
Data incorporated by reference to the Company's
2001 Annual Report:
Consolidated Balance Sheets at December 31, 2001
and 2000..................................... -- 37
Consolidated Statements of Earnings for the
years ended December 31, 2001, 2000 and
1999......................................... -- 38
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2001, 2000
and 1999..................................... -- 40
Consolidated Statements of Cash Flows for the
years ended December 31, 2001, 2000 and
1999......................................... -- 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 Registrant filed a Current Report on Form 8-K
on January 30, 2002 containing the Registrant's consolidated financial
statements for the year ended December 31, 2001.
(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.1-10.18 are management contracts, compensatory plans or
arrangements):
<Table>
<C> <C> <S>
3.1 -- Restated Articles of Incorporation of the Company.(1)
3.2 -- By-Laws, as amended, of the Company.
4.1 -- Indenture dated as of August 1, 1990, between the Company
and The Chase Manhattan Bank (formerly known as Chemical
Bank), Trustee.(2)
4.2 -- First Supplemental Indenture dated as of February 1, 1991,
to Indenture dated as of August 1, 1990, between the Company
and The Chase Manhattan Bank (formerly known as Chemical
Bank) Trustee.(3)
4.3 -- Second Supplemental Indenture dated as of January 21, 1992,
to Indenture dated as of August 1, 1990, between the Company
and The Chase Manhattan Bank (formerly known as Chemical
Bank) Trustee.(4)
4.4 -- Indenture dated as of December 2, 1996, between the Company
and The Chase Manhattan Bank, Trustee.(5)
4.5 -- Indenture dated as of October 17, 2001, between Kraft Foods
Inc. and The Chase Manhattan Bank, Trustee.(29)
4.6 -- The Registrant agrees to furnish copies of any instruments
defining the rights of holders of long-term debt of the
Registrant and its consolidated subsidiaries that does not
exceed 10 percent of the total assets of the Registrant and
its consolidated subsidiaries to the Commission upon
request.
</Table>
30
<PAGE>
<Table>
<C> <C> <S>
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 -- Post-Retirement Consulting Agreement between the Company and
Geoffrey C. Bible.
10.19 -- Comprehensive Settlement Agreement and Release dated October
17, 1997, related to settlement of Mississippi health care
cost recovery action.(7)
10.20 -- Settlement Agreement dated August 25, 1997, related to
settlement of Florida health care cost recovery action.(13)
10.21 -- Comprehensive Settlement Agreement and Release dated January
16, 1998, related to settlement of Texas health care cost
recovery action.(14)
10.22 -- Settlement Agreement and Stipulation for Entry of Judgment,
dated May 8, 1998, regarding the claims of the State of
Minnesota.(15)
10.23 -- Settlement Agreement and Release, dated May 8, 1998,
regarding the claims of Blue Cross and Blue Shield of
Minnesota.(15)
10.24 -- 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)
10.25 -- 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)
10.26 -- 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)
10.27 -- Master Settlement Agreement relating to state health care
cost recovery and other claims.(18)
10.28 -- Stipulation and Agreed Order Regarding Stay of Execution
Pending Review and Related Matters.(28)
12 -- Statements re: computation of ratios.(19)
13 -- Pages 19 to 60 of the 2001 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 2001 Annual Report is not to be deemed "filed" as
part of this Report.
</Table>
31
<PAGE>
<Table>
<S> <C> <C>
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 -- 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 (File No. 1-08940).
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No. 1-08940).
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-08940).
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997.
(12) Incorporated by reference to the Company's proxy statement dated March 10,
1997.
(13) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 25, 1997.
(14) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 16, 1998.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1998.
(18) Incorporated by reference to the Company's Current Report on Form 8-K dated
November 25, 1998, as amended by Form 8/K-A dated December 24, 1998.
(19) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 30, 2002.
(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.
32
<PAGE>
(23) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2000.
(24) Incorporated by reference to the Company's Quarterly Report on Form 10-K
for the year ended December 31, 2000.
(25) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 2001.
(26) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2001.
(27) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2001.
(28) Incorporated by reference to the Company's Current Report on Form 8-K dated
May 8, 2001.
(29) Incorporated by reference to Kraft Foods Inc.'s Registration Statement on
Form S-3 (No. 333-67770) dated August 16, 2001.
33
<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
Chief Executive Officer)
Date: March 19, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
<Table>
<Caption>
Signature Title Date
--------- ----- ----
<C> <C> <S> <C>
/s/ GEOFFREY C. BIBLE Director, Chairman of the March 19, 2002
- -------------------------------------------------------- Board and Chief Executive
(Geoffrey C. Bible) Officer
/s/ LOUIS C. CAMILLERI Senior Vice President and March 19, 2002
- -------------------------------------------------------- Chief Financial Officer
(Louis C. Camilleri)
/s/ JOSEPH A. TIESI Vice President and March 19, 2002
- -------------------------------------------------------- Controller
(Joseph A. Tiesi)
*ELIZABETH E. BAILEY,
HAROLD BROWN,
JANE EVANS,
J. DUDLEY FISHBURN,
ROBERT E. R. HUNTLEY,
BILLIE JEAN KING,
RUPERT MURDOCH,
JOHN D. NICHOLS,
LUCIO A. NOTO,
CARLOS SLIM HELU,
WILLIAM H. WEBB,
STEPHEN M. WOLF Directors
*BY: /s/ LOUIS C. CAMILLERI March 19, 2002
---------------------------------------------------
(Louis C. Camilleri,
Attorney-in-fact)
</Table>
34
<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 28, 2002 appearing in the 2001 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 28, 2002
S-1
<PAGE>
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2001, 2000 and 1999
(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>
2001:
CONSUMER PRODUCTS:
Allowance for discounts........ $ 9 $709 $ 4 $709 $ 13
Allowance for doubtful
accounts.................... 210 27 5 35 207
Allowance for returned goods... 8 145 -- 146 7
---- ---- --- ---- ----
$227 $881 $ 9 $890 $227
==== ==== === ==== ====
FINANCIAL SERVICES:
Allowance for losses........... $121 $ 11 $-- $ -- $132
==== ==== === ==== ====
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
==== ==== === ==== ====
</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-3.2
<SEQUENCE>3
<FILENAME>y58476ex3-2.txt
<DESCRIPTION>BY-LAWS AS AMENDED
<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.
August 29, 2001
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<PAGE>
Notwithstanding the foregoing, a written waiver of notice signed by the
person or persons entitled to such notice, either before or after the time
stated therein, shall be equivalent to the giving of such notice. A stockholder
who attends a meeting shall be deemed to have (i) waived objection to lack of
notice or defective notice of the meeting, unless at the beginning of the
meeting he or she objects to holding the meeting or transacting business at the
meeting, and (ii) waived objection to consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the meeting
notice, unless he or she objects to considering the matter when it is presented.
Section 5. Quorum. - At all meetings of the stockholders, unless a greater
number or voting by classes is required by law, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, action on a matter is approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless the vote
of a greater number or voting by classes is required by law or the Articles of
Incorporation, and except that in elections of directors those receiving the
greatest number of votes shall be deemed elected even though not receiving a
majority. Less than a quorum may adjourn.
Section 6. Organization and Order of Business. - At all meetings of the
stockholders, the chairman of the Board of Directors or, in the chairman's
absence, the deputy chairman of the Board of Directors (if any), the vice
chairman of the Board of Directors (if any), the president (if one shall have
been elected by the Board of Directors) or, in the absence of all of the
foregoing, the most senior executive vice president, shall act as chairman. In
the absence of all of the foregoing officers or, if present, with their consent,
a majority of the shares entitled to vote at such meeting, may appoint any
person to act as chairman. The secretary of the Corporation or, in the
secretary's absence, an assistant secretary, shall act as secretary at all
meetings of the stockholders. In the event that neither the secretary nor any
assistant secretary is present, the chairman may appoint any person to act as
secretary of the meeting.
The chairman shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts and things as are necessary
or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the dismissal of business not
properly presented, the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof and the opening and closing of the voting polls.
At each annual meeting of stockholders, only such business shall be
conducted as shall have been properly brought before the meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of the
Corporation who shall be entitled to
-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.
-4-
<PAGE>
ARTICLE II
Board of Directors
Section 1. General Powers. - The business and affairs of the Corporation
shall be managed under the direction of the Board of Directors.
Section 2. Number. - The number of directors shall be fourteen (14).
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.
-9-
<PAGE>
Section 6. Chairman of the Board of Directors and Chief Executive Officer.
- - The chairman of the Board of Directors shall preside at meetings of the
stockholders and of the Board of Directors and shall be a member of the
executive committee. The chairman shall be the Chief Executive Officer of the
Corporation and shall be responsible to the Board of Directors. He or she shall
be responsible for the general management and control of the business and
affairs of the Corporation and shall see to it that all orders and resolutions
of the Board of Directors are implemented. The chairman shall from, time to
time, report to the Board of Directors on matters within his or her knowledge
which the interests of the Corporation may require be brought to its notice. The
chairman shall do and perform such other duties as from time to time the Board
of Directors may prescribe.
Section 7. Deputy Chairman of the Board of Directors. - In the absence of
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if elected by the Board of Directors) shall preside at meetings of
the stockholders and of the Board of Directors. The deputy chairman shall be
responsible to the chairman of the Board of Directors and shall perform such
duties as shall be assigned to him or her by the chairman of the Board of
Directors. The deputy chairman shall from time to time report to the chairman of
the Board of Directors on matters within the deputy chairman's knowledge which
the interests of the Corporation may require be brought to the chairman's
notice.
Section 8. President. - In the absence of the chairman of the Board of
Directors and the deputy chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) shall
preside at meetings of the stockholders and of the Board of Directors. The
president shall be responsible to the chairman of the Board of Directors.
Subject to the authority of the chairman of the Board of Directors, the
president shall be devoted to the Corporation's business and affairs under the
basic policies set by the Board of Directors and the chairman of the Board of
Directors. He or she shall from, time to time, report to the chairman of the
Board of Directors on matters within the president's knowledge which the
interests of the Corporation may require be brought to the chairman's notice. In
the absence of the chairman of the Board of Directors and the deputy chairman of
the Board of Directors (if any), the president (if any) shall, except as
otherwise directed by the Board of Directors, have all of the powers and the
duties of the chairman of the Board of Directors. The president (if any) shall
do and perform such other duties as from time to time the Board of Directors or
the chairman of the Board of Directors may prescribe.
Section 9. Vice Chairmen of the Board of Directors. - In the absence of
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), the vice chairman of the Board of
Directors designated for such purpose by the chairman of the Board of Directors
(if any) shall preside at meetings of the stockholders and of the Board of
Directors. Each vice chairman of the
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<PAGE>
Board of Directors shall be responsible to the chairman of the Board of
Directors. Each vice chairman of the Board of Directors shall from time to time
report to the chairman of the Board of Directors on matters within the vice
chairman's knowledge which the interests of the Corporation may require be
brought to the chairman's notice. In the absence or inability to act of the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), such vice chairman of the Board
of Directors as the chairman of the Board of Directors may designate for the
purpose shall have the powers and discharge the duties of the chairman of the
Board of Directors. In the event of the failure or inability of the chairman of
the Board of Directors to so designate a vice chairman of the Board of
Directors, the Board of Directors may designate a vice chairman of the Board of
Directors who shall have the powers and discharge the duties of the chairman of
the Board of Directors.
Section 10. Chief Operating Officer. - The chief operating officer (if
any) shall be responsible to the Chairman of the Board of Directors for the
principal operating businesses of the Corporation and shall perform those duties
which may from time to time be assigned.
Section 11. Vice Presidents. - The vice presidents of the Corporation
shall assist the chairman of the Board of Directors, the deputy chairman of the
Board of Directors, the president (if any) and the vice chairmen (if any) of the
Board of Directors in carrying out their respective duties and shall perform
those duties which may from time to time be assigned to them. The chief
financial officer shall be a vice president of the Corporation (or more senior)
and shall be responsible for the management and supervision of the financial
affairs of the Corporation.
Section 12. Treasurer. - The treasurer shall have charge of the funds,
securities, receipts and disbursements of the Corporation. He or she shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such banks or trust companies or with such bankers or other
depositaries as the Board of Directors may from time to time designate. The
treasurer shall render to the Board of Directors, the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if any), the vice chairmen of the Board of Directors (if any), and the chief
financial officer, whenever required by any of them, an account of all of his
transactions as treasurer. If required, the treasurer shall give a bond in such
sum as the Board of Directors may designate, conditioned upon the faithful
performance of the duties of the treasurer's office and the restoration to the
Corporation at the expiration of his or her term of office or in case of death,
resignation or removal from office, of all books, papers, vouchers, money or
other property of whatever kind in his or her possession or under his or her
control belonging to the Corporation. The treasurer shall perform such other
duties as from time to time may be assigned to him or her.
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<PAGE>
Section 13. Assistant Treasurers. - In the absence or disability of the
treasurer, one or more assistant treasurers shall perform all the duties of the
treasurer and, when so acting, shall have all the powers of, and be subject to
all restrictions upon, the treasurer. Assistant treasurers shall also perform
such other duties as from time to time may be assigned to them.
Section 14. Secretary. - The secretary shall keep the minutes of all
meetings of the stockholders and of the Board of Directors in a book or books
kept for that purpose. He or she shall keep in safe custody the seal of the
Corporation, and shall affix such seal to any instrument requiring it. The
secretary shall have charge of such books and papers as the Board of Directors
may direct. He or she shall attend to the giving and serving of all notices of
the Corporation and shall also have such other powers and perform such other
duties as pertain to the secretary's office, or as the Board of Directors, the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), the president (if any) or any vice chairman of the Board of
Directors may from time to time prescribe.
Section 15. Assistant Secretaries. - In the absence or disability of the
secretary, one or more assistant secretaries shall perform all of the duties of
the secretary and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the secretary. Assistant secretaries shall
also perform such other duties as from time to time may be assigned to them.
Section 16. Controller. - The controller shall be administrative head of
the controller's department. He or she shall be in charge of all functions
relating to accounting and the preparation and analysis of budgets and
statistical reports and shall establish, through appropriate channels, recording
and reporting procedures and standards pertaining to such matters. The
controller shall report to the chief financial officer and shall aid in
developing internal corporate policies whereby the business of the Corporation
shall be conducted with the maximum safety, efficiency and economy. The
controller shall be available to all departments of the Corporation for advice
and guidance in the interpretation and application of policies which are within
the scope of his or her authority. The controller shall perform such other
duties as from time to time may be assigned to him or her.
Section 17. Assistant Controllers. - In the absence or disability of the
controller, one or more assistant controllers shall perform all of the duties of
the controller and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the controller. Assistant controllers
shall also perform such other duties as from time to time may be assigned to
them.
-12-
<PAGE>
ARTICLE V
Contracts, Checks, Drafts, Bank Accounts, Etc.
Section 1. Contracts. - The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president, the treasurer
and such other persons as the chairman of the Board of Directors may authorize
shall have the power to execute any contract or other instrument on behalf of
the Corporation; no other officer, agent or employee shall, unless otherwise in
these By-Laws provided, have any power or authority to bind the Corporation by
any contract or acknowledgement, or pledge its credit or render it liable
pecuniarily for any purpose or to any amount.
Section 2. Loans. - The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president, the treasurer
and such other persons as the Board of Directors may authorize shall have the
power to effect loans and advances at any time for the Corporation from any
bank, trust company or other institution, or from any corporation, firm or
individual, and for such loans and advances may make, execute and deliver
promissory notes or other evidences of indebtedness of the Corporation, and, as
security for the payment of any and all loans, advances, indebtedness and
liability of the Corporation, may pledge, hypothecate or transfer any and all
stocks, securities and other personal property at any time held by the
Corporation, and to that end endorse, assign and deliver the same.
Section 3. Voting of Stock Held. - The chairman of the Board of Directors,
the deputy chairman of the Board of Directors (if any), the president (if any),
any vice chairman of the Board of Directors (if any), any vice president or the
secretary may from time to time appoint an attorney or attorneys or agent or
agents of the Corporation to cast the votes that the Corporation may be entitled
to cast as a stockholder or otherwise in any other corporation, any of whose
stock or securities may be held by the Corporation, at meetings of the holders
of the stock or other securities of such other corporation, or to consent in
writing to any action by any other such corporation, and may instruct the person
or persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed on behalf of the Corporation
such written proxies, consents, waivers or other instruments as such officer may
deem necessary or proper in the premises; or the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if any), any vice chairman of the Board of Directors (if any), any vice
president or the secretary may attend in person any meeting of the holders of
stock or other securities of such other corporation and thereat vote or exercise
any and all powers of the Corporation as the holder of such stock or other
securities of such other corporation.
-13-
<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.
-14-
<PAGE>
ARTICLE X
Amendment
The power to alter, amend or repeal the By-Laws of the Corporation or to
adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made by
the Board of Directors may be repealed or changed by the stockholders, or new
By-Laws may be adopted by the stockholders, and the stockholders may prescribe
that any By-Laws made by them shall not be altered, amended or repealed by the
directors.
ARTICLE XI
Emergency By-Laws
If a quorum of the Board of Directors cannot be readily assembled because
of some catastrophic event, and only in such event, these By-Laws shall, without
further action by the Board of Directors, be deemed to have been amended for the
duration of such emergency, as follows:
Section 1. Section 6 of Article II shall read as follows:
Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the directors present at a meeting of
the Board of Directors called in accordance with these By-Laws.
Section 2. The first sentence of Section 10 of Article II shall read as
follows:
Special meetings of the Board of Directors shall be held whenever called
by order of the chairman of the Board of Directors or a deputy chairman
(if any),or of the president (if any) or any vice chairman of the Board of
Directors (if any) or any director or of any person having the powers and
duties of the chairman of the Board of Directors, the deputy chairman, the
president or any vice chairman of the Board of Directors.
Section 3. Section 12 of Article II shall read as follows:
The directors present at any regular or special meeting called in
accordance with these By-Laws shall constitute a quorum for the
transaction of business at such meeting, and the action of a majority of
such directors shall be the act of the Board of Directors, provided,
however, that in the event that only one director is present at any such
meeting no action except the election of directors shall be taken until at
least two additional directors have been elected and are in attendance.
-15-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.18
<SEQUENCE>4
<FILENAME>y58476ex10-18.txt
<DESCRIPTION>POST RETIREMENT CONSULTING AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.18
AGREEMENT
AGREEMENT made this 31st day of January, 2002, between Philip
Morris Companies Inc., a corporation organized and existing under the laws of
the Commonwealth of Virginia, hereinafter called the "Company," and Geoffrey C.
Bible, hereinafter called "Consultant."
WHEREAS, Consultant has been employed by the Company or its
affiliates continuously since 1976 and has served the Company as President and
Chief Executive Officer since June 1994 and Chairman and Chief Executive Officer
since February 1995 and has contributed significantly to the Company's success;
and
WHEREAS, the Company desires that Consultant continue to make
himself available following his retirement to consult with the Company and his
successor on various issues;
NOW, THEREFORE, in consideration of Consultant's significant
contributions to the success of the Company and the other agreements contained
herein, the parties hereto agree as follows:
1. For the five-year period commencing with the date of Consultant's
retirement from the Company (the "term hereof"), Consultant shall, at
all reasonable times and insofar as his physical condition may permit,
make himself available to the Company to consult with and advise its
officers, directors and other representatives in connection with such
matters as the then chief executive officer of the Company shall
require. The Company will reimburse Consultant for his reasonable
out-of-pocket expenses incurred in providing such services.
2. For so long as Consultant shall maintain a residence within reasonable
commuting distance of Greenwich, Connecticut, the Company shall provide
Consultant at Company expense with an office at the location specified
in Exhibit A or another comparable office in the Greenwich, Connecticut
area, together with secretarial service and office furniture, supplies
and equipment, including two phone lines, telephones and a fax machine,
comparable to that to which he is currently accustomed. If Consultant
shall cease to maintain a residence within reasonable commuting
distance of Greenwich, Connecticut, the Company shall no longer be
required to maintain such office, but in lieu thereof shall provide
Consultant, if Consultant so requests, with a comparable office and
secretarial service, furniture, supplies and equipment at a Company
facility within a reasonable commuting distance of Consultant's new
residence, subject to available space and the approval of the Company's
chief executive officer. If there is no Company facility within a
reasonable commuting distance of Consultant's new residence or if
Consultant has requested office space at such a facility and the
Company has not provided such space, the Company shall provide
Consultant with an allowance of up to $190,000 a year for office space,
furniture, supplies and equipment and in addition with comparable
<PAGE>
secretarial service. The Company's obligations under this paragraph
shall continue for Consultant's life.
3. In addition to the Company's obligations to Consultant under paragraph
2, the Company shall provide Consultant at Company expense with the
following for his life or until Consultant no longer requires them:
(a) a telephone calling card;
(b) two cellular telephones, of Consultant's choosing, two
cellular telephone lines, and costs of maintenance; and two
home fax machines, of Consultant's choosing, fax telephone
lines, and costs of maintenance;
(c) the security arrangements in existence or their equivalent at
Consultant's current home and vacation home or at any other
two residences that Consultant may subsequently occupy;
(d) reasonable access to Company facilities, including dining
rooms and fitness centers, and use of Company aircraft subject
to availability of such aircraft and the approval of the
Company's chief executive officer;
(e) a Company car and driver; provided that if Consultant shall
cease to maintain a residence within reasonable commuting
distance of the Greenwich, Connecticut area, the Company shall
no longer be required to provide a car and driver, but in lieu
thereof shall provide Consultant, if Consultant so requests,
with an allowance of up to $100,000 per year for a car
service; and
(f) up to $15, 000 a year in financial counseling expenses.
4. If at any time in the future Consultant is made a party or witness, or
is threatened to be made a party or witness, to any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding") by reason of the fact that Consultant was a director,
officer or employee of the Company (or any subsidiary or affiliate
thereof) whether or not the basis for such proceedings is Consultant's
alleged action in an official capacity while serving as a director,
officer or employee, the Company agrees that Consultant shall be
indemnified and held harmless by the Company to the fullest extent
permitted or authorized by applicable law against all cost, expense,
liability and loss (including, without limitation, attorney's fees,
judgments, fines and amounts paid or to be paid in settlement)
reasonably incurred or suffered by Consultant in connection therewith.
Such indemnification will inure to the benefit of Consultant's heirs,
executors and administrators. The Company shall also advance to
Consultant all reasonable costs and expenses incurred by Consultant in
connection with a Proceeding within 20 days after receipt by the
Company of a written request for such advance as well as Consultant's
written agreement to submit subsequent documentation of such costs.
Such request shall include a written statement, executed personally, of
Consultant's good faith belief that Consultant met any standard of
conduct that is a prerequisite to Consultant's entitlement to
indemnification under applicable law and a written undertaking by
Consultant to repay
<PAGE>
the amount of such advance if it shall ultimately be determined that
Consultant did not meet such standard of conduct. This paragraph shall
remain in full force and effect regardless of any other provision of
this agreement, including paragraph 5 below.
5. The Company and Consultant shall each inform the other in writing at
least six months prior to the expiration of the consulting period
specified in paragraph 1 and each extension thereof whether the party
wishes to renew such consulting agreement and, thereafter, by mutual
written agreement, such agreement may be renewed for additional terms
and under conditions, as the parties shall agree. It is intended that a
mutual determination of the continuation of Consultant's services
desired by Consultant and the Company will determine the specifics
relative to the length and terms of any further agreement between
Consultant and the Company.
6. In rendering services as a consultant as provided in paragraph 1,
Consultant shall be an independent contractor.
7. This agreement shall be binding upon and inure to the benefit of the
parties hereto and any successors to the business of the Company, and
the obligations of the Company, and any successor, to Consultant shall
continue notwithstanding any change in control of the Company as such
term is defined in the agreement dated February 1, 1995 between Company
and Consultant. Neither this agreement nor any rights hereunder shall
be assignable by Consultant.
8. This agreement contains the entire understanding and agreement between
the parties hereto with respect to the subject matter hereof, provided
that the parties expressly acknowledge that this agreement does not
pertain to any pension, health care or other benefits to which
Consultant may otherwise be entitled as a retiree of the Company under
other policies or agreements, except that the Company expressly agrees
that the health care benefits to which Consultant and his spouse shall
be entitled upon his retirement from the Company (or to the extent such
health care benefits may later be increased) shall continue in effect
for his life and the life of Consultant's spouse without reduction in
the level of benefits or increase in the cost of such benefits to
Consultant or Consultant's spouse. No representations have been made,
except as herein set forth, and no change may be made in the terms and
provisions hereof, except by an instrument in writing signed by the
parties hereto.
If the foregoing conforms to your understanding, please sign and return the
enclosed counterpart of this letter, which will thereupon become a binding
agreement between us.
PHILIP MORRIS COMPANIES INC.
/s/ TIMOTHY A. SOMPOLSKI
-------------------------------------
Timothy A. Sompolski
<PAGE>
Accepted and agreed to:
/s/ GEOFFREY C. BIBLE March 18, 2002
- ---------------------------------- ---------------------------
Geoffrey C. Bible Date
<PAGE>
EXHIBIT A
Office space on the second level of the office building located at
One East Putnam Avenue in Greenwich, Connecticut
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>5
<FILENAME>y58476ex13.txt
<DESCRIPTION>PAGES 19 TO 60 OF THE 2001 ANNUAL REPORT
<TEXT>
<PAGE>
Financial Review
Contents
20 Management's Discussion and Analysis of Financial Condition and Results of
Operations
36 Selected Financial Data -- Five-Year Review
37 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
[Logo of L&M] [Logo of Milka] [Logo of Altoids]
[Logo of Lunchables] [Logo of Marlboro] [Logo of Miller Lite]
[Logo of Kraft] [Logo of Kool-Aid] [Logo of Carte Noire]
19
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Philip Morris Companies Inc., through its wholly-owned subsidiaries, Philip
Morris Incorporated ("PM Inc."), Philip Morris International Inc. ("PMI") and
Miller Brewing Company ("Miller"), and its majority owned (83.9%) subsidiary,
Kraft Foods Inc. ("Kraft"), is engaged in the manufacture and sale of various
consumer products, including cigarettes, packaged grocery products, snacks,
beverages, cheese, convenient meals and beer. Philip Morris Capital Corporation
("PMCC"), another wholly-owned subsidiary, is primarily engaged in leasing
activities. During November 2001, the Company announced that it would ask
stockholders at its next Annual Meeting of Stockholders in April 2002 to approve
changing the Company's name from Philip Morris Companies Inc. to Altria Group,
Inc. All subsequent references to "the Company" include Philip Morris Companies
Inc. and its subsidiaries.
Financial Reporting Release No. 60, which was recently issued by the
Securities and Exchange Commission ("SEC"), requires all registrants to discuss
critical accounting policies or methods used in the preparation of financial
statements. Note 2 to the consolidated financial statements includes a summary
of the significant accounting policies and methods used in the preparation of
the Company's consolidated financial statements. However, in the opinion of
management, the Company does not have any individual accounting policy which is
critical to the preparation of its consolidated financial statements. This is
due principally to the definitive nature of accounting requirements for the
Company's consumer products businesses. Also, in many instances, the Company
must use an accounting policy or method because it is the only policy or method
permitted under accounting principles generally accepted in the United States of
America ("U.S. GAAP"). The following is a review of the more significant
accounting policies and methods used by the Company:
- - Revenue Recognition: As required by U.S. GAAP, the Company recognizes
operating revenues for its consumer product businesses upon shipment of products
to customers when title and risk of loss pass to its customers. Provisions and
allowances for sales returns and bad debts are also recorded in the Company's
consolidated financial statements. The amounts recorded for these provisions and
related allowances are not significant to the Company's consolidated financial
position or results of operations. As discussed in Note 2 to the consolidated
financial statements, effective January 1, 2002, the Company will adopt new
required accounting standards mandating that certain costs currently reported as
marketing expenses be shown as a reduction of operating revenues and as an
increase in cost of sales and excise taxes on products. As a result, previously
reported revenues will be reduced by approximately $9.1 billion, $6.9 billion
and $5.9 billion for 2001, 2000 and 1999, respectively. The adoption of the new
accounting standards will have no impact on net earnings or basic or diluted
earnings per share.
- - Depreciation and Amortization: The Company depreciates its property, plant and
equipment and amortizes its goodwill and other intangible assets using
straight-line methods. Through December 31, 2001, the Company used forty years
to amortize goodwill and other intangible assets, in recognition of the strength
of its brands, which resulted in amortization expense of $1.0 billion for the
year ended December 31, 2001. Beginning on January 1, 2002, with the adoption of
a new required accounting standard, the Company will no longer be required to
amortize a substantial portion of its goodwill and other intangible assets. As a
result, the Company estimates that amortization expense will approximate $10
million for the year ending December 31, 2002. The Company will also continue to
review annually its goodwill and other intangible assets for possible impairment
or loss of value. However, the Company does not currently anticipate having to
record an impairment loss when it adopts the new standard.
- - Marketing Costs: As required by U.S. GAAP, the Company records marketing costs
as an expense in the period to which such costs relate. The Company does not
defer the recognition of any amounts on its consolidated balance sheets with
respect to marketing costs. The Company expenses advertising costs as incurred,
which is the period in which the related advertisement initially appears. The
Company records consumer incentive and trade promotion costs as an expense in
the period in which these programs are offered, based on estimates of
utilization and redemption rates that are developed from historical information.
As discussed above under "Revenue Recognition," beginning January 1, 2002, the
Company will adopt previously mentioned revenue recognition accounting standards
mandating that certain costs currently reported as marketing expense be shown as
a reduction of operating revenues and as an increase in cost of sales and excise
taxes on products. As a result, previously reported amounts for marketing,
administration and research costs will be reduced by approximately $9.9 billion,
$7.6 billion and $6.4 billion for 2001, 2000 and 1999, respectively. The
adoption of the new accounting standards will have no impact on net earnings or
basic or diluted earnings per share.
- - Hedging Instruments: As of January 1, 2001, the Company adopted the provisions
of a new required accounting standard, which reduced net earnings by $6 million
and increased other comprehensive earnings by $15 million. The new accounting
standard requires that the fair value of all derivative financial instruments be
recorded on the Company's consolidated balance sheet as assets or liabilities.
Substantially all of the Company's derivative financial instruments are
effective as hedges under the new standard; accordingly, the changes in their
fair value are recognized in earnings when the related hedged items are recorded
in earnings. During 2001, the Company recognized deferred gains of $84 million
in income, which offset the impact of losses on the related hedged items. In
Note 15 of the notes to consolidated financial statements, the Company has
included a detailed discussion of the types of exposures that are periodically
hedged, as well as a summary of the various instruments which the Company
utilizes. The Company does not use derivative financial instruments for
speculative purposes.
- - Contingencies: As discussed in Note 16. Contingencies, of the notes to the
consolidated financial statements ("Note 16"), legal proceedings covering a wide
range of matters are pending or threatened in various jurisdictions against the
Company. In 1998, PM Inc. and certain other United States tobacco product
manufacturers entered into the Master Settlement Agreement (the "MSA") with 46
states and various other governments and jurisdictions 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
20
<PAGE>
claims brought by four other states (together with the MSA, the "State
Settlement Agreements"). As part of the MSA, PM Inc. and three other domestic
tobacco product manufacturers agreed to establish and fund a trust to provide
aid to tobacco growers and quota-holders. The State Settlement Agreements
require that the domestic tobacco industry make substantial annual payments
subject to adjustment for several factors, including inflation, market share and
industry volume. In addition, the domestic tobacco industry is required to pay
settling plaintiffs' attorneys' fees, subject to an annual cap. These payment
obligations, which are subject to adjustment for the factors mentioned above,
are the several and not joint obligations of each settling defendant. Industry
payments under the settlement agreement are: 2002, $11.3 billion; 2003, $10.9
billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4
billion each year. PM Inc.'s portion of ongoing adjusted payments and legal fees
is based on its relative share of the settling manufacturers' domestic cigarette
shipments, including roll-your-own cigarettes, in the year preceding that in
which the payment is due. PM Inc. records its portion of ongoing settlement
payments as cost of sales as product is shipped. During the year ended December
31, 2001, PM Inc. recognized $5.9 billion as part of cost of sales for the
payments under the State Settlement Agreements and to fund the trust for tobacco
growers and quota-holders.
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
against PM Inc. have been returned in the Engle smoking and health class action,
several individual smoking and health cases and a health care cost recovery case
and are being appealed. It is possible that there could be further adverse
developments in these cases and that additional cases could be decided
unfavorably. An unfavorable outcome or settlement of a pending smoking and
health or health care cost recovery case could encourage the commencement of
additional similar litigation. There have also been a number of adverse
legislative, regulatory, political and other developments concerning cigarette
smoking and the tobacco industry that have received widespread media attention.
These developments may negatively affect the perception of potential triers of
fact with respect to the tobacco industry, possibly to the detriment of certain
pending litigation, and may prompt the commencement of additional similar
litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of pending tobacco-related
litigation, and the Company has not provided any amounts in the consolidated
financial statements for unfavorable outcomes, if any. 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 for 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.
- - Employee Benefit Plans: The Company and its subsidiaries provide a range of
benefits to their employees and retired employees, including pensions,
postretirement health care and postemployment benefits (primarily severance).
The Company records annual amounts relating to these plans based on calculations
specified by U.S. GAAP, which include various actuarial assumptions, such as
discount rates, assumed rates of return, compensation increases, turnover rates
and health care cost trend rates. The Company reviews its actuarial assumptions
on an annual basis and makes modifications to the assumptions based on current
rates and trends when it is deemed appropriate to do so. As required by U.S.
GAAP, the effect of the modifications is generally recorded or amortized over
future periods. The Company believes that the assumptions utilized in recording
its obligations under its plans, which are presented in Note 13 to the
consolidated financial statements, are reasonable based on advice from its
actuaries and information as to assumptions used by other employers.
PMCC is primarily engaged in leasing activities. PMCC's operating revenues and
operating companies income approximated less than 2% of the Company's
consolidated operating revenues and operating companies income for the year
ended December 31, 2001. The accounting principle used by PMCC for revenue
recognition, which is prescribed by U.S. GAAP, differs from that used by the
Company's consumer products businesses. A summary of this policy is as follows:
- - Leasing: A substantial portion, or over 60%, of PMCC's operating revenues
relate to leveraged leases. Income relating to leveraged leases is recorded
initially as unearned income, which is included in finance assets, net, on the
Company's consolidated balance sheets, and is subsequently recorded as revenue
over the life of the related leases at a constant after-tax rate of return. The
remainder of PMCC's operating revenues consist primarily of amounts related to
direct finance leases, with income initially recorded as unearned and recognized
in operating revenues over the life of the leases at a constant pre-tax rate of
return.
The Company's investment in leases is included in finance assets, net, on
the consolidated balance sheet as of December 31, 2001. As required by U.S.
GAAP, the Company's investment in leases is presented on a net basis and
consists of lease receivables and estimated residual values, reduced by
non-recourse debt (which is collateralized by the assets under lease and lease
receivables) and unearned income. Estimated residual values represent the
Company's estimate at lease inception as to the fair value of assets under lease
at the end of the lease term. The estimated residual values are reviewed
annually by PMCC management based on a number of factors, including appraisals,
activity in the relevant industry and other factors. If necessary, revisions to
reduce the residual values are recorded. Such review has not resulted in
adjustments to PMCC's operating revenues or results of operations for the
periods presented. For a further discussion of the Company's investment in
leveraged leases, see the section entitled "Leveraged Leases" within the
Company's Financial Review of Debt and Liquidity.
----------
The preparation of all financial statements includes the use of estimates and
assumptions that affect a number of amounts included in the Company's financial
statements, including among other things, employee benefit costs and related
disclosures, inventories under the last-in, first-out ("LIFO") method, marketing
costs (advertising, consumer incentives and trade promotions), income taxes and
contingencies. The Company bases its estimates on historical experience and
other assumptions which it believes are reasonable. If actual amounts are
ultimately different from previous
21
<PAGE>
estimates, the revisions are included in the Company's results of operations for
the period in which the actual amounts become known. Historically, the aggregate
differences, if any, between the Company's estimates and actual amounts in any
year, have not had a significant impact on its consolidated financial
statements.
Consolidated Operating Results
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
Domestic tobacco $ 24,784 $ 22,658 $ 19,596
International tobacco 26,586 26,374 27,506
North American food 25,106 18,461 17,897
International food 8,769 8,071 8,900
Beer 4,244 4,375 4,342
Financial services 435 417 355
- --------------------------------------------------------------------------------
Operating revenues $ 89,924 $ 80,356 $ 78,596
================================================================================
</TABLE>
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Income
Domestic tobacco $ 5,264 $ 5,350 $ 4,865
International tobacco 5,406 5,211 4,968
North American food 4,796 3,547 3,190
International food 1,239 1,208 1,063
Beer 481 650 511
Financial services 296 262 228
- --------------------------------------------------------------------------------
Operating companies income 17,482 16,228 14,825
General corporate expenses (766) (831) (627)
Amortization of goodwill and
other intangibles (1,014) (591) (582)
- --------------------------------------------------------------------------------
Operating income $ 15,702 $ 14,806 $ 13,616
================================================================================
</TABLE>
Items Affecting Comparability
Several events occurred in 2001, 2000 and 1999 that affected the comparability
of income statement amounts. In order to isolate the impact of these events and
disclose underlying business trends, comparisons will be disclosed both
including and excluding these events, which are as follows:
- - Nabisco Acquisition: On December 11, 2000, the Company acquired all of the
outstanding shares of Nabisco Holdings Corp. ("Nabisco") for $55 per share in
cash, through its subsidiary Kraft. 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 $12.2 billion of short-term
obligations and $3.0 billion of available cash. The acquisition has been
accounted for as a purchase. Nabisco's balance sheet was consolidated with the
Company as of December 31, 2000; however, Nabisco's earnings subsequent to
December 11, 2000 were not included in the consolidated operating results of the
Company in 2000 since such amounts were insignificant. Beginning January 1,
2001, Nabisco's earnings have been included in the consolidated operating
results of the Company. The Company's interest cost on borrowings associated
with acquiring Nabisco has been included in interest and other debt expense,
net, in the Company's consolidated statements of earnings for the years ended
December 31, 2001 and 2000.
- - Kraft IPO: On June 13, 2001, Kraft completed an initial public offering
("IPO") of 280,000,000 shares of its Class A common stock at a price of $31.00
per share. The Company used the IPO proceeds, net of underwriting discount and
expenses, of $8.4 billion to retire a portion of the debt incurred to finance
the acquisition of Nabisco. After the completion of the IPO, the Company owns
approximately 83.9% of the outstanding shares of Kraft's capital stock through
the Company's ownership of 49.5% of Kraft's Class A common stock and 100% of
Kraft's Class B common stock. Kraft's Class A common stock has one vote per
share while Kraft's Class B common stock has ten votes per share. Therefore, the
Company holds 97.7% of the combined voting power of Kraft's outstanding common
stock.
- - Litigation Related Expense: As discussed in Note 16, on May 7, 2001, the trial
court in the Engle class action approved a stipulation and agreed order among PM
Inc., certain other defendants and the plaintiffs providing that the execution
or enforcement of the punitive damages component of the judgment in that case
will remain stayed through the completion of all judicial review. As a result of
the stipulation, PM Inc. placed $500 million into a separate interest-bearing
escrow account that, regardless of the outcome of the appeal, will be paid to
the court and the court will determine how to allocate or distribute it
consistent with the Florida Rules of Civil Procedure. As a result, the Company
has recorded a $500 million pre-tax charge in marketing, administration and
research costs in the consolidated statement of earnings of the domestic tobacco
segment for the year ended December 31, 2001. In July 2001, PM Inc. also placed
$1.2 billion into an interest-bearing escrow account, which will be returned to
PM Inc. should it prevail in its appeal of the case. The $1.2 billion escrow
account is included in the December 31, 2001 consolidated balance sheet as other
assets. Interest income on the $1.2 billion escrow account is paid to PM Inc.
quarterly and is being recorded as earned in the Company's consolidated
statement of earnings.
- - Sale of Food Factory and Integration Costs: During 2001, the Company recorded
pre-tax charges of $53 million for site reconfigurations and other consolidation
programs in the United States. In addition, the Company recorded a pre-tax
charge of $29 million to close a North American food factory. These pre-tax
charges, which aggregate $82 million, were included in marketing, administration
and research costs in the consolidated statement of earnings of the North
American food segment.
- - Contract Brewing Charge: During 2001, the Company revised the terms of a
contract brewing agreement with Pabst Brewing Co. ("Pabst"), which resulted in
pre-tax charges of $19 million in marketing, administration and research costs
in the consolidated statement of earnings of the beer segment.
- - Sale of Molson Rights in the U.S.: During 2000, the Company's beer business
sold its rights to Molson trademarks in the United States ("Molson Sale") and
recorded a pre-tax gain of $100 million in marketing, administration and
research costs in the consolidated statement of earnings of the beer segment.
- - Sale of French Confectionery Business: During 2000, the Company sold a French
confectionery business ("French Confectionery Sale") and recorded a pre-tax gain
of $139 million in marketing, administration and research costs in the
consolidated statement of earnings of the international food segment.
- - Century Date Change: During the fourth quarter of 1999, the Company's
customers purchased additional product in anticipation of potential Century Date
Change ("CDC") related disruptions. These incremental shipments would have
normally been made during the first quarter of 2000. The increased shipments in
1999 resulted in incremental operating revenues and operating
22
<PAGE>
companies income in 1999 of approximately $225 million and $100 million,
respectively, and corresponding decreases in operating revenues and operating
companies income in 2000.
2001 compared with 2000
Operating revenues for 2001 increased $9.6 billion (11.9%) over 2000, due
primarily to the acquisition of Nabisco and an increase in revenues from the
Company's domestic tobacco operations. Including the incremental CDC revenues in
the first quarter of 2000, and excluding the revenues of businesses divested
since the beginning of 2000, operating revenues for 2001 increased $9.6 billion
(12.0%) over 2000. Operating revenues would have increased 2.3% over 2000 had
the acquisition of Nabisco occurred on January 1, 2000.
Operating income for 2001 increased $896 million (6.1%) over 2000.
Including the incremental CDC income in 2000 and excluding the previously
discussed unusual items from each year, as well as the results from operations
divested since the beginning of 2000, operating income for 2001 increased $1.7
billion (11.5%) over 2000, due primarily to higher operating income from the
Company's food and tobacco operations, partially offset by higher goodwill
amortization relating to the acquisition of Nabisco. Operating income would have
increased 7.3% had the acquisition of Nabisco occurred on January 1, 2000.
Operating companies income, which is defined as operating income before
general corporate expenses and amortization of goodwill, increased $1.3 billion
(7.7%) over 2000, due primarily to the Nabisco acquisition, partially offset by
the 2001 litigation related expense. Including the incremental CDC income in
2000 and excluding the unusual items from each year, as well as the results from
operations divested since the beginning of 2000, operating companies income
increased $2.0 billion (12.7%). Operating companies income would have increased
6.1% had the acquisition of Nabisco occurred on January 1, 2000, due primarily
to higher results from the Company's tobacco and food operations.
Currency movements have decreased operating revenues by $1.9 billion ($1.1
billion, after excluding the impact of currency movements on excise taxes) and
operating companies income by $449 million from 2000. Declines in operating
revenues and operating companies income are due primarily to the strength of the
U.S. dollar against the euro, the Turkish lira and Asian currencies. Although
the Company cannot predict future movements in currency rates, the strength of
the U.S. dollar, primarily against the euro and Asian currencies, if sustained
during 2002, could continue to have an unfavorable impact on operating revenues
and operating companies income comparisons with 2001.
Interest and other debt expense, net, of $1.4 billion for 2001 increased
$699 million over 2000. This increase was due primarily to higher average debt
outstanding in 2001, as a result of the Nabisco acquisition. The Kraft IPO
proceeds, net of underwriting discount and expenses, of $8.4 billion were used
to retire a portion of the debt incurred as a result of the Nabisco acquisition.
During 2001, the Company's effective tax rate decreased by 0.8 percentage
points to 37.9%. This change primarily reflects the reversal in 2001 of
previously accrued taxes for certain foreign jurisdictions where the Company has
received favorable closings of audits by taxing authorities.
Diluted and basic earnings per share ("EPS") after the cumulative effect
of an accounting change, of $3.87 and $3.92, respectively, for 2001, increased
by 3.2% and 4.0%, respectively, over 2000. Net earnings of $8.6 billion for 2001
increased $50 million (0.6%) over 2000. These results include the unusual items
previously discussed. Excluding the after-tax impact of the unusual items, net
earnings increased 5.9% to $8.9 billion, diluted EPS increased 8.9% to $4.04 and
basic EPS increased 9.7% to $4.09.
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 CDC. 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 3.2% over 1999.
Operating income for 2000 increased $1.2 billion (8.7%) over 1999.
Operating income for 2000 includes pre-tax gains related to the French
Confectionery Sale and the Molson Sale. Operating income for 1999 includes
pre-tax charges of $319 million related to domestic and international tobacco
factory closures, $157 million related to a domestic food separation program and
$29 million related to the write-down of three brewing facilities to their
estimated fair values. In addition, 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 4.9% 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
was due primarily to higher spending on the Company's corporate image campaign.
Operating companies income 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 pre-tax charges, partially offset by 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 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.
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.
Diluted and basic 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.
- - Century Date Change: The Company did not experience any material disruptions
to its businesses as a result of the CDC. 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
23
<PAGE>
$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: Twelve of the fifteen member countries of the European Union have
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency--the euro. In January 2002, the new
euro-denominated currency (bills and coins) was issued. The Company's operating
subsidiaries affected by the euro conversion have addressed the systems and
business issues raised by the euro currency conversion. These issues included,
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 makes it more difficult for
businesses to charge different prices for the same products on a
country-by-country basis. 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., PMI
and the Company.
These issues, some of which are more fully discussed below, include
pending and threatened smoking and health litigation and certain jury verdicts
against PM Inc., including a $74 billion punitive damages verdict in the Engle
smoking and health class action case discussed in Note 16 and punitive damages
awards in individual smoking and health cases discussed in Note 16; the civil
lawsuit filed by the United States federal government against various cigarette
manufacturers and others discussed in Note 16; 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 in the United States and foreign markets; diversion into
the United States market of products intended for sale outside the United
States; governmental investigations; actual and proposed requirements regarding
the use and 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
jurisdictions inside and outside the United 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.
In general, such taxes have been increasing. The United States federal excise
tax on cigarettes is currently $0.39 per pack of 20 cigarettes. In the United
States, state and local sales and excise taxes vary considerably and, when
combined with sales taxes, local taxes and the current federal excise tax, may
be as high as $2.00 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 significant increases in excise and other
cigarette-related taxes have been proposed or enacted at the state and local
levels within the United States and in many jurisdictions outside the United
States. In the European Union (the "EU"), taxes on cigarettes vary considerably
and currently may be as high as the equivalent of $4.88 per pack on the most
popular brands. In Germany, where total tax on cigarettes is currently
equivalent to $1.96 per pack on the most popular brands, the excise tax is
scheduled to increase by approximately $0.17 per pack by January 2003.
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.
- - Tar and Nicotine Test Methods and Brand Descriptors: Jurisdictions around the
world have questioned the utility of standardized test methods to measure tar
and nicotine yields of cigarettes. In September 1997, the United States Federal
Trade Commission ("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 ("HHS") 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. In November 2001, the National Cancer Institute, issued a report as
a part of HHS' response to the FTC's request. The report concluded, among other
things, that because there was no meaningful difference in smoke exposure or
risk to smokers between cigarettes with different machine-measured tar and
nicotine yields, the marketing of low yield cigarettes was deceptive. Similarly,
public health officials in other countries and the EU have questioned the
relevance of the related International Standards Organization's test method for
measuring tar, nicotine and carbon monoxide yields. The EU Commission has been
directed to establish a committee to address, among other things, alternative
methods for measuring tar, nicotine and carbon monoxide yields. In addition,
public health authorities in the United States, the EU, Brazil and other
countries have called for the prohibition of the use of brand descriptors such
as "Lights" and "Ultra Lights." In the United States, as of December 31, 2001,
there were 11 putative class actions pending against PM Inc. and the Company in
which plaintiffs allege, among other things, that the use of the terms "Lights"
and/or "Ultra Lights," constitutes deceptive and unfair trade practices.
- - Food and Drug Administration ("FDA") Regulations: In August 1996, the FDA
promulgated regulations asserting
24
<PAGE>
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, recordkeeping, 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: Jurisdictions inside and outside the United States
have enacted or proposed legislation or regulations that would require cigarette
manufacturers to disclose the ingredients used in the manufacture of cigarettes,
and in certain cases, to provide toxicological information supporting the use of
ingredients. In the United States, the Commonwealth of Massachusetts has enacted
legislation to require cigarette manufacturers to report the flavorings and
other ingredients used in each brand-style of cigarettes sold in 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, and defendants appealed. In
October 2001, the United States Court of Appeals for the First Circuit reversed
the district court's decision, holding that the Massachusetts disclosure statute
does not constitute an impermissible taking of private property. In November
2001, the First Circuit granted the cigarette manufacturers' petition for
rehearing en banc and withdrew the prior opinion. The First Circuit, sitting en
banc, heard oral argument in January 2002. The ultimate outcome of this lawsuit
cannot be predicted. Similar legislation has been enacted or proposed in other
states and in jurisdictions outside the United States, including the EU. Under
the EU product directive described below, tobacco companies must disclose the
use of, and provide toxicological information about, all ingredients by October
2002. PMI has voluntarily disclosed ingredients in its brands in a number of EU
member states and in other countries. Other jurisdictions have enacted or
proposed legislation that would require the submission of toxicological
information about ingredients and would permit governments to prohibit their
use.
- - 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.
It is the policy of each of PM Inc. and PMI to support a single,
consistent public health message on the role played by cigarette smoking in the
development of diseases in smokers, and on smoking and addiction. It is also
their policy in relation to these issues and the health effects of exposure to
ETS to defer to the judgment of public health authorities as to the text of
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. The web sites advise
smokers, and those considering smoking, to rely on the messages of public health
authorities in making all smoking-related decisions.
The sites also state that government agencies have concluded that ETS
causes diseases--including lung cancer and heart disease--in nonsmokers. 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 warning
requirements including the use of pictorial or graphic images; 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
25
<PAGE>
playing field. The outcome of the treaty negotiations cannot be predicted.
- - Other Legislative Initiatives: In recent years, various members of the United
States 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 HHS 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. The
EU has issued a directive on tobacco product regulation that, among other
things, reduces maximum permitted levels of tar, nicotine and carbon monoxide
yields to 10, 1 and 10 milligrams respectively, requires manufacturers to
disclose ingredients and toxicological data on ingredients, requires health
warnings on the front of a pack that cover at least 30% of the front panel and
14 rotational warnings that cover no less than 40% of the back panel, requires
the health warnings to be surrounded by a black border, requires the printing of
tar, nicotine and carbon monoxide numbers on the side panel of the pack at a
minimum size of 10% of the side panel, and as described above, prohibits the use
of texts, names, trademarks and figurative or other signs suggesting that a
particular tobacco product is less harmful than others. The EU's member states
are in the process of drafting and adopting legislation that will implement the
provisions of the directive. The European Commission is also considering a new
directive that would further restrict tobacco marketing and advertising in the
EU. Tobacco control legislation addressing the manufacture, marketing and sale
of tobacco products has been proposed in numerous other jurisdictions.
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 is being considered in
other states and localities and at the federal level, as well as in
jurisdictions outside the United States.
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: In June 2001, the competition authorities in
Italy and Turkey initiated separate investigations into business activities
among participants in the cigarette markets of those countries. The order
initiating the Italian investigation named the Company and certain of its
affiliates as well as all other parties purportedly engaged in the sale of
cigarettes in Italy, including the Italian state tobacco monopoly. The Turkish
investigation is directed at one of the Company's Turkish affiliates and another
cigarette manufacturer. In 2001, authorities in Australia initiated an
investigation into use of descriptors, alleging that their use was false and
misleading. The investigation is directed at one of the Company's Australian
affiliates and other cigarette manufacturers. While it is not possible to
predict the outcome of these investigations, the Company and its affiliates
believe they have meritorious responses to the matters being investigated. They
are cooperating with the investigations and are prepared to vigorously contest
any findings of unlawful conduct that may result from the investigations.
- - 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 PM Inc. and the Company. (See Note 16 for a
discussion of such litigation.)
- - State Settlement Agreements: As discussed in Note 16, 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.
Operating Results
<TABLE>
<CAPTION>
(in millions) Operating Revenues Operating Companies Income
- ------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
tobacco $24,784 $22,658 $19,596 $ 5,264 $ 5,350 $4,865
International
tobacco 26,586 26,374 27,506 5,406 5,211 4,968
- ------------------------------------------------------------------------------------
Total $51,370 $49,032 $47,102 $10,670 $10,561 $9,833
====================================================================================
</TABLE>
2001 compared with 2000
- - Domestic tobacco: During 2001, PM Inc.'s operating revenues increased $2.1
billion (9.4%) over 2000, due primarily to higher pricing ($2.6 billion) and
improved mix, partially offset by lower volume ($525 million).
Operating companies income for 2001 decreased $86 million (1.6%) from
2000, due primarily to higher marketing, administration and research costs ($1.2
billion, primarily marketing), the 2001 Engle litigation related expense ($500
million) and lower
26
<PAGE>
volume ($403 million), partially offset by price increases, net of cost
increases ($2.0 billion) and improved mix. Excluding the 2001 Engle litigation
related expense, operating companies income of $5.8 billion in 2001 increased
7.7% over $5.4 billion in 2000.
As reported by Management Science Associates, shipment volume for the
domestic tobacco industry during 2001 decreased to 406.3 billion units, a 3.2%
decrease from 2000, primarily as a result of wholesalers' decisions to reduce
inventory at the end of 2001 in advance of the January 1, 2002 increase in the
federal excise tax rate. PM Inc.'s shipment volume for 2001 was 207.1 billion
units, a decrease of 2.3% from 2000. After adjusting for changes in trade
inventories, PM Inc. estimates that industry volume declined at an annual rate
of 1.0% to 2.0%.
For 2001, PM Inc.'s shipment market share was 51.0%, an increase of 0.5
share points over 2000 due to increased shipment share for Marlboro, Parliament
and Virginia Slims. Marlboro shipment volume decreased 397 million units (0.3%)
from 2000 to 157.8 billion units for a 38.8% share of the total industry, an
increase of 1.1 share points over 2000.
Based on shipments, the premium segment accounted for approximately 73.9%
of the domestic cigarette industry volume in 2001, an increase of 0.4 share
points over 2000. In the premium segment, PM Inc.'s volume decreased 1.1% during
2001, compared with a 2.7% decrease for the industry, resulting in a premium
segment share of 61.6%, an increase of 1.0 share points over 2000.
In the discount segment, PM Inc.'s shipments decreased 11.0% to 22.2
billion units in 2001, compared with an industry decrease of 4.5%, resulting in
a discount segment share of 20.9%, a decrease of 1.6 share points from 2000.
Basic shipment volume for 2001 was down 5.5% to 20.4 billion units, for a 19.2%
share of the discount segment, down 0.2 share points compared to 2000.
According to consumer purchase data from Information Resources
Inc./Capstone, PM Inc.'s share of cigarettes sold at retail grew 0.3 share
points to 50.8% for 2001. The 2001 retail share for Marlboro increased 1.1 share
points to 38.2%.
In October 2001, PM Inc. announced a price increase of $2.50 per thousand
cigarettes on its domestic premium and discount brands. This followed price
increases of $7.00 per thousand in April 2001, $7.00 per thousand in December
2000, $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 changes 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 under the caption "Tobacco--Business Environment."
- - International tobacco: During 2001, international tobacco operating revenues,
including excise taxes, increased $212 million (0.8%) from 2000. Excluding
excise taxes, operating revenues increased $154 million (1.1%), due primarily to
price increases ($366 million), higher volume/mix ($156 million) and the shift
in CDC revenues ($97 million), partially offset by unfavorable currency
movements.
Operating companies income for 2001 increased $195 million (3.7%) over
2000, due primarily to price increases and favorable costs ($430 million),
higher volume/mix ($23 million), the shift of CDC income ($59 million) and the
favorable impact of new distribution and contract manufacturing agreements in
several markets, partially offset by unfavorable currency movements ($390
million). Adjusting for the shift in CDC income, operating companies income of
$5,406 million in 2001 increased 2.6% over $5,270 million in 2000.
PMI's volume for 2001 of 698.9 billion units increased 27.7 billion units
(4.1%) over 2000. Adjusting for the shift in CDC volume (the basis of
presentation for all following PMI volume disclosures), PMI's volume for 2001
increased 23.5 billion units (3.5%) over 2000, due primarily to volume increases
in Western, Central and Eastern Europe, as well as Asia. Volume advanced in a
number of important markets, including Italy, Belgium, France, Spain, Portugal,
the Netherlands, Sweden, the United Kingdom, Israel, Poland, Romania, Saudi
Arabia, Russia, the Ukraine, Japan, Korea, Indonesia, Taiwan, Malaysia,
Thailand, Mexico and Brazil. PMI recorded market share gains in most of its
major markets. Volume and share in Germany were lower due to the continued
growth of low-priced trade brands. Volume declined in Turkey as several price
increases related to the Turkish lira devaluation have led to a market
contraction and consumer downtrading. In Argentina, volume declined due to a
recession-driven decline in the total cigarette industry, which more than offset
higher market share. The Company expects continued erosion of the economic
climate in Argentina to negatively affect income in 2002. International volume
for Marlboro decreased 0.4%, as lower volumes in Germany, Turkey, Poland, Egypt,
the Philippines, Argentina and worldwide duty-free were partially offset by
higher volumes in France, Spain, Russia, the Ukraine, Indonesia, Japan, Korea
and Mexico. Excluding Argentina, Turkey and worldwide duty-free, international
volume for Marlboro increased 2.5%.
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
closure of a Louisville, Kentucky manufacturing plant ("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.
As reported by Management Science Associates, 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
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<PAGE>
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 2000.
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.
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%.
- - 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 a factory closure in Brazil ("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.
PMI'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), PMI'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,
the Ukraine, Kazakhstan, Saudi Arabia, Egypt, Japan, Indonesia, Thailand, Korea,
Malaysia and Mexico. PMI 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 PMI'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. PMI'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.
Food
Business Environment
Kraft, the largest branded food and beverage company headquartered in the United
States, conducts its global business through two units. A wide variety of
snacks, beverages, cheese, grocery products and convenient meals are
manufactured and marketed in the United States, Canada and Mexico by Kraft Foods
North America, Inc. ("Kraft Foods North America"). Subsidiaries and affiliates
of Kraft Foods International, Inc. ("Kraft Foods International") manufacture and
market a wide variety of snacks, beverages, cheese, grocery products and
convenient meals in Europe, the Middle East and Africa, as well as the Latin
America and Asia Pacific regions. Kraft Foods North America 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 consequent
inventory reductions, and changing consumer preferences. Certain competitors may
have different profit objectives and some international competitors may be less
susceptible to currency exchange rates. To confront these challenges, Kraft
continues to take steps to build the value of its brands and improve its food
business portfolio with new product and marketing initiatives.
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, including dairy, coffee bean and cocoa costs. Dairy commodity
costs on average have been higher in 2001 than those seen in 2000. Cocoa bean
prices have also been higher, while coffee bean prices have been lower than in
2000. During the latter part of 2000 and into 2001, 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 the operating
results of the Company.
Kraft's subsidiaries end their fiscal years on the last Saturday in
December. Accordingly, most years contain 52 weeks of operating results while
every fifth or sixth year includes 53 weeks. The Company's consolidated
statement of earnings for the year ended December 31, 2000 included a 53rd week.
The benefit to 2000 operating results from an extra week of shipments was
essentially offset by reductions in retail trade inventories for certain of the
Company's products. A similar level of reductions in trade inventories also
occurred in 2001. The net result is that Kraft's 2001 volume and revenue
comparisons to 2000 were affected by the extra week of shipments in 2000. Volume
comparisons contained in Management's Discussion and Analysis for 2001 versus
2000 have been provided on a comparable 52-week basis to provide a more
meaningful comparison.
On December 11, 2000, the Company, through Kraft, acquired all of the
outstanding shares of Nabisco. The integration of Nabisco into Kraft has
continued throughout 2001. The closure of a number of Nabisco domestic and
international facilities resulted in severance and other exit costs of $379
million, which are included in the adjustments for the allocation of purchase
price. The closures will result in the elimination of approximately 7,500
employees and will require total cash payments of $373 million, of which
approximately $74 million has been spent through
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<PAGE>
December 31, 2001. Substantially all of the closures will be completed by the
end of 2002.
The integration of Nabisco into the operations of the Company will also
result in the closure or reconfiguration of several existing Kraft facilities.
The aggregate charges to the Company's consolidated statement of earnings to
close or reconfigure its facilities and integrate Nabisco are estimated to be in
the range of $200 million to $300 million. During 2001, the Company incurred
pre-tax integration costs of $53 million for site reconfigurations and other
consolidation programs in the United States. In October 2001, Kraft announced
that it was offering a voluntary retirement program to certain salaried
employees in the United States. The program is expected to terminate
approximately 750 employees and will result in an estimated pre-tax charge of
approximately $140 million upon final employee acceptance in the first quarter
of 2002.
During 2001, the Company purchased coffee businesses in Romania, Morocco
and Bulgaria and also acquired confectionery businesses in Russia and Poland.
The total cost of these and other smaller food acquisitions was $194 million.
The operating results of these businesses were not material to the Company's
consolidated financial position or results of operations in any of the periods
presented.
During 2000, the Company purchased the outstanding common stock of Balance
Bar Co., a maker of energy and nutrition snack products. In a separate
transaction, the Company also acquired Boca Burger, Inc., a manufacturer and
marketer of soy-based meat alternatives. The total cost of these and other
smaller food acquisitions was $365 million. The operating results of these
businesses were not material to the Company's consolidated financial position or
results of operations in any of the periods presented.
During 2001, 2000 and 1999, the Company sold several small international
and domestic food businesses, including a French confectionery business in 2000.
The aggregate proceeds received in these transactions were $21 million in 2001,
$300 million in 2000 and $175 million in 1999, on which pre-tax gains of $8
million in 2001, $172 million in 2000 and $62 million in 1999 were recorded. The
operating results of businesses divested were not material to the Company's
consolidated financial position or results of operations in any of the periods
presented.
Operating Results
<TABLE>
<CAPTION>
(in millions) Operating Revenues Operating Companies Income
- ----------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
North
American
food $25,106 $18,461 $17,897 $4,796 $3,547 $3,190
International
food 8,769 8,071 8,900 1,239 1,208 1,063
- ----------------------------------------------------------------------------------
Total $33,875 $26,532 $26,797 $6,035 $4,755 $4,253
==================================================================================
</TABLE>
2001 compared with 2000
- - North American food: During 2001, operating revenues increased $6.6 billion
(36.0%) over 2000, due primarily to the acquisition of Nabisco ($6.6 billion),
the shift in CDC revenues ($71 million), partially offset by unfavorable
currency movements ($62 million). Adjusting for the shift in CDC revenues and
excluding businesses divested since the beginning of 2000, operating revenues
increased 35.5%. Operating revenues would have increased 0.8% had the
acquisition of Nabisco occurred on January 1, 2000.
Operating companies income for 2001 increased $1.2 billion (35.2%) over
2000, primarily reflecting the acquisition of Nabisco ($1.2 billion), lower
marketing, administration and research costs ($177 million, the majority of
which related to lower marketing expenses) and the shift in CDC income ($27
million), partially offset by the pre-tax loss on the sale of a North American
food factory and integration costs ($82 million) and lower margins ($39 million,
driven by higher dairy commodity costs). Adjusting for the shift in CDC income
and excluding the loss on the sale of a food factory and integration costs, as
well as the impact of businesses divested since the beginning of 2000, operating
companies income of $4,878 million in 2001 increased 36.6% over $3,570 million
in 2000. Operating companies income would have increased 9.0% had the
acquisition of Nabisco occurred on January 1, 2000.
Volume for 2001 increased 31.7% over 2000. Excluding the impact of
divested businesses and adjusting for the shift in volume related to the CDC,
volume increased 31.2%, due primarily to the acquisition of Nabisco. Had the
acquisition of Nabisco occurred on January 1, 2000, volume would have increased
2.1%. Excluding the 53rd week of shipments in 2000 (the basis of presentation of
all of the following Kraft Foods North America 2001 volume comparisons), volume
increased 3.4%. In Cheese, Meals and Enhancers, volume increased slightly due
primarily to increases in grated and natural cheese, spoonable and pourable
dressings, and higher shipments of macaroni & cheese dinners. Partially
offsetting these increases were lower U.S. food service volume, lower shipments
of process cheese loaves and cream cheese, and the discontinuation of
lower-margin, non-branded cheese products. In Canada, shipments increased as a
result of higher consumption of branded products. Volume increased in Biscuits,
Snacks and Confectionery, driven primarily by new biscuit product introductions,
partially offset by lower shipments of snack nuts. Volume gains were achieved in
Beverages, Desserts and Cereals, driven primarily by the strength of
ready-to-drink beverages, partially offset by volume declines in desserts and
cereals. In Oscar Mayer and Pizza, volume increased due primarily to hot dogs,
bacon, luncheon meats, soy-based meat alternatives and frozen pizza.
- - International food: Operating revenues for 2001 increased $698 million (8.6%)
over 2000. Adjusting for the shift in CDC revenues and excluding the operating
revenues of businesses divested since the beginning of 2000, operating revenues
increased $820 million (10.3%) due primarily to the acquisition of Nabisco ($1.2
billion), partially offset by unfavorable currency movements ($460 million).
Operating revenues would have decreased 4.0% from 2000 had the acquisition of
Nabisco occurred on January 1, 2000, due primarily to unfavorable currency
movements and lower coffee pricing.
Operating companies income for 2001 increased $31 million (2.6%) over
2000. Adjusting for the shift in CDC income and excluding the pre-tax gain on
the French Confectionery Sale in 2000 and the operating companies income of
businesses divested since the beginning of 2000, operating companies income
increased $191 million (18.2%), due primarily to the acquisition of Nabisco
($128 million) and lower marketing, administration and research costs ($119
million), partially offset by unfavorable currency movements ($51 million).
Operating companies income would have increased 8.5% had the acquisition of
Nabisco occurred on January 1, 2000.
Volume for 2001 increased 34.4% over 2000. Excluding the impact of
divested businesses and adjusting for the shift in volume related to the CDC,
volume increased 36.3%, due primarily to the acquisition of Nabisco. Volume
would have increased 3.5%
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<PAGE>
had the acquisition of Nabisco occurred on January 1, 2000. Excluding the 53rd
week of shipments in 2000 (the basis of presentation of all following Kraft
Foods International 2001 volume comparisons), volume increased 4.7%.
In Europe, Middle East and Africa, volume increased over 2000, due
primarily to higher volume in the developing markets of Central and Eastern
Europe and growth in many Western European markets, partially offset by lower
volume in Germany and Italy. In beverages, volume increased in both coffee and
refreshment beverages. Coffee volume grew in many markets, due primarily to
recent acquisitions in Romania, Morocco and Bulgaria and new product
introductions. Refreshment beverage volume increased, driven by higher sales to
the Middle East. Snacks volume increased, driven by confectionery and salty
snacks. Snacks growth was moderated by lower volume in Germany, due to increased
price competition and trade inventory reductions. Cheese volume increased, due
primarily to cream cheese growth across the region, partially offset by lower
volume in Germany. In convenient meals and grocery, volume decreased, as lower
canned meats volume in Italy and a decline in grocery volume in Germany were
partially offset by higher shipments of lunch combinations and pourable
dressings in the United Kingdom.
Volume increased in the Latin American and Asia Pacific regions driven by
gains across most categories. Beverages volume increased, due primarily to
growth in refreshment beverages, in Latin America and Asia Pacific, and coffee
in Asia Pacific. Cheese volume increased driven primarily by cream cheese and
process cheese. Grocery volume was higher, due primarily to new product
introductions. Snacks volume increased, driven primarily by new biscuit product
introductions and geographic expansion, partially offset by lower volume in
Argentina due to economic weakness in that country. The Company expects
continued erosion of the economic climate in Argentina to negatively affect
volume and income in 2002.
2000 compared with 1999
- - North American food: During 2000, operating revenues increased $564 million
(3.2%) over 1999, due primarily to higher volume/mix ($465 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 a domestic
food separation program ($157 million) and higher volume/mix ($240 million),
partially offset by higher marketing, administration and research costs ($310
million, the majority of which related to higher marketing expenses) and the
shift in CDC income ($54 million).
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, declines in rice and
ethnic foods, and 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/mix ($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/mix ($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).
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 4.9%, of
which 1.7 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.
Beer
Business Environment
The domestic beer industry is intensely competitive, with the major methods of
competition being product quality and price. The Company's beer business has
lost market share in 2001 and 2000, and has instituted actions to increase the
equity of its brands and focus on premium brands with the highest growth
potential. These actions include an emphasis on advertising and promotion of its
premium brands, streamlining its contract brewing operations, exiting certain
licenses to brew brands for domestic distribution, reducing inventory on hand at
distributors and
30
<PAGE>
pursuing opportunities in the growing ready-to-drink flavored malt beverages
category.
In 2002, the Company entered into partnerships with Skyy Spirits LLC and
Allied Domecq PLC to launch a range of new ready-to-drink malt beverages. The
flavored-alcohol malt beverage category is the fastest growing segment in the
wine, beer and spirits industry. The partnership with Skyy Spirits will
introduce Skyy Blue(TM), a flavored malt beverage with a citrus flavor. The
partnership with Allied Domecq will introduce flavored malt beverages based on
Allied Domecq's popular Stolichnaya(TM) vodka and Sauza(TM) tequila brands.
During 2001, the Company revised the terms of a contract brewing agreement
with Pabst, which resulted in pre-tax charges of $19 million.
In December 2000, the Company 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, the Company purchased four trademarks from Pabst and the
Stroh Brewery Company. The Company also agreed to increase its contract
manufacturing of Pabst products. The Company began brewing and shipping the
acquired brands during the second quarter of 1999. In the third quarter of 1999,
the Company assumed ownership of the former Pabst brewery in Tumwater,
Washington, as part of these agreements. In addition, the Company 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, two of the facilities were sold, and the remaining facility was closed.
2001 compared with 2000
Operating revenues for 2001 decreased $131 million (3.0%) from 2000. Excluding
the operating revenues of businesses divested since the beginning of 2000,
operating revenues decreased slightly, due primarily to lower volume ($98
million) and contract manufacturing fees, partially offset by higher pricing
($101 million). Operating companies income for 2001 decreased $169 million
(26.0%) from 2000. Excluding the contract brewing charge, the Molson Sale and
the operating companies income of businesses divested since the beginning of
2000, operating companies income decreased by $43 million (7.9%), due primarily
to lower volume ($44 million) and higher marketing, administration and research
costs ($61 million, primarily higher marketing spending for core brands),
partially offset by higher pricing ($58 million).
Domestic shipment volume of 39.6 million barrels for 2001 decreased 4.8%
from 2000. Excluding the impact of businesses divested since the beginning of
2000, total domestic shipment volume was down 2.4%. The majority of the
Company's decline in domestic shipments was due to below-premium products, which
decreased 7.7%, while premium brands decreased 1.0%. The Company's estimated
market share of the U.S. malt beverage industry (based on shipments, including
exports) was 19.7%, a decrease of 1.0 share points from the prior year.
Excluding the impact of businesses divested since the beginning of 2000, total
wholesalers' sales to retailers decreased 2.5% from 2000, reflecting lower
retail sales of Miller Lite, Miller Genuine Draft, Icehouse, Milwaukee's Best
and Red Dog.
2000 compared with 1999
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.
The Company's domestic shipment volume of 41.6 million barrels for 2000
decreased 3.8% from 1999, reflecting higher pricing, the Company'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. The Company'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.
Financial Services
PMCC's operating revenues and operating companies income for 2001 increased $18
million (4.3%) and $34 million (13.0%), respectively, over 2000. These increases
were due primarily to growth in leasing activities and continued gains derived
from PMCC's finance asset portfolio. Additionally, operating companies income
benefited from lower interest rates.
PMCC's 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.
Financial Review
- - Net Cash Provided by Operating Activities: During 2001, net cash provided by
operating activities was $8.9 billion compared with $11.0 billion in 2000. The
decrease was due primarily to cash payments of $1.7 billion for the
establishment of litigation related escrow bonds (see Note 16) and higher
inventory spending. During 2000, net cash provided by operating activities was
slightly below 1999, due primarily to the timing of tobacco litigation
settlement payments, partially offset by higher net earnings.
- - Net Cash Used in Investing Activities: During 2001, 2000 and 1999, net cash
used in investing activities was $2.9 billion, $17.5 billion and $2.7 billion,
respectively. The increase in 2000 primarily reflects the cash used for the
acquisition of Nabisco.
Capital expenditures for 2001, which were funded by operating activities,
increased 14.3% to $1.9 billion. Approximately 30% related to tobacco operations
and approximately 57% related to food operations, which were primarily for
modernization and consolidation of manufacturing facilities and expansion of
certain production capacity. The increase in 2001 over 2000 was due primarily to
the acquisition and integration of Nabisco. Capital expenditures are expected to
be approximately the same amount in 2002 and are expected to be funded from
operations.
31
<PAGE>
- - Net Cash Used in Financing Activities: During 2001, net cash of $6.4 billion
was used in financing activities, compared with $2.7 billion provided by
financing activities during 2000. The Company used cash during 2001 to
repurchase Philip Morris common stock and pay dividends on Philip Morris common
stock. These uses of cash were partially offset by net debt issuances of $1.7
billion during 2001, excluding debt repayments made with the Kraft IPO proceeds.
The proceeds from the Kraft IPO were used to repay debt and, as a result, had no
net impact on financing cash flows. In 2000, the Company's financing activities
provided cash, as additional borrowings to finance the acquisition of Nabisco
exceeded the cash used to repurchase Philip Morris common stock and pay
dividends to Philip Morris stockholders.
- - Debt and Liquidity: The SEC recently issued Financial Reporting Release No.
61, which sets forth the views of the SEC regarding enhanced disclosures
relating to liquidity and capital resources. The information provided below
about the Company's debt, credit facilities, guarantees and future commitments
is included here to facilitate a review of the Company's liquidity.
Debt: The Company's total debt (consumer products and financial services) was
$22.1 billion and $29.1 billion at December 31, 2001 and 2000, respectively.
Total consumer products debt was $20.1 billion and $27.2 billion at December 31,
2001 and 2000, respectively. As discussed in Notes 6 and 7 to the consolidated
financial statements, the Company's total debt of $22.1 billion at December 31,
2001 is due to be repaid as follows: in 2002, $6.9 billion; in 2003-2004, $2.8
billion; in 2005-2006, $5.5 billion; and thereafter, $6.9 billion. Debt
obligations due to be repaid in 2002 will be satisfied with a combination of
short-term borrowings, refinancing transactions in the debt markets and
operating cash flows. During 2001, the proceeds from the Kraft IPO and a Kraft
global bond offering were used to repay outstanding borrowings. At December 31,
2001 and 2000, the Company's ratio of consumer products debt to total equity was
1.02 and 1.81, respectively. The ratio of total debt to total equity was 1.13
and 1.94 at December 31, 2001 and 2000, respectively.
Fixed-rate debt constituted approximately 75% and 50% of total consumer
products debt at December 31, 2001 and 2000, respectively. The increase in the
percentage of fixed-rate debt at December 31, 2001 was due primarily to the
repayment of commercial paper borrowings in 2001 with the proceeds from the
Kraft IPO and Kraft's completion of a $4.0 billion public global bond offering.
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 5.8% and 6.9% at December 31, 2001 and 2000, respectively.
Credit Ratings: The Company's credit ratings by Moody's at December 31, 2001 and
2000 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, 2001 and 2000 were "A-1" in the commercial paper market, and "A-"
in 2001 and "A" in 2000 for long-term debt obligations. The Company's credit
ratings by Fitch Rating Services at December 31, 2001 and 2000 were "F-1" in the
commercial paper market and "A" for long-term debt obligations. The changed
rating by S&P for long-term debt obligations was due to a change in S&P's policy
regarding how it rates companies with holding company structures and does not
reflect a change in S&P's view of the Company's credit quality. Changes in the
Company's credit ratings, although none are currently anticipated, could result
in corresponding changes in the Company's borrowing costs; however, none of the
Company's debt agreements require accelerated repayment in the event of a
decrease in credit ratings.
Credit Facilities: The Company and its subsidiaries maintain credit facilities
with a number of lending institutions, amounting to approximately $16.2 billion
at December 31, 2001. Approximately $15.6 billion of these facilities were
undrawn at December 31, 2001. Certain of these facilities, used to support
commercial paper borrowings, are available for general corporate purposes. The
Company's credit facilities include $7.0 billion (of which $2.0 billion is for
the sole use of Kraft) of 5-year revolving credit facilities expiring in July
2006, and $7.0 billion (of which $4.0 billion is for the sole use of Kraft) of
364-day revolving credit facilities expiring in July 2002. The Philip Morris
facilities require the maintenance of a fixed charges coverage ratio and the
Kraft facilities require the maintenance of a minimum net worth. Philip Morris
and Kraft exceeded these covenants at December 31, 2001 and do not currently
anticipate any difficulty in continuing to exceed these covenant requirements.
The foregoing revolving credit facilities do not include any other covenants
that could require an acceleration of maturity or the posting of collateral. The
majority of the Company's remaining facilities expire within one year. The
5-year revolving credit facilities enable the Company to reclassify short-term
debt on a long-term basis. At December 31, 2001, approximately $3.5 billion of
short-term borrowings that the Company intends to refinance were reclassified as
long-term debt. The Company expects to 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.
Guarantees: At December 31, 2001, the Company was contingently liable for
guarantees and commitments of $1.1 billion, consisting of the following:
- $0.8 billion of guarantees of excise tax and import duties related
to international shipments of tobacco products. In these agreements,
a bank provides a guarantee of tax payments to respective
governments. PMI then issues a guarantee to the respective banks for
the payment of the taxes. These are revolving facilities that are
integral to the shipment of tobacco products in international
markets, and the underlying taxes payable are recorded on the
Company's consolidated balance sheet.
- $0.2 billion, primarily surety bonds, related to government approval
of production changes at an international tobacco facility. The
surety bonds expire in 2002.
- $0.1 billion of commitments to purchase leaf tobacco from the United
States. PM Inc.'s current leaf commitment expires in 2003.
Although these guarantees are typically short-term in nature, they will be
replaced, upon expiration, with similar guarantees of similar amounts.
Guarantees do not have, and are not expected to have, a significant impact on
the Company's liquidity.
Litigation Escrow Deposits: As discussed in Note 16, on May 7, 2001, the trial
court in the Engle class action approved a stipulation and agreed order among PM
Inc., certain other defendants and the plaintiffs providing that the execution
or enforcement of the punitive damages component of the judgment in that case
will remain stayed through the completion of all judicial review. As a result of
the stipulation, PM Inc. placed $500 million into a separate interest-bearing
escrow account that, regardless of the outcome of the appeal, will be paid to
the court and the court will determine how to allocate or distribute it
consistent with the Florida Rules of Civil Procedure. As a result, the Company
has recorded a $500 million pre-tax charge in marketing, administration and
research costs in the consolidated statement of earnings
32
<PAGE>
of the domestic tobacco segment for the year ended December 31, 2001. In July
2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow account,
which will be returned to PM Inc. should it prevail in its appeal of the case.
The $1.2 billion escrow account is included in the December 31, 2001
consolidated balance sheet as other assets. Interest income on the $1.2 billion
escrow account is paid to PM Inc. quarterly and is being recorded as earned in
the Company's consolidated statement of earnings.
Tobacco Litigation Settlement Payments: As discussed in Note 16 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: 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 an additional $250 million each year from
2002 through 2003. 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 relative share of the settling
manufacturers' domestic cigarette shipments, including roll-your-own cigarettes,
in the year preceding that in which the payment is due. Accordingly, PM Inc.
records its portions of ongoing settlement payments as part of cost of sales as
product is shipped.
As part of the MSA, the settling defendants committed to work
cooperatively with the tobacco-growing states to address concerns about the
potential adverse economic impact of the MSA on tobacco growers and
quota-holders. To that end, four of the major domestic tobacco product
manufacturers, including PM Inc., and the grower states, have established a
trust fund to provide aid to tobacco growers and quota-holders. The trust will
be funded by these four manufacturers over 12 years with payments, prior to
application of various adjustments, scheduled to total $5.15 billion. Future
industry payments (in 2002 through 2008, $500 million each year; and 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.
During the year ended December 31, 2001, PM Inc. recognized $5.9 billion
as part of cost of sales attributable to the foregoing settlement obligations.
As discussed above under "Tobacco--Business Environment," the present
legislative and litigation environment is substantially uncertain and could
result in material adverse consequences for the business, financial condition,
cash flows or results of operations of the Company, PM Inc. and PMI. Assuming
there are no material adverse developments in the legislative and litigation
environment, the Company expects its cash flow from operations and its access to
global capital markets to provide sufficient liquidity to meet the ongoing needs
of the business.
Rent Payments: The Company's consolidated rent expense for 2001 was $534
million. Accordingly, the Company does not consider its operating lease
commitments to be a significant determinant of the Company's liquidity.
Leveraged Leases: As part of its lease portfolio, PMCC invests in leveraged
leases. At December 31, 2001, PMCC's net investment of $7.0 billion in leveraged
leases, which is included in finance assets, net, is comprised of total lease
payments receivable ($26.2 billion) and the residual value of assets under lease
($2.6 billion), reduced by non-recourse third-party debt ($17.9 billion) and
unearned income ($3.9 billion). PMCC has no obligation for the payment of the
non-recourse third-party debt issued to purchase the assets under lease. The
payment of the debt is collateralized only by lease payments receivable and the
leased property, and is non-recourse to all other assets of PMCC or the Company.
As required by U.S. GAAP, the non-recourse debt has been offset against the
related rentals receivable and the residual value of the property, and has been
presented on a net basis within finance assets, net, in the Company's
consolidated balance sheet at December 31, 2001.
- - Equity and Dividends: During 2001 and 2000, the Company repurchased 84.6
million and 137.6 million shares, respectively, of its common stock at a cost of
$4.0 billion and $3.6 billion, respectively. During the first quarter of 2001,
the Company completed its three-year, $8 billion share repurchase program and
announced a new three-year, $10 billion share repurchase program. At December
31, 2001, cumulative repurchases under the $10 billion authority totaled 69.6
million shares at an aggregate cost of $3.3 billion.
Dividends paid in 2001 and 2000 were $4.8 billion and $4.5 billion,
respectively, an increase of 6.0%, reflecting a higher dividend rate in 2001,
partially offset by a lower number of shares outstanding as a result of ongoing
share repurchases. During the third quarter of 2001, the Company's Board of
Directors approved a 9.4% increase in the quarterly dividend rate to $0.58 per
share. As a result, the annualized dividend rate increased to $2.32 from $2.12.
Market Risk
The Company operates internationally, with manufacturing and sales facilities in
various locations around the world, and utilizes certain financial instruments
to manage its foreign currency and commodity exposures, which primarily relate
to forecasted transactions and interest rate exposures. Derivative financial
instruments are used by the Company, principally to reduce exposures to market
risks resulting from fluctuations in foreign exchange rates, commodity prices
and interest rates, by creating offsetting exposures. The Company is not a party
to leveraged derivatives. For a derivative to qualify as a hedge at inception
and throughout the hedged period, the Company formally documents the nature and
relationships between the hedging instruments and hedged items, as well as its
risk-management objectives, strategies for undertaking the various hedge
transactions and method of assessing hedge effectiveness. Additionally, for
hedges of forecasted transactions, the significant characteristics and expected
terms of a forecasted transaction must be specifically identified, and it must
be probable that each forecasted transaction will occur. Financial instruments
qualifying for hedge accounting must maintain a specified level of effectiveness
between the hedging instrument and the item being hedged, both at inception and
throughout the hedged period. The Company does not use derivative financial
instruments for speculative purposes.
Substantially all of the Company's derivative financial instruments are
effective as hedges under the new accounting standard. Accordingly, the Company
recorded deferred gains of $33 million in accumulated other comprehensive losses
relating to the fair value of the Company's derivative financial instruments.
This
33
<PAGE>
reflects a gain resulting from the initial adoption of the accounting
pronouncement of $15 million and an increase in the fair value of derivatives
during the year of $102 million, partially offset by deferred gains transferred
to earnings of $84 million. The fair value of all derivative financial
instruments has been calculated based on active market quotes.
- - Foreign exchange rates: The Company uses forward foreign exchange contracts
and foreign currency options to mitigate its exposure to changes in exchange
rates from third-party and intercompany forecasted transactions. The primary
currencies to which the Company is exposed include the Japanese yen, Swiss franc
and the euro. At December 31, 2001 and 2000, the Company had option and forward
foreign exchange contracts with aggregate notional amounts of $3.7 billion and
$5.8 billion, respectively, for the purchase or sale of foreign currencies. The
Company uses foreign currency swaps to mitigate its exposure to changes in
exchange rates related to foreign currency denominated debt. These swaps
typically convert fixed-rate foreign currency denominated debt to fixed-rate
debt denominated in the functional currency of the borrowing entity. Foreign
currency swap agreements are accounted for as cash flow hedges. At December 31,
2001 and 2000, the notional amounts of foreign currency swap agreements
aggregated $2.3 billion.
The Company also uses certain foreign currency denominated debt as net
investment hedges of foreign operations. During the year ended December 31,
2001, losses of $18 million, net of income taxes of $10 million, which
represented effective hedges of net investments, were reported as a component of
accumulated other comprehensive losses within currency translation adjustments.
- - Commodities: The Company is exposed to price risk related to forecasted
purchases of certain commodities used as raw materials by the Company's
businesses. Accordingly, the Company uses commodity forward contracts, as cash
flow hedges, primarily for coffee, cocoa, milk, cheese and wheat. Commodity
futures and options are also used to hedge the price of certain commodities,
including milk, coffee, cocoa, wheat, corn, sugar and soybean. At December 31,
2001 and 2000, the Company had net long commodity positions of $589 million and
$617 million, respectively.
- - Interest rates: The Company uses interest rate swaps to hedge the fair value
of an insignificant portion of its long-term debt. The differential to be paid
or received is accrued and recognized as interest expense. 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 the year ended December 31,
2001, there was no ineffectiveness relating to these fair value hedges. At
December 31, 2001, the Company had interest rate swap agreements which converted
$102 million of fixed-rate debt to variable-rate debt, of which $29 million will
mature in 2003 and $73 million will mature in 2004.
- - 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, 2001 and 2000, 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) 12/31/01 Average High Low
================================================================================
<S> <C> <C> <C> <C>
Instruments sensitive to:
Foreign currency rates $ 40 $30 $ 49 $12
Commodity prices 5 7 11 5
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Fair Value Impact
------------------------------------------------
At
(in millions) 12/31/01 Average High Low
================================================================================
<S> <C> <C> <C> <C>
Instruments sensitive to:
Interest rates $121 $68 $121 $45
================================================================================
</TABLE>
<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
================================================================================
</TABLE>
<TABLE>
<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
================================================================================
</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.
34
<PAGE>
New Accounting Standards
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and its related amendment, SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities." These standards require
that all derivative financial instruments be recorded on the consolidated
balance sheets at their fair value as either assets or liabilities. Changes in
the fair value of derivatives are recorded each period in earnings or
accumulated other comprehensive losses, 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
accumulated other comprehensive losses are included in earnings in the periods
in which earnings are affected by the hedged item. As of January 1, 2001, the
adoption of these new standards resulted in a cumulative effect of an accounting
change that reduced net earnings by $6 million, net of income taxes of $3
million, and decreased accumulated other comprehensive losses by $15 million,
net of income taxes of $8 million.
The Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives" and EITF Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." As a result, certain items previously included in marketing,
administration and research costs on the consolidated statement of earnings will
be recorded as a reduction of operating revenues, and an increase in cost of
sales and excise taxes on products. These EITF Issues will be effective in the
first quarter of 2002. The Company estimates that adoption of EITF Issues No.
00-14 and No. 00-25 will result in a reduction of operating revenues in 2001,
2000 and 1999 of approximately $9.1 billion, $6.9 billion and $5.9 billion,
respectively. Marketing, administration and research costs will decline in 2001,
2000 and 1999 by approximately $9.9 billion, $7.6 billion and $6.4 billion,
respectively. Cost of sales will increase in 2001, 2000 and 1999 by
approximately $600 million, $500 million and $400 million, respectively, and
excise taxes on products will increase by approximately $200 million, $200
million and $100 million, respectively. The adoption of these EITF Issues will
have no impact on net earnings or basic and diluted EPS.
During 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." Effective January 1, 2002, the Company will no longer be
required to amortize indefinite life goodwill and intangible assets as a charge
to earnings. In addition, the Company will be required to conduct an annual
review of goodwill and other intangible assets for potential impairment. The
Company estimates that net earnings and diluted earnings per share would have
been approximately $9,569 million and $4.33, respectively, for the year ended
December 31, 2001; $9,096 million and $4.00, respectively, for the year ended
December 31, 2000; and $8,252 million and $3.43, respectively, for the year
ended December 31, 1999, had the provisions of the new standards been applied in
those years. The Company does not currently anticipate having to record a charge
to earnings for the potential impairment of goodwill or other intangible assets
as a result of adoption of these new standards.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of." SFAS No. 144 provides updated guidance concerning the recognition
and measurement of an impairment loss for certain types of long-lived assets,
expands the scope of a discontinued operation to include a component of an
entity and eliminates the current exemption to consolidation when control over a
subsidiary is likely to be temporary. SFAS No. 144 is effective for the Company
on January 1, 2002. The Company does not expect the adoption of SFAS No. 144 to
have a material impact on the Company's 2002 financial statements.
Contingencies
See Note 16 to the consolidated financial statements for a discussion of
contingencies.
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or oral
forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders. One can identify these forward-looking statements by use of words
such as "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 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. The food industry continues to be subject to the possibility
that consumers could lose confidence in the safety and quality of certain food
products. 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, PMI, 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
above and which descriptions are incorporated into this section by reference,
could cause the Company's results to differ materially from results that have
been or may be projected by or on behalf of the Company. The Company cautions
that the foregoing list of important factors is not exclusive. The Company does
not undertake to update any forward-looking statement that may be made from time
to time by or on behalf of the Company.
35
<PAGE>
Selected Financial Data -- Five-Year Review
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Operating revenues $ 89,924 $ 80,356 $ 78,596 $ 74,391 $ 72,055
United States export sales 3,882 4,354 5,046 6,005 6,705
Cost of sales 33,267 29,148 29,561 26,820 26,689
Federal excise taxes on products 4,154 4,309 3,252 3,438 3,596
Foreign excise taxes on products 12,826 12,771 13,593 13,140 12,345
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 15,702 14,806 13,616 10,105 11,750
Interest and other debt expense, net 1,418 719 795 890 1,052
Earnings before income taxes, minority interest and cumulative
effect of accounting change 14,284 14,087 12,821 9,215 10,698
Pre-tax profit margin 15.9% 17.5% 16.3% 12.4% 14.8%
Provision for income taxes 5,407 5,450 5,020 3,715 4,301
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before minority interest and cumulative effect of
accounting change 8,877 8,637 7,801 5,500 6,397
Minority interest in earnings 311 127 126 128 87
Earnings before cumulative effect of accounting change 8,566 8,510 7,675 5,372 6,310
Cumulative effect of accounting change (6)
Net earnings 8,560 8,510 7,675 5,372 6,310
- ------------------------------------------------------------------------------------------------------------------------------------
Basic EPS before cumulative effect of accounting change 3.93 3.77 3.21 2.21 2.61
Per share cumulative effect of accounting change (0.01)
Basic EPS 3.92 3.77 3.21 2.21 2.61
Diluted EPS before cumulative effect of accounting change 3.88 3.75 3.19 2.20 2.58
Per share cumulative effect of accounting change (0.01)
Diluted EPS 3.87 3.75 3.19 2.20 2.58
Dividends declared per share 2.22 2.02 1.84 1.68 1.60
Weighted average shares (millions)--Basic 2,181 2,260 2,393 2,429 2,420
Weighted average shares (millions)--Diluted 2,210 2,272 2,403 2,446 2,442
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures 1,922 1,682 1,749 1,804 1,874
Depreciation 1,323 1,126 1,120 1,106 1,044
Property, plant and equipment, net (consumer products) 15,137 15,303 12,271 12,335 11,621
Inventories (consumer products) 8,923 8,765 9,028 9,445 9,039
Total assets 84,968 79,067 61,381 59,920 55,947
Total long-term debt 18,651 19,154 12,226 12,615 12,430
Total debt--consumer products 20,098 27,196 13,522 13,953 13,258
--financial services 2,004 1,926 946 709 845
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred income taxes 8,622 4,750 3,751 3,638 3,382
Stockholders' equity 19,620 15,005 15,305 16,197 14,920
Common dividends declared as a % of Basic EPS 56.6% 53.6% 57.3% 76.0% 61.3%
Common dividends declared as a % of Diluted EPS 57.4% 53.9% 57.7% 76.4% 62.0%
Book value per common share outstanding 9.11 6.79 6.54 6.66 6.15
Market price per common share--high/low 53.88-38.75 45.94-18.69 55.56-21.25 59.50-34.75 48.13-36.00
- ------------------------------------------------------------------------------------------------------------------------------------
Closing price of common share at year end 45.85 44.00 23.00 53.50 45.25
Price/earnings ratio at year end--Basic 12 12 7 24 17
Price/earnings ratio at year end--Diluted 12 12 7 24 18
Number of common shares outstanding at
year end (millions) 2,153 2,209 2,339 2,431 2,425
Number of employees 175,000 178,000 137,000 144,000 152,000
====================================================================================================================================
</TABLE>
36
<PAGE>
Consolidated Balance Sheets
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
at December 31, 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Consumer products
Cash and cash equivalents $ 453 $ 937
Receivables (less allowances of $193 and $199) 5,148 5,019
Inventories:
Leaf tobacco 3,827 3,749
Other raw materials 1,909 1,721
Finished product 3,187 3,295
- ---------------------------------------------------------------------------------------------------------------------------
8,923 8,765
Other current assets 2,751 2,517
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 17,275 17,238
Property, plant and equipment, at cost:
Land and land improvements 796 784
Buildings and building equipment 6,347 6,255
Machinery and equipment 17,152 16,440
Construction in progress 1,330 1,427
- ---------------------------------------------------------------------------------------------------------------------------
25,625 24,906
Less accumulated depreciation 10,488 9,603
- ---------------------------------------------------------------------------------------------------------------------------
15,137 15,303
Goodwill and other intangible assets (less accumulated amortization of $7,363 and $6,319) 37,548 33,090
Other assets 6,144 5,034
- ---------------------------------------------------------------------------------------------------------------------------
Total consumer products assets 76,104 70,665
Financial services
Finance assets, net 8,691 8,118
Other assets 173 284
- ---------------------------------------------------------------------------------------------------------------------------
Total financial services assets 8,864 8,402
- ---------------------------------------------------------------------------------------------------------------------------
Total Assets $ 84,968 $ 79,067
===========================================================================================================================
Liabilities
Consumer products
Short-term borrowings $ 997 $ 3,166
Current portion of long-term debt 1,942 5,775
Accounts payable 3,600 3,787
Accrued liabilities:
Marketing 2,794 3,082
Taxes, except income taxes 1,654 1,436
Employment costs 1,192 1,317
Settlement charges 3,210 2,724
Other 2,480 2,572
Income taxes 1,021 914
Dividends payable 1,251 1,176
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 20,141 25,949
Long-term debt 17,159 18,255
Deferred income taxes 5,238 1,827
Accrued postretirement health care costs 3,315 3,287
Minority interest 4,013 302
Other liabilities 7,796 7,015
- ---------------------------------------------------------------------------------------------------------------------------
Total consumer products liabilities 57,662 56,635
Financial services
Short-term borrowings 512 1,027
Long-term debt 1,492 899
Deferred income taxes 5,246 4,838
Other liabilities 436 663
- ---------------------------------------------------------------------------------------------------------------------------
Total financial services liabilities 7,686 7,427
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 65,348 64,062
Contingencies (Note 16)
Stockholders' Equity
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) 935 935
Additional paid-in capital 4,503
Earnings reinvested in the business 37,269 33,481
Accumulated other comprehensive losses (including currency translation of $3,238 and $2,864) (3,373) (2,950)
Cost of repurchased stock (653,458,100 and 597,064,937 shares) (19,714) (16,461)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 19,620 15,005
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 84,968 $ 79,067
===========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
Consolidated Statements of Earnings
(in millions of dollars, except per share data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
for the years ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $89,924 $80,356 $78,596
Cost of sales 33,267 29,148 29,561
Excise taxes on products 16,980 17,080 16,845
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 39,677 34,128 32,190
Marketing, administration and research costs 22,961 18,731 17,992
Amortization of goodwill and other intangible assets 1,014 591 582
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income 15,702 14,806 13,616
Interest and other debt expense, net 1,418 719 795
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes, minority interest and cumulative effect of accounting change 14,284 14,087 12,821
Provision for income taxes 5,407 5,450 5,020
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before minority interest and cumulative effect of accounting change 8,877 8,637 7,801
Minority interest in earnings 311 127 126
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change 8,566 8,510 7,675
Cumulative effect of accounting change (6)
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 8,560 $ 8,510 $ 7,675
=================================================================================================================================
Per share data:
Basic earnings per share before cumulative effect of accounting change $ 3.93 $ 3.77 $ 3.21
Cumulative effect of accounting change (0.01)
- ---------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 3.92 $ 3.77 $ 3.21
=================================================================================================================================
Diluted earnings per share before cumulative effect of accounting change $ 3.88 $ 3.75 $ 3.19
Cumulative effect of accounting change (0.01)
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 3.87 $ 3.75 $ 3.19
=================================================================================================================================
</TABLE>
Consolidated Statements of Cash Flows
(in millions of dollars)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
for the years ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided by (Used in) Operating Activities
Net earnings--Consumer products $ 8,382 $ 8,345 $ 7,534
--Financial services 178 165 141
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings 8,560 8,510 7,675
Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Cumulative effect of accounting change 6
Depreciation and amortization 2,337 1,717 1,702
Deferred income tax provision (benefit) 277 660 (156)
Loss on sale of a North American food factory and integration costs 82
Escrow bond for domestic tobacco litigation (1,200)
Gains on sales of businesses (8) (274) (62)
Cash effects of changes, net of the effects from acquired and divested companies:
Receivables, net (437) 7 95
Inventories (293) 741 (39)
Accounts payable (192) 84 122
Income taxes 782 (178) 401
Accrued liabilities and other current assets (917) (142) 1,343
Other (520) (410) (17)
Financial services
Deferred income tax provision 408 346 300
Other 8 (17) 11
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,893 11,044 11,375
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
Consolidated Statements of Cash Flows
(continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
for the years ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided by (Used in) Investing Activities
Consumer products
Capital expenditures $ (1,922) $ (1,682) $(1,749)
Purchase of Nabisco, net of acquired cash (15,159)
Purchase of other businesses, net of acquired cash (451) (417) (522)
Proceeds from sales of businesses 21 433 175
Other 139 28 37
Financial services
Investments in finance assets (960) (865) (682)
Proceeds from finance assets 257 156 59
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,916) (17,506) (2,682)
- --------------------------------------------------------------------------------------------------------------
Cash Provided by (Used in) Financing Activities
Consumer products
Net (repayment) issuance of short-term borrowings (5,678) 8,501 435
Long-term debt proceeds 4,079 3,110 1,339
Long-term debt repaid (5,215) (1,702) (1,843)
Financial services
Net (repayment) issuance of short-term borrowings (515) 1,027
Long-term debt proceeds 557 500
Long-term debt repaid (200)
Repurchase of Philip Morris common stock (3,960) (3,597) (3,329)
Dividends paid on Philip Morris common stock (4,769) (4,500) (4,338)
Issuance of Philip Morris common stock 779 112 74
Issuance of Kraft Foods Inc. common stock 8,425
Other (143) (293) (135)
- --------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (6,440) 2,658 (7,497)
- --------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (21) (359) (177)
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
(Decrease) increase (484) (4,163) 1,019
Balance at beginning of year 937 5,100 4,081
- --------------------------------------------------------------------------------------------------------------
Balance at end of year $ 453 $ 937 $ 5,100
==============================================================================================================
Cash paid: Interest--Consumer products $ 1,689 $ 1,005 $ 1,086
==============================================================================================================
--Financial services $ 76 $ 102 $ 75
==============================================================================================================
Income taxes $ 3,775 $ 4,358 $ 4,308
==============================================================================================================
</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)
--------------------------------
Additional Earnings Currency Cost of Total
Common Paid-in Reinvested in Translation Repurchased Stockholders'
Stock Capital the Business Adjustments Other Total Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1999 $ 935 $ -- $ 26,261 $(1,081) $ (25) $(1,106) $ (9,893) $16,197
Comprehensive earnings:
Net earnings 7,675 7,675
Other comprehensive losses,
net of income taxes:
Currency translation
adjustments (975) (975) (975)
Additional minimum
pension liability (27) (27) (27)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive losses (1,002)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive earnings 6,673
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options and
issuance of other stock awards 13 115 128
Cash dividends declared ($1.84
per share) (4,393) (4,393)
Stock repurchased (3,300) (3,300)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 935 -- 29,556 (2,056) (52) (2,108) (13,078) 15,305
Comprehensive earnings:
Net earnings 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
Comprehensive earnings:
Net earnings 8,560 8,560
Other comprehensive losses,
net of income taxes:
Currency translation
adjustments (753) (753) (753)
Additional minimum
pension liability (89) (89) (89)
Change in fair value of
derivatives accounted
for as hedges 33 33 33
- ------------------------------------------------------------------------------------------------------------------------------------
Total other comprehensive losses (809)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive earnings 7,751
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise of stock options and
issuance of other stock awards 138 70 747 955
Cash dividends declared
($2.22 per share) (4,842) (4,842)
Stock repurchased (4,000) (4,000)
Sale of Kraft Foods Inc.
common stock 4,365 379 7 386 4,751
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2001 $ 935 $ 4,503 $ 37,269 $(3,238) $ (135) $(3,373) $(19,714) $19,620
====================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
Notes to Consolidated Financial Statements
Note 1.
Background and Basis of Presentation:
- - Background: Philip Morris Companies Inc., through its wholly-owned
subsidiaries, Philip Morris Incorporated, Philip Morris International Inc. and
Miller Brewing Company, and its majority owned (83.9%) subsidiary, Kraft Foods
Inc., is engaged in the manufacture and sale of various consumer products,
including cigarettes, packaged grocery products, snacks, beverages, cheese,
convenient meals and beer. Philip Morris Capital Corporation, another
wholly-owned subsidiary, is primarily engaged in leasing activities. During
November 2001, management announced that the name of the parent company will be
changed from Philip Morris Companies Inc. to Altria Group, Inc., pending
stockholder approval in 2002.
- - Basis of presentation: The consolidated financial statements include Philip
Morris Companies Inc. and its subsidiaries (the "Company"). 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.
Note 2.
Summary of Significant Accounting Policies:
- - 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,
including intangible 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.
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of." SFAS No. 144 provides updated guidance concerning the recognition
and measurement of an impairment loss for certain types of long-lived assets,
expands the scope of a discontinued operation to include a component of an
entity and eliminates the current exemption to consolidation when control over a
subsidiary is likely to be temporary. SFAS No. 144 is effective for the Company
on January 1, 2002. The Company does not expect the adoption of SFAS No. 144 to
have a material impact on the Company's 2002 financial statements.
- - 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.
During 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." Effective January 1, 2002,
the Company will no longer be required to amortize indefinite life goodwill and
intangible assets as a charge to earnings. In addition, the Company will be
required to conduct an annual review of goodwill and other intangible assets for
potential impairment. The Company estimates that net earnings and diluted
earnings per share ("EPS") would have been approximately $9,569 million and
$4.33, respectively, for the year ended December 31, 2001; $9,096 million and
$4.00, respectively, for the year ended December 31, 2000; and $8,252 million
and $3.43, respectively, for the year ended December 31, 1999, had the
provisions of the new standards been applied in those years. The Company does
not currently anticipate having to record a charge to earnings for the potential
impairment of goodwill or other intangible assets as a result of adoption of
these new standards.
- - Marketing costs: The Company promotes its products with significant marketing
activities, including advertising, consumer incentives and trade promotions.
Advertising costs are expensed as incurred. Consumer incentive and trade
promotion activities are recorded as expense based on amounts estimated as being
due to customers and consumers at the end of a period, based principally on the
Company's historical utilization and redemption rates.
- - Income taxes: The Company accounts for income taxes in accordance with 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.
41
<PAGE>
- - Revenue recognition: The Company's consumer products businesses recognize
operating revenues upon shipment of goods when title and risk of loss passes to
customers. The Company classifies shipping and handling costs as part of cost of
sales. 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.
The Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives" and EITF Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." As a result, certain items previously included in marketing,
administration and research costs on the consolidated statement of earnings will
be recorded as a reduction of operating revenues, and an increase in cost of
sales and excise taxes on products. These EITF Issues will be effective in the
first quarter of 2002. The Company estimates that adoption of EITF Issues No.
00-14 and No. 00-25 will result in a reduction of operating revenues in 2001,
2000 and 1999 of approximately $9.1 billion, $6.9 billion and $5.9 billion,
respectively. Marketing, administration and research costs will decline in 2001,
2000 and 1999 by approximately $9.9 billion, $7.6 billion and $6.4 billion,
respectively. Cost of sales will increase in 2001, 2000 and 1999 by
approximately $600 million, $500 million and $400 million, respectively, and
excise taxes on products will increase by approximately $200 million, $200
million and $100 million, respectively. The adoption of these EITF Issues will
have no impact on net earnings or basic and diluted EPS.
- - Hedging instruments: Effective January 1, 2001, the Company adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," and its
related amendment, SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities" (collectively referred to as "SFAS No. 133").
These standards require that all derivative financial instruments be recorded on
the consolidated balance sheets at their fair value as either assets or
liabilities. Changes in the fair value of derivatives are recorded each period
in earnings or accumulated other comprehensive losses, 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 accumulated other comprehensive losses are included in earnings in
the periods in which earnings are affected by the hedged item. As of January 1,
2001, the adoption of these new standards resulted in a cumulative effect of an
accounting change that reduced net earnings by $6 million, net of income taxes
of $3 million, and decreased accumulated other comprehensive losses by $15
million, net of income taxes of $8 million.
- - 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 for stock options.
- - Software costs: The Company capitalizes certain computer software and software
development costs incurred in connection with developing or obtaining computer
software for internal use. Capitalized software costs, which are not
significant, 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. Transaction gains and losses for all periods presented
were not significant.
- - Environmental costs: The Company is subject to laws and regulations relating
to the protection of the environment. The Company provides for expenses
associated with environmental remediation obligations when such amounts are
probable and can be reasonably estimated. Such accruals are adjusted as new
information develops or circumstances change.
While it is not possible to quantify with certainty the potential impact
of actions regarding environmental remediation and compliance efforts that the
Company may undertake in the future, in the opinion of management, environmental
remediation and compliance costs, before taking into account any recoveries from
third parties, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Note 3.
Divestitures:
During 2001, the Company sold several small food businesses. The aggregate
proceeds received in these transactions were $21 million, on which the Company
recorded a pre-tax gain of $8 million.
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, 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 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 4.
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, through
its subsidiary Kraft Foods Inc. ("Kraft"). 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 $12.2 billion of
short-term obligations and $3.0 billion of available cash. The acquisition has
been accounted for as a purchase. Nabisco's balance sheet was consolidated with
the
42
<PAGE>
Company as of December 31, 2000; however, Nabisco's earnings subsequent to
December 11, 2000 were not included in the consolidated operating results of the
Company in 2000 since such amounts were insignificant. Beginning January 1,
2001, Nabisco's earnings have been included in the consolidated operating
results of the Company. 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 statements of earnings for the years ended
December 31, 2001 and 2000.
During 2001, the Company completed the allocation of excess purchase price
relating to Nabisco. As a result, the Company recorded, among other things, the
final valuation of property, plant and equipment and intangible assets,
primarily trade names, amounts relating to the closure of Nabisco facilities and
related deferred income taxes. The final allocation of excess purchase price at
December 31, 2001 was as follows:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
<S> <C>
Purchase price $ 15,254
Historical value of tangible assets acquired
and liabilities assumed (1,271)
- --------------------------------------------------------------------------------
Excess of purchase price over assets acquired and
liabilities assumed at the date of acquisition 16,525
Increases for allocation of purchase price:
Property, plant and equipment 367
Other assets 347
Accrued postretirement health care costs 230
Pension liabilities 190
Debt 50
Legal, professional, lease and contract
termination costs 129
Other liabilities, principally severance 602
Deferred income taxes 3,583
- --------------------------------------------------------------------------------
Goodwill and other intangible assets at
December 31, 2001 $ 22,023
================================================================================
</TABLE>
Goodwill and other intangible assets at December 31, 2001 include approximately
$11.7 billion related to trade names.
The closure of a number of Nabisco domestic and international facilities
resulted in severance and other exit costs of $379 million, which are included
in the above adjustments for the allocation of purchase price. The closures will
result in the elimination of approximately 7,500 employees and will require
total cash payments of $373 million, of which approximately $74 million has been
spent through December 31, 2001.
The integration of Nabisco into the operations of the Company will also
result in the closure of several existing Kraft facilities. The aggregate
charges to the Company's consolidated statement of earnings to close or
reconfigure its facilities and integrate Nabisco are estimated to be in the
range of $200 million to $300 million. During 2001, the Company incurred pre-tax
integration costs of $53 million for site reconfigurations and other
consolidation programs in the United States. In October 2001, Kraft announced
that it was offering a voluntary retirement program to certain salaried
employees in the United States. The program is expected to eliminate
approximately 750 employees and will result in an estimated pre-tax charge of
approximately $140 million upon final employee acceptance in the first quarter
of 2002.
Assuming the acquisition of Nabisco occurred at the beginning of 2000 and
1999, pro forma operating revenues would have been $88 billion in 2000 and $86
billion in 1999; pro forma net earnings would have been $8 billion in 2000 and
$7 billion in 1999; pro forma basic EPS would have been $3.52 in 2000 and $2.96
in 1999; and pro forma diluted EPS would have been $3.50 in 2000 and $2.95 in
1999. These pro forma results, which are unaudited, do not give effect to any
synergies expected to result from the merger of Nabisco's operations with those
of the Company, nor do they give effect to the reduction of interest expense
from the repayment of borrowings with proceeds from Kraft's initial public
offering ("IPO") of its common stock. The pro forma results also do not reflect
the effects of SFAS Nos. 141 and 142 on the amortization of goodwill or other
intangible assets, or the EITF Issues concerning the classification of certain
expenses on the consolidated statements of earnings. The pro forma results are
not necessarily indicative of what actually would have occurred if the
acquisition had been consummated and the IPO completed at the beginning of each
year, nor are they necessarily indicative of future consolidated operating
results.
On June 13, 2001, Kraft completed an IPO of 280,000,000 shares of its
Class A common stock at a price of $31.00 per share. The Company used the IPO
proceeds, net of underwriting discount and expenses, of $8.4 billion to retire a
portion of the debt incurred to finance the acquisition of Nabisco. After the
completion of the IPO, the Company owns approximately 83.9% of the outstanding
shares of Kraft's capital stock through the Company's ownership of 49.5% of
Kraft's Class A common stock and 100% of Kraft's Class B common stock. Kraft's
Class A common stock has one vote per share while Kraft's Class B common stock
has ten votes per share. Therefore, the Company holds 97.7% of the combined
voting power of Kraft's outstanding common stock. As a result of the IPO, an
adjustment of $8.4 billion to the carrying amount of the Company's investment in
Kraft has been reflected on the Company's consolidated balance sheet as an
increase to additional paid-in capital of $4.4 billion (net of the recognition
of cumulative currency translation adjustments and other comprehensive losses)
and minority interest of $3.7 billion.
- - Other Acquisitions: During 2001, the Company increased its ownership interest
in its Argentine tobacco subsidiary for an aggregate cost of $255 million. In
addition, the Company purchased coffee businesses in Romania, Morocco and
Bulgaria and also acquired confectionery businesses in Russia and Poland. The
total cost of these and other smaller acquisitions was $451 million.
During 2000, the Company purchased the outstanding common stock of Balance
Bar Co., a maker of energy and nutrition snack products. In a separate
transaction, the Company also acquired Boca Burger, Inc., a manufacturer and
marketer of soy-based meat alternatives. The total cost of these and other
smaller acquisitions was $417 million.
During 1999, the Company increased its ownership interest in a Portuguese
tobacco company from 65% to 90% at a cost of $70 million. The Company also
increased its ownership interest in a Polish tobacco company from 75% to 96% at
a cost of $104 million.
During 1999, the Company purchased four trademarks from the Pabst Brewing
Company ("Pabst") and the Stroh Brewery Company and agreed to increase its
contract manufacturing of Pabst products. In addition, the Company assumed
ownership of the Pabst brewery in Tumwater, Washington. The total cost of the
four trademarks and the brewery was $189 million.
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.
43
<PAGE>
Note 5.
Inventories:
The cost of approximately 50% and 52% of inventories in 2001 and 2000,
respectively, was determined using the LIFO method. The stated LIFO amounts of
inventories were approximately $0.7 billion and $0.8 billion lower than the
current cost of inventories at December 31, 2001 and 2000, respectively.
Note 6.
Short-Term Borrowings and Borrowing Arrangements:
At December 31, 2001 and 2000, the Company's consumer products businesses had
short-term borrowings of $4,485 million and $10,173 million, respectively,
consisting principally of commercial paper borrowings with an average year-end
interest rate of 1.9% and 6.7%, respectively. Of these amounts, the Company
reclassified $3.5 billion at December 31, 2001 and $7.0 billion at December 31,
2000 of the commercial paper borrowings to long-term debt based upon its intent
and ability to refinance these borrowings.
In addition, at December 31, 2001 and 2000, the Company's financial
services business had short-term commercial paper borrowings of $512 million and
$1,027 million, respectively, with an average year-end interest rate of 2.0% and
6.6%, respectively.
The fair values of the Company's short-term borrowings at December 31,
2001 and 2000, 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 $16.2 billion at December
31, 2001. Approximately $15.6 billion of these facilities were undrawn at
December 31, 2001. Certain of these facilities, used to support commercial paper
borrowings, are available for general corporate purposes. These facilities
require the maintenance of a fixed charges coverage ratio or a minimum net
worth. The Company's credit facilities include $7.0 billion (of which $2.0
billion is for the sole use of Kraft) of 5-year revolving credit facilities
maturing in July 2006, and $7.0 billion (of which $4.0 billion is for the sole
use of Kraft) of 364-day revolving credit facilities maturing in July 2002.
Note 7.
Long-Term Debt:
At December 31, 2001 and 2000, the Company's long-term debt consisted of the
following:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Consumer products:
Short-term borrowings, reclassified as
long-term debt $ 3,488 $ 7,007
Notes, 4.63% to 8.25% (average effective
rate 6.56%), due through 2035 12,012 12,901
Debentures, 7.00% to 8.50% (average
effective rate 8.36%), $1.2 billion face
amount, due through 2027 1,118 1,500
Foreign currency obligations:
Euro, 4.50% to 5.63% (average effective
rate 5.07%), due through 2008 1,841 1,881
German mark, 5.63%, due 2002 140 143
Other foreign 137 193
Other 365 405
- --------------------------------------------------------------------------------
19,101 24,030
Less current portion of long-term debt (1,942) (5,775)
- --------------------------------------------------------------------------------
$ 17,159 $ 18,255
================================================================================
Financial services:
Eurodollar bonds, 7.50%, due 2009 $ 498 $ 497
Foreign currency obligations:
Swiss franc, 4.00%, due 2006 601
French franc, 6.88%, due 2006 138 141
German mark, 6.50% and 5.38%
(average effective rate 5.89%),
due 2003 and 2004 255 261
- --------------------------------------------------------------------------------
$ 1,492 $ 899
================================================================================
</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>
2002 $1,942
2003 1,581 $ 116
2004 971 139
2005 1,784
2006 2,995 739
2007-2011 4,444 498
2012-2016 397
Thereafter 1,555
================================================================================
</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, 2001 and
2000, was $21.1 billion and $24.9 billion, respectively.
44
<PAGE>
Note 8.
Capital Stock:
Shares of authorized common stock are 12 billion; issued, repurchased and
outstanding shares were as follows:
<TABLE>
<CAPTION>
Shares Shares Net Shares
Issued Repurchased Outstanding
===========================================================================
<S> <C> <C> <C>
Balances,
January 1,
1999 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
Exercise of stock
options and
issuance of other
stock awards 28,184,943 28,184,943
Repurchased (84,578,106) (84,578,106)
- ---------------------------------------------------------------------------
Balances,
December 31,
2001 2,805,961,317 (653,458,100) 2,152,503,217
===========================================================================
</TABLE>
At December 31, 2001, 237,318,887 shares of common stock were reserved for stock
options and other stock awards under the Company's stock plans, and 10 million
shares of Serial Preferred Stock, $1.00 par value, were authorized, none of
which have been issued.
Note 9.
Stock Plans:
Under the Philip Morris 2000 Performance Incentive Plan (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. In addition, the Company may
grant up to one million shares of common stock to members of the Board of
Directors who are not employees of the Company under the 2000 Stock Compensation
Plan for Non-Employee Directors (the "2000 Directors Plan"). Shares available to
be granted under the 2000 Plan and the 2000 Directors Plan at December 31, 2001
were 97,229,707 and 848,293, 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 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 EPS would have been $8,392 million,
$3.85 and $3.80, respectively, for the year ended December 31, 2001; $8,389
million, $3.71 and $3.69, respectively, for the year ended December 31, 2000;
and $7,582 million, $3.17 and $3.16, respectively, for the year ended December
31, 1999. 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
================================================================================
<S> <C> <C> <C> <C> <C>
------------- --------- ---------- -------- ------------
2001 4.85% 5 years 33.75% 4.67% $10.71
------------- --------- ---------- -------- ------------
2000 6.57 5 31.73 8.98 3.22
1999 5.81 5 26.06 4.41 8.21
================================================================================
</TABLE>
Option activity was as follows for the years ended December 31, 1999, 2000 and
2001:
<TABLE>
<CAPTION>
Weighted
Shares Average
Subject Exercise Options
to Option Price Exercisable
===============================================================================
<S> <C> <C> <C>
Balance at January 1, 1999 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
Options granted 35,636,252 45.64
Options exercised (30,276,835) 25.71
Options canceled (1,223,518) 42.45
- -------------------------------------------------------------------------------
Balance at December 31, 2001 137,134,837 35.98 103,155,954
===============================================================================
</TABLE>
The weighted average exercise prices of options exercisable at December 31,
2001, 2000 and 1999 were $32.74, $35.30 and $33.19, respectively.
The following table summarizes the status of stock options outstanding and
exercisable as of December 31, 2001 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 29,413,632 7 years $20.72 29,413,632 $20.72
24.52 - 34.90 22,107,890 4 29.83 22,107,890 29.83
35.75 - 40.00 38,667,474 7 39.80 38,607,283 39.80
41.62 - 58.72 46,945,841 8 45.29 13,027,149 43.91
- ----------------------------------------------------------------------------
137,134,837 103,155,954
=========== ===========
</TABLE>
45
<PAGE>
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 2001, 2000 and
1999, the Company granted 889,680, 3,473,270 and 100,000 shares, respectively,
of restricted stock to eligible U.S.-based employees and also issued to eligible
non-U.S. employees rights to receive 36,210, 1,717,640 and 125,000 equivalent
shares, respectively. At December 31, 2001, restrictions on the stock, net of
forfeitures, lapse as follows: 2002-6,624,690 shares; 2003-272,250 shares;
2004-126,000 shares; 2005-39,000 shares; and 2006 and thereafter-368,000 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 $89
million, $84 million and $9 million for the years ended December 31, 2001, 2000
and 1999, respectively. The unamortized portion, which is reported as a
reduction of earnings reinvested in the business, was $22 million and $83
million at December 31, 2001 and 2000, respectively.
Note 10.
Earnings per Share:
Basic and diluted EPS were calculated using the following for the years ended
December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings $8,560 $8,510 $7,675
================================================================================
Weighted average shares for
basic EPS 2,181 2,260 2,393
Plus incremental shares from
conversions:
Restricted stock and stock rights 7 4 2
Stock options 22 8 8
- --------------------------------------------------------------------------------
Weighted average shares for
diluted EPS 2,210 2,272 2,403
================================================================================
</TABLE>
In 2001, 2000 and 1999, options on 5 million, 69 million and 47 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 11.
Pre-tax Earnings and Provision for Income Taxes:
Pre-tax earnings and provision for income taxes consisted of the following for
the years ended December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Pre-tax earnings:
United States $ 9,105 $ 9,273 $ 8,511
Outside United States 5,179 4,814 4,310
- --------------------------------------------------------------------------------
Total pre-tax earnings $14,284 $14,087 $ 12,821
================================================================================
Provision for income taxes:
United States federal:
Current $ 2,722 $ 2,571 $ 2,810
Deferred 570 736 280
- --------------------------------------------------------------------------------
3,292 3,307 3,090
State and local 484 552 485
- --------------------------------------------------------------------------------
Total United States 3,776 3,859 3,575
- --------------------------------------------------------------------------------
Outside United States:
Current 1,516 1,321 1,581
Deferred 115 270 (136)
- --------------------------------------------------------------------------------
Total outside United States 1,631 1,591 1,445
- --------------------------------------------------------------------------------
Total provision for income taxes $ 5,407 $ 5,450 $ 5,020
================================================================================
</TABLE>
At December 31, 2001, applicable United States federal income taxes and foreign
withholding taxes have not been provided on approximately $5.6 billion of
accumulated earnings of foreign subsidiaries that are expected to be permanently
reinvested. The Company is unable to provide a meaningful estimate of additional
deferred taxes that would have been provided were these earnings not considered
permanently reinvested.
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, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
<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 2.3 2.6 2.5
Rate differences--foreign
operations (2.3) (1.2) (0.6)
Goodwill amortization 2.3 1.3 1.4
Other 0.6 1.0 0.9
- --------------------------------------------------------------------------------
Effective tax rate 37.9% 38.7% 39.2%
================================================================================
</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, 2001 and 2000:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Accrued postretirement and
postemployment benefits $ 1,403 $ 1,421
Settlement charges 1,132 964
Other 859 591
- --------------------------------------------------------------------------------
Total deferred income tax assets 3,394 2,976
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Trade names (3,847)
Property, plant and equipment (2,142) (2,260)
Prepaid pension costs (781) (628)
- --------------------------------------------------------------------------------
Total deferred income tax liabilities (6,770) (2,888)
- --------------------------------------------------------------------------------
Net deferred income tax (liabilities) assets $(3,376) $ 88
================================================================================
</TABLE>
46
<PAGE>
Financial services deferred income tax liabilities are primarily attributable to
temporary differences from investments in finance leases.
Note 12.
Segment Reporting:
The Company's products include cigarettes, food (consisting principally of a
wide variety of snacks, beverages, cheese, grocery products and convenient
meals) and beer. A subsidiary of the Company, Philip Morris Capital Corporation,
is primarily engaged in leasing activities. 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
segments excludes general corporate expenses 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 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.
Segment data were as follows:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues:
Domestic tobacco $ 24,784 $ 22,658 $ 19,596
International tobacco 26,586 26,374 27,506
North American food 25,106 18,461 17,897
International food 8,769 8,071 8,900
Beer 4,244 4,375 4,342
Financial services 435 417 355
- --------------------------------------------------------------------------------
Total operating revenues $ 89,924 $ 80,356 $ 78,596
================================================================================
Operating companies income:
Domestic tobacco $ 5,264 $ 5,350 $ 4,865
International tobacco 5,406 5,211 4,968
North American food 4,796 3,547 3,190
International food 1,239 1,208 1,063
Beer 481 650 511
Financial services 296 262 228
- --------------------------------------------------------------------------------
Total operating
companies income 17,482 16,228 14,825
Amortization of goodwill and
other intangible assets (1,014) (591) (582)
General corporate expenses (766) (831) (627)
- --------------------------------------------------------------------------------
Total operating income 15,702 14,806 13,616
Interest and other debt
expense, net (1,418) (719) (795)
- --------------------------------------------------------------------------------
Total earnings before income
taxes, minority interest
and cumulative effect of
accounting change $ 14,284 $ 14,087 $ 12,821
================================================================================
</TABLE>
As discussed in Note 16. Contingencies, on May 7, 2001, the trial court in the
Engle class action approved a stipulation and agreed order among Philip Morris
Incorporated ("PM Inc."), certain other defendants and the plaintiffs providing
that the execution or enforcement of the punitive damages component of the
judgment in that case will remain stayed through the completion of all judicial
review. As a result of the stipulation, PM Inc. placed $500 million into a
separate interest-bearing escrow account that, regardless of the outcome of the
appeal, will be paid to the court and the court will determine how to allocate
or distribute it consistent with the Florida Rules of Civil Procedure. As a
result, the Company has recorded a $500 million pre-tax charge in marketing,
administration and research costs in the consolidated statement of earnings of
the domestic tobacco segment for the year ended December 31, 2001. In July 2001,
PM Inc. also placed $1.2 billion into an interest-bearing escrow account, which
will be returned to PM Inc. should it prevail in its appeal of the case. The
$1.2 billion escrow account is included in the December 31, 2001 consolidated
balance sheet as other assets. Interest income on the $1.2 billion escrow
account is being recorded as earned in the Company's consolidated statement of
earnings.
During 2001, the Company recorded pre-tax charges of $53 million for site
reconfigurations and other consolidation programs in the United States. In
addition, the Company recorded a pre-tax charge of $29 million to close a North
American food factory. These pre-tax charges, which aggregate $82 million, were
included in marketing, administration and research costs in the consolidated
statement of earnings.
During 2001, the Company revised the terms of a contract brewing agreement
with Pabst, which resulted in pre-tax charges of $19 million in marketing,
administration and research costs in the consolidated statement of earnings of
the beer segment. During 2000, the Company's beer business sold its rights to
Molson trademarks in the United States and recorded a pre-tax gain of $100
million in marketing, administration and research costs in the consolidated
statement of earnings of the beer segment. During 1999, the Company recorded a
pre-tax charge of $29 million in marketing, administration and research costs in
the consolidated statement of earnings of the beer segment to write down the
book value of three brewing facilities to their estimated fair values. As of
December 31, 2001, one of the facilities was closed, while the remaining two
facilities were sold.
During 1999, PM Inc. announced plans to phase out cigarette production
capacity at its Louisville, Kentucky, manufacturing plant by August 2000. 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.
During 1999, the Company's North American food business 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
47
<PAGE>
programs and elected to retire or terminate. As a result, a pre-tax charge of
$157 million was recorded 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 and related
payments were completed during 2000. Salary and related benefit costs of
employees prior to the retirement or termination date were expensed as incurred.
During 1999, the Company's international tobacco business 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. The
Company 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 was insignificant.
See Notes 3 and 4 regarding divestitures and acquisitions.
For the years ended December 31,
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation expense:
Domestic tobacco $ 187 $ 202 $ 212
International tobacco 294 277 278
North American food 483 310 286
International food 197 189 205
Beer 119 118 114
- --------------------------------------------------------------------------------
1,280 1,096 1,095
Other 43 30 25
- --------------------------------------------------------------------------------
Total depreciation expense $ 1,323 $ 1,126 $ 1,120
================================================================================
Assets:
Tobacco $17,791 $15,687 $16,241
Food 55,798 52,071 30,336
Beer 1,782 1,751 1,769
Financial services 8,864 8,402 7,711
- --------------------------------------------------------------------------------
84,235 77,911 56,057
Other 733 1,156 5,324
- --------------------------------------------------------------------------------
Total assets $84,968 $79,067 $61,381
================================================================================
Capital expenditures:
Domestic tobacco $ 166 $ 156 $ 122
International tobacco 418 410 561
North American food 761 588 575
International food 340 318 285
Beer 132 135 165
- --------------------------------------------------------------------------------
1,817 1,607 1,708
Other 105 75 41
- --------------------------------------------------------------------------------
Total capital expenditures $ 1,922 $ 1,682 $ 1,749
================================================================================
</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 $7.1 billion, $7.6 billion and $8.9 billion for the years
ended December 31, 2001, 2000 and 1999, respectively.
Geographic data for operating revenues and long-lived assets (which
consist of all financial services assets and non-current consumer products
assets, other than goodwill and other intangible assets) were as follows:
For the years ended December 31,
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues:
United States--domestic $52,098 $43,951 $40,287
--export 3,882 4,354 5,046
Europe 23,197 23,454 25,103
Other 10,747 8,597 8,160
- --------------------------------------------------------------------------------
Total operating revenues $89,924 $80,356 $78,596
================================================================================
Long-lived assets:
United States $23,284 $21,314 $17,263
Europe 4,332 4,299 4,143
Other 2,529 3,126 2,201
- --------------------------------------------------------------------------------
Total long-lived assets $30,145 $28,739 $23,607
================================================================================
</TABLE>
Note 13.
Benefit Plans:
The Company and its subsidiaries sponsor noncontributory defined benefit pension
plans covering substantially all U.S. employees. Pension coverage for employees
of the Company's non-U.S. subsidiaries is provided, to the extent deemed
appropriate, through separate plans, many of which are governed by local
statutory requirements. In addition, the Company and its U.S. and Canadian
subsidiaries provide health care and other benefits to substantially all retired
employees. Health care benefits for retirees outside the United States and
Canada are generally covered through local government plans.
- - Pension Plans: Net pension (income) cost consisted of the following for the
years ended December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
(in millions) U.S. Plans Non-U.S. Plans
- -------------------------------------------------------------------------------------
2001 2000 1999 2001 2000 1999
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 189 $ 142 $ 152 $ 100 $ 93 $ 102
Interest cost 595 455 436 174 157 162
Expected return
on plan assets (961) (799) (766) (205) (175) (168)
Amortization:
Net gain on
adoption of
SFAS No. 87 (10) (22) (23)
Unrecognized
net (gain)
loss from
experience
differences (34) (53) (22) (3) (3) 3
Prior service
cost 22 21 19 7 5 6
Termination,
settlement and
curtailment (12) (34) 22
- -------------------------------------------------------------------------------------
Net pension
(income) cost $(211) $(290) $(182) $ 73 $ 77 $ 105
=====================================================================================
</TABLE>
48
<PAGE>
During 2001, 2000 and 1999, employees left the Company under early retirement
and workforce reduction programs. This resulted in settlement gains of $12
million in 2001, $34 million in 2000 and additional termination benefits of $128
million, net of settlement and curtailment gains of $106 million in 1999. During
2001, the Company announced that it was offering voluntary early retirement
programs to certain eligible salaried employees in the beer and North American
food businesses. These programs are expected to eliminate approximately 850
employees and will result in pre-tax charges of approximately $150 million upon
final employee acceptance in the first quarter of 2002.
The changes in benefit obligations and plan assets, as well as the funded
status of the Company's pension plans at December 31, 2001 and 2000, were as
follows:
<TABLE>
<CAPTION>
(in millions) U.S. Plans Non-U.S. Plans
- ----------------------------------------------------------------------------
2001 2000 2001 2000
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation at
January 1 $7,602 $5,795 $3,183 $3,037
Service cost 189 142 100 93
Interest cost 595 455 174 157
Benefits paid (605) (464) (169) (138)
Acquisitions 71 1,463 (22) 236
Termination,
settlement and
curtailment 14 11
Actuarial losses 897 175 70 66
Currency 5 (301)
Other 55 25 63 33
- ----------------------------------------------------------------------------
Benefit obligation at
December 31 8,818 7,602 3,404 3,183
- ----------------------------------------------------------------------------
Fair value of plan assets
at January 1 10,342 9,621 2,676 2,372
Actual return on
plan assets (584) (350) (373) 220
Contributions 223 333 127 58
Benefits paid (599) (480) (127) (107)
Acquisitions (45) 1,226 (41) 265
Currency 7 (192)
Actuarial gains
(losses) 111 (8) 3 60
- ----------------------------------------------------------------------------
Fair value of plan assets
at December 31 9,448 10,342 2,272 2,676
- ----------------------------------------------------------------------------
Excess (deficit) of plan
assets versus benefit
obligations at
December 31 630 2,740 (1,132) (507)
Unrecognized actuarial
losses (gains) 1,147 (1,167) 392 (145)
Unrecognized prior
service cost 185 152 71 46
Unrecognized net
transition obligation (3) (11) 9 9
- ----------------------------------------------------------------------------
Net prepaid pension
asset (liability) $1,959 $1,714 $ (660) $ (597)
============================================================================
</TABLE>
The combined U.S. and non-U.S. pension plans resulted in a net prepaid pension
asset of $1.3 billion and $1.1 billion at December 31, 2001 and 2000,
respectively. These amounts were recognized in the Company's consolidated
balance sheets at December 31, 2001 and 2000, as other assets of $2.7 billion
and $2.6 billion, respectively, for those plans in which plan assets exceeded
their accumulated benefit obligations, and as other liabilities of $1.4 billion
and $1.5 billion, respectively, 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 $2,677 million, $2,170 million and $1,753
million, respectively, as of December 31, 2001, and $423 million, $320 million
and $60 million, respectively, as of December 31, 2000. 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
$1,490 million, $1,343 million and $451 million, respectively, as of December
31, 2001, and $895 million, $804 million and $49 million, respectively, as of
December 31, 2000.
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
- --------------------------------------------------------------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 7.00% 7.75% 5.38% 5.52%
Expected rate of return
on plan assets 9.00 9.00 7.94 7.93
Rate of compensation
increase 4.50 4.50 3.68 3.81
================================================================================
</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 $231 million, $211 million and $198 million in 2001, 2000 and
1999, respectively.
- - Postretirement Benefit Plans: Net postretirement health care costs consisted
of the following for the years ended December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 64 $ 51 $ 56
Interest cost 270 199 188
Amortization:
Unrecognized net loss (gain)
from experience differences 1 (8) (3)
Unrecognized prior service cost (12) (12) (12)
Other expense 23
- --------------------------------------------------------------------------------
Net postretirement health
care costs $323 $230 $252
================================================================================
</TABLE>
During 1999, the Company instituted early retirement and work-force reduction
programs. These actions resulted in curtailment losses of $23 million in 1999,
which are included in other expense above.
49
<PAGE>
The Company's postretirement health care plans are not funded. The changes
in the benefit obligations of the plans at December 31, 2001 and 2000 were as
follows:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit
obligation at January 1 $3,323 $2,529
Service cost 64 51
Interest cost 270 199
Benefits paid (233) (161)
Acquisitions 8 633
Plan amendments 1 2
Actuarial losses 533 70
- --------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation at December 31 3,966 3,323
Unrecognized actuarial (losses) gains (475) 41
Unrecognized prior service cost 63 76
- --------------------------------------------------------------------------------
Accrued postretirement health
care costs $3,554 $3,440
================================================================================
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for U.S. plans was 7.1% in 2000, 6.5% in 2001
and 5.9% in 2002, declining to 5.0% by the year 2005 and remaining at that level
thereafter. For Canadian plans, the assumed health care cost trend rate was 8.0%
in 2000, 9.0% in 2001 and 8.0% in 2002, declining to 4.0% by the year 2006 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, 2001, and
postretirement health care cost (service cost and interest cost) for the year
then ended by approximately 8.7% 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,
2001, and postretirement health care cost (service cost and interest cost) for
the year then ended by approximately 7.2% and 9.9%, respectively.
The accumulated postretirement benefit obligations for U.S. plans at
December 31, 2001 and 2000, were determined using assumed discount rates of 7.0%
and 7.75%, respectively. The accumulated postretirement benefit obligations for
Canadian plans at December 31, 2001 and 2000, were determined using assumed
discount rates of 6.75% and 7.0%, respectively.
- - Postemployment Benefit Plans: The Company and certain of its affiliates
sponsor postemployment benefit plans covering substantially all salaried and
certain hourly employees. The cost of these plans is charged to expense over the
working life of the covered employees. Net postemployment costs consisted of the
following for the years ended December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $34 $26 $ 24
Amortization of
unrecognized net loss 8 6 2
Other expense 161
- --------------------------------------------------------------------------------
Net postemployment costs $42 $32 $187
================================================================================
</TABLE>
The Company instituted workforce reduction programs in its tobacco and North
American food operations in 1999. 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, 2001 and 2000 were as follows:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation
at January 1 $ 656 $ 638
Service cost 34 26
Benefits paid (225) (161)
Acquisitions 269 74
Actuarial losses 54 79
- --------------------------------------------------------------------------------
Accumulated benefit obligation
at December 31 788 656
Unrecognized experience losses (144) (89)
- --------------------------------------------------------------------------------
Accrued postemployment costs $ 644 $ 567
================================================================================
</TABLE>
The accumulated benefit obligation was determined using an assumed ultimate
annual turnover rate of 0.3% in 2001 and 0.3% in 2000, assumed compensation cost
increases of 4.5% in 2001 and in 2000, 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 14.
Additional Information:
<TABLE>
<CAPTION>
For the years ended December 31,
(in millions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Research and development expense $ 647 $ 538 $ 522
================================================================================
Advertising expense $2,196 $2,353 $2,301
================================================================================
Interest and other debt
expense, net:
Interest expense $1,659 $1,078 $1,100
Interest income (241) (359) (305)
- --------------------------------------------------------------------------------
$1,418 $ 719 $ 795
================================================================================
Interest expense of financial
services operations
included in cost of sales $ 99 $ 96 $ 89
================================================================================
Rent expense $ 534 $ 441 $ 467
================================================================================
</TABLE>
Note 15.
Financial Instruments:
- - Derivative financial instruments: The Company operates internationally, with
manufacturing and sales facilities in various locations around the world and
utilizes certain financial instruments to manage its foreign currency and
commodity exposures, primarily related to forecasted transactions and interest
rate exposures. Derivative financial instruments are used by the Company,
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. For a derivative to qualify as
a hedge at inception and throughout the hedged period, the Company formally
documents the nature and relationships between the hedging instruments and
hedged items, as well as its risk-management objectives, strategies for
undertaking the various hedge transactions and method of assessing hedge
effectiveness. Additionally, for hedges of forecasted transactions, the
significant characteristics and
50
<PAGE>
expected terms of a forecasted transaction must be specifically identified, and
it must be probable that each forecasted transaction will occur. If it were
deemed probable that the forecasted transaction will not occur, the gain or loss
would be recognized in earnings currently. Financial instruments qualifying for
hedge accounting must maintain a specified level of effectiveness between the
hedging instrument and the item being hedged, both at inception and throughout
the hedged period.
The Company uses forward foreign exchange contracts and foreign currency
options to mitigate its exposure to changes in foreign currency exchange rates
from third-party and intercompany forecasted transactions. The primary
currencies to which the Company is exposed include the Japanese yen, Swiss franc
and the euro. At December 31, 2001 and 2000, the Company had option and forward
foreign exchange contracts with aggregate notional amounts of $3.7 billion and
$5.8 billion, respectively, for the purchase or sale of foreign currencies. The
effective portion of unrealized gains and losses associated with forward
contracts and the value of option contracts are deferred as a component of
accumulated other comprehensive losses until the underlying hedged transactions
are reported on the Company's consolidated statement of earnings.
The Company uses foreign currency swaps to mitigate its exposure to
changes in foreign currency exchange rates related to foreign currency
denominated debt. These swaps typically convert fixed-rate foreign currency
denominated debt to fixed-rate debt denominated in the functional currency of
the borrowing entity. Foreign currency swap agreements are accounted for as cash
flow hedges.
The Company also uses certain foreign currency denominated debt as net
investment hedges of foreign operations. During the year ended December 31,
2001, losses of $18 million, net of income taxes of $10 million, which
represented effective hedges of net investments, were reported as a component of
accumulated other comprehensive losses within currency translation adjustments.
The Company uses interest rate swaps to hedge the fair value of an
insignificant portion of its long-term debt. The differential to be paid or
received is accrued and recognized as interest expense. 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 the year ended December 31,
2001, there was no ineffectiveness relating to these fair value hedges.
At December 31, 2001 and 2000, the aggregate notional principal amounts of
foreign currency and related interest rate swap agreements were $2.4 billion.
Aggregate maturities at December 31, 2001 were as follows (in millions):
2002-$147; 2003-$151; 2004-$228; 2006-$834; and 2008-$1,004.
During the year ended December 31, 2001, ineffectiveness related to cash
flow hedges was not material. The Company is hedging forecasted transactions for
periods not exceeding the next eighteen months and expects substantially all
amounts reported in accumulated other comprehensive losses to be reclassified to
the consolidated statement of earnings within the next twelve months.
The Company is exposed to price risk related to forecasted purchases of
certain commodities used as raw materials by the Company's businesses.
Accordingly, the Company uses commodity forward contracts, as cash flow hedges,
primarily for coffee, cocoa, milk, cheese and wheat. Commodity futures and
options are also used to hedge the price of certain commodities, including milk,
coffee, cocoa, wheat, corn, sugar, soybean and energy. In general, commodity
forward contracts qualify for the normal purchase exception under SFAS No. 133
and are, therefore, not subject to the provisions of SFAS No. 133. At December
31, 2001 and 2000, the Company had net long commodity positions of $589 million
and $617 million, respectively. The effective portion of unrealized gains and
losses on commodity futures and option contracts is deferred as a component of
accumulated other comprehensive losses and is recognized as a component of cost
of sales in the Company's consolidated statement of earnings when the related
inventory is sold. Unrealized gains or losses on net commodity positions were
immaterial at December 31, 2001 and 2000.
Hedging activity affected accumulated other comprehensive losses, net of
income taxes, during the year ended December 31, 2001, as follows:
<TABLE>
<CAPTION>
(in millions)
- --------------------------------------------------------------------------------
<S> <C>
Balance as of January 1, 2001 $ --
Impact of SFAS No. 133 adoption 15
Derivative gains transferred to earnings (84)
Change in fair value 102
- --------------------------------------------------------------------------------
Balance as of December 31, 2001 $ 33
================================================================================
</TABLE>
The Company does not engage in speculative use of financial instruments.
Derivative gains reported in accumulated other comprehensive losses are a result
of qualifying hedging activity. Transfers of these gains from accumulated other
comprehensive losses to earnings are offset by losses on the underlying hedged
item.
- - 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,
2001.
- - Fair value: The aggregate fair value, based on market quotes, of the Company's
total debt at December 31, 2001 was $22.6 billion, as compared with its carrying
value of $22.1 billion. The aggregate fair value of the Company's total debt at
December 31, 2000 was $29.1 billion, approximating its carrying value.
See Notes 6 and 7 for additional disclosures of fair value for short-term
borrowings and long-term debt.
Note 16.
Contingencies:
Legal proceedings covering a wide range of matters are pending or threatened in
various United States and foreign jurisdictions against the Company, its
subsidiaries and affiliates, including PM Inc. and Philip Morris International
Inc. ("PMI"), the Company's international tobacco subsidiary, as well as 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
51
<PAGE>
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
class action suits alleging that the use of the terms "Lights" and "Ultra
Lights" constitutes deceptive and unfair trade practices, suits by foreign
governments seeking to recover damages for taxes lost as a result of the
allegedly illegal importation of cigarettes into their jurisdictions, 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 various antitrust
suits. 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, 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
1,500 such cases on December 31, 2000, and approximately 380 such cases on
December 31, 1999. In certain jurisdictions, individual smoking and health cases
have been aggregated for trial in a single proceeding; the largest such
proceeding aggregates 1,250 cases in West Virginia and is currently scheduled
for trial in September 2002. An estimated 10 of the individual cases involve
allegations of various personal injuries allegedly related to exposure to
environmental tobacco smoke ("ETS"). In addition, approximately 2,875 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, 2001, there were an estimated 25 smoking and health
purported class actions pending in the United States against PM Inc. and, in
some cases, the Company (including three that involve allegations of various
personal injuries related to exposure to ETS), compared with approximately 36
such cases on December 31, 2000, and approximately 50 such cases on December 31,
1999. 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, 2001, there were an estimated 45 health care cost
recovery actions, including the suit discussed below under "Federal Government's
Lawsuit," filed by the United States government, pending in the United States
against PM Inc. and, in some instances, the Company, compared with approximately
52 such cases pending on December 31, 2000, and 60 such cases on December 31,
1999. In addition, health care cost recovery actions are pending in Israel, the
Marshall Islands, the Province of British Columbia, Canada, and France (in a
case brought by a local agency of the French social security health insurance
system).
There are also a number of other tobacco-related actions pending outside
the United States against PMI and its affiliates and subsidiaries, including an
estimated 64 smoking and health cases brought on behalf of individuals
(Argentina (40), Brazil (14), Czech Republic (1), Ireland (1), Israel (1), Italy
(2), Japan (1), the Philippines (1), Scotland (1) and Spain (2)), compared with
approximately 68 such cases on December 31, 2000, and 55 such cases on December
31, 1999. In addition, as of December 31, 2001, there were 11 smoking and health
putative class actions pending outside the United States (Brazil (2), Canada
(3), Israel (2) and Spain (4)), compared with 9 such cases on December 31, 2000,
and 10 such cases on December 31, 1999.
- - Pending and Upcoming Trials: Trial is currently underway in Louisiana in a
smoking and health class action in which PM Inc. is a defendant and in which
plaintiffs seek the creation of funds to pay for medical monitoring and smoking
cessation programs.
Additional cases against PM Inc. and, in some instances, the Company, are
scheduled for trial through the end of 2002, including two purported smoking and
health class actions and a purported Lights/Ultra Lights class action (discussed
below) and an estimated 13 individual smoking and health cases, including one
trial scheduled to begin in February 2002 in Oregon and two trials scheduled to
begin in March 2002 in Louisiana and Rhode Island. In addition, excluding the
cases discussed above, approximately 15 cases involving flight attendants'
claims for personal injuries from ETS are currently scheduled for trial during
2002, including two trials scheduled to begin in February 2002 and four trials
scheduled to begin in March 2002. Cases against other tobacco companies are also
scheduled for trial through the end of 2002. Trial dates, however, are subject
to change.
- - Recent Industry Trial Results: In recent years, several jury verdicts have
been returned in tobacco-related litigation.
In December 2001, in an individual smoking and health case involving
another cigarette manufacturer, a Florida jury awarded a smoker $165,000 in
damages, and defendant has filed post-trial motions challenging the verdict. In
November 2001, a West Virginia jury returned a verdict in favor of defendants,
including PM Inc., in a smoking and health class action in which plaintiffs
sought the creation of a fund to pay for medical monitoring of class members. In
January 2002, the court denied plaintiffs' motion for a new trial. In October
2001, an Ohio jury returned a verdict in favor of all defendants, including PM
Inc., in an individual smoking and health case, and plaintiff has filed
post-trial motions seeking a new trial. In June 2001, a California jury awarded
a smoker with lung cancer approximately $5.5 million in compensatory damages,
and $3 billion in punitive damages against PM Inc. In August 2001, the court
reduced the punitive damages award to $100 million, and PM Inc. and plaintiff
have appealed. In June 2001, a New York jury awarded $6.8 million in
compensatory damages against PM Inc. and a total of $11 million against four
other defendants to a Blue Cross and Blue Shield plan seeking reimbursement of
health care expenditures allegedly caused by tobacco products. In October 2001,
the trial court denied defendants' post-trial motions challenging the verdict
and, in November 2001, entered judgment in the case; PM Inc. has appealed. In
May 2001, a New Jersey jury returned a verdict in favor of defendants, including
PM Inc., in an individual smoking and health case. In April 2001, a Florida jury
returned a verdict in favor of defendants, including PM Inc., in an individual
smoking and health case brought by a flight attendant claiming personal injuries
from ETS. Plaintiff's post-trial motions challenging the jury's verdict were
denied in October 2001, and plaintiff has appealed. In February and March 2001,
juries in individual
52
<PAGE>
smoking and health cases in South Carolina and Texas returned verdicts in favor
of other cigarette manufacturers. In January 2001, a mistrial was declared in a
case in New York in which an asbestos manufacturer's 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, and in June 2001, the trust announced that it would not retry
the case. 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, 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 Class Action," below.)
In July 2000, a Mississippi jury returned a verdict in favor of defendant
in an individual smoking and health case against another cigarette manufacturer.
Plaintiffs' post-trial motions challenging the verdict were denied, and
plaintiffs have appealed. 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 appealed. In September 2001, the appellate court
dismissed plaintiffs' appeal. 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 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 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 and
defendants to be equally at fault, 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. The court reduced the punitive damages award to
$32 million, and PM Inc. has appealed the verdict and damages award. 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
court reduced the punitive damages award to $25 million, and PM Inc. appealed.
In November 2001, a California district court of appeals affirmed the trial
court's ruling; PM Inc. has appealed to the California Supreme Court.
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 were considered in
subsequent proceedings. In September 2001, a French appellate court ruled in
favor of defendant and dismissed plaintiff's claim.
- - Engle Class Action: 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
punitive damages amount would be divided equally among those plaintiffs who,
53
<PAGE>
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 had previously indicated that they believe the bond cap
legislation is unconstitutional and might 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. In May 2001, the
trial court approved a stipulation (the "Stipulation") among PM Inc., certain
other defendants, plaintiffs and the plaintiff class that provides that
execution or enforcement of the punitive damages component of the Engle judgment
will remain stayed against PM Inc. and the other participating defendants
through the completion of all judicial review. As a result of the Stipulation
and in addition to the $100 million bond it previously posted, PM Inc. placed
$1.2 billion into an interest-bearing escrow account for the benefit of the
Engle class. Should PM Inc. prevail in its appeal of the case, both amounts are
to be returned to PM Inc. PM Inc. also placed an additional $500 million into a
separate interest-bearing escrow account for the benefit of the Engle class. If
PM Inc. prevails in its appeal, this amount will be paid to the court, and the
court will determine how to allocate or distribute it consistent with the
Florida Rules of Civil Procedure. In connection with the Stipulation, the
Company recorded a $500 million pre-tax charge in its consolidated statement of
earnings for the quarter ended March 31, 2001.
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. 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.
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, 2001, smoking and health putative class actions were pending in
Alabama, California, Florida, Illinois, Indiana, Iowa, Louisiana, Michigan,
Missouri, Nevada, New Mexico, New York, North Carolina, Oregon, Tennessee,
Texas, Utah, West Virginia and the District of Columbia, as well as in Brazil,
Canada, Israel and Spain. Class certification has been denied or reversed by
courts in 29 smoking and health class actions involving PM Inc. in Arkansas, the
District of Columbia, Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan,
Minnesota, Nevada (4), 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), two cases in
California and in a case in Louisiana in which plaintiffs seek the creation of
funds to pay for medical monitoring and smoking cessation programs for class
members. Some of the decisions denying or granting 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. In November
2001, in the first medical monitoring class action case to go to trial, a West
Virginia jury returned a verdict in favor of all defendants, including PM Inc.;
in January 2002, the trial court denied plaintiffs' motion for a new trial.
54
<PAGE>
Health Care Cost Recovery Litigation
- - Overview: In certain 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. 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, additional disclosure of nicotine
yields, and payment of attorney and expert witness fees. Certain of the health
care cost recovery cases purport to be brought on behalf of a class of
plaintiffs.
The claims asserted in the 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.
Although there have been some decisions to the contrary, most courts that
have decided motions in these cases have dismissed all or most of the claims
against the industry. In addition, eight federal circuit courts of appeals, the
Second, Third, Fifth, Seventh, Eighth, Ninth, Eleventh and District of Columbia
circuits, as well as California and Tennessee intermediate appellate courts,
relying primarily on grounds that plaintiffs' claims were too remote, have
affirmed dismissals of, or reversed trial courts that had refused to dismiss,
health care cost recovery actions. The United States Supreme Court has refused
to consider plaintiffs' appeals from the cases decided by the courts of appeals
for the Second, Third, Ninth and District of Columbia circuits.
As of December 31, 2001, there were an estimated 45 health care cost
recovery cases pending in the United States against PM Inc., and in some
instances, the Company, including the case filed by the United States
government, which is discussed below under "Federal Government's Lawsuit."
The cases brought in the United States include actions brought by Belize,
Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario,
Canada, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 11
Brazilian states, 11 Brazilian cities and a group of Argentine unions. The
actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the
Province of Ontario, Panama, the Russian Federation, Tajikistan, Ukraine,
Venezuela, 9 Brazilian states and 11 Brazilian cities were consolidated for
pre-trial purposes and transferred to the United States District Court for the
District of Columbia. The court has remanded the cases of Venezuela, Ecuador
and two Brazilian states to state court in Florida, and defendants appealed to
the United States Court of Appeals for the District of Columbia Circuit.
Subsequent to remand, the Ecuador case was voluntarily dismissed. In November
2001, the cases brought by Venezuela and the Brazilian state of Espirito Santo
were dismissed, and Venezuela has appealed. The district court dismissed the
cases brought by Guatemala, Nicaragua, Ukraine and the Province of Ontario, and
plaintiffs appealed. In May 2001, the United States Court of Appeals for the
District of Columbia Circuit affirmed the district court's dismissals of the
cases brought by Guatemala, Nicaragua and Ukraine, and in October 2001, the
United States Supreme Court refused to consider plaintiffs' appeal. In November
2001, the Province of Ontario voluntarily dismissed its appeal. In January 2001,
the Superior Court of the District of Columbia dismissed the suit brought by the
Argentine unions. In addition to cases brought in the United States, health care
cost recovery actions have also been brought in Israel, the Marshall Islands,
the Province of British Columbia, Canada, and France, and other entities have
stated that they are considering filing such actions.
In March 1999, in the first health care cost recovery case to go to trial,
an Ohio jury returned a verdict in favor of defendants on all counts. In June
2001, a New York jury returned a verdict awarding $6.83 million in compensatory
damages against PM Inc. and a total of $11 million against four other defendants
in a health care cost recovery action brought by a Blue Cross and Blue Shield
plan; in October 2001, the trial court denied defendants' post-trial motions
challenging the verdict and, in November 2001, entered judgment in the case; PM
Inc. has appealed.
- - Settlements of Health Care Cost Recovery Litigation: 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"). The MSA has received final judicial
approval in all 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 annual payments of $250 million through 2003. 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.
55
<PAGE>
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 (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.
Certain litigation has arisen challenging the validity of the MSA and
alleging violations of 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 alleged violation of antitrust
law, based in part on the MSA. Plaintiffs sought 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 sought injunctive relief against certain aspects of the
MSA. In March 2000, the court granted defendants' motion to dismiss the
complaint, and plaintiffs appealed. In June 2001, the appellate court affirmed
the trial court's ruling, and in January 2002, the United States Supreme Court
refused to consider plaintiffs' appeal.
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'
appeal was denied by the appellate court.
In addition, since December 2000, cases have been filed in Virginia and
Pennsylvania against governmental entities alleging that enforcement of the MSA
is unconstitutional and violates antitrust laws. Neither PM Inc. nor the Company
is a party to these suits.
- - 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 PM Inc. and the Company,
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. PM Inc. and the Company 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. In February 2001, the government filed an amended complaint
attempting to replead the MSP claims. In July 2001, the court denied the
government's motion for reconsideration of the dismissal of the MCRA claims and
dismissed the government's amended MSP claims. Trial of the case is currently
scheduled for July 2003.
In June 2001, representatives of the Department of Justice invited the
defendants, including PM Inc. and the Company, to participate in settlement
discussions. A meeting with representatives of the Department of Justice was
held in July 2001. PM Inc. and the Company cannot predict whether discussions
will continue or the outcome of any such discussions. The Company and PM Inc.
believe that they have a number of valid defenses to the lawsuit and will
continue to vigorously defend it.
Certain Other Tobacco-Related Litigation
- - Lights/Ultra Lights Cases: As of December 31, 2001, there were 11 putative
class actions pending against PM Inc. and the Company in California, Florida,
Illinois, Massachusetts, Minnesota, Missouri, New Jersey, Ohio (2), Tennessee
and West Virginia 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. Plaintiffs in
these cases allege, among other things, that the use of the terms "Lights"
and/or "Ultra Lights" constitutes deceptive and unfair trade practices, and seek
injunctive and equitable relief, including restitution. In November 2001,
plaintiffs voluntarily dismissed a case in Pennsylvania, and in October 2001, a
Massachusetts court certified a statewide class. In February 2001, an Illinois
court also certified a class, and trial in this case is scheduled for August
2002. During the first quarter of 2001, plaintiffs voluntarily dismissed cases
in Florida and New York. In July 2001, an Arizona court refused to certify a
class, and that case has been voluntarily dismissed.
56
<PAGE>
- - Cigarette Importation Cases: As of December 31, 2001, the European Community,
various Departments of Colombia, Ecuador, Belize and Honduras 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 sold to distributors cigarettes that would be illegally
imported into the plaintiff jurisdictions in an effort to evade taxes. The
claims asserted in these cases include negligence, negligent misrepresentation,
fraud, 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. In January 2001, the Company and its defendant
subsidiaries moved to dismiss the complaints filed in the European Community and
Colombia cases. In July 2001, the court dismissed the complaint filed by the
European Community for lack of standing, while noting that the ruling is not
applicable to suits that the European Community's member states may choose to
file, and in August 2001, the European Community and ten member states refiled
the complaint. Also, in July 2001, PM Inc. and the Company moved to dismiss the
complaint filed by Ecuador. In September 2001, PM Inc. and the Company moved to
dismiss the complaints filed by Belize and Honduras. In October 2001, the United
States Court of Appeals for the Second Circuit affirmed the dismissal of a
cigarette importation case filed against another cigarette manufacturer. In
November 2001, the company moved to dismiss the complaint filed by the European
Community in August 2001.
- - Asbestos Contribution Cases: As of December 31, 2001, an estimated 13 suits
were pending on behalf of former asbestos manufacturers and affiliated entities
against domestic tobacco manufacturers, including PM Inc. 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.
- - 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 May 2001, the court denied
plaintiffs' motion alleging that PM Inc. had violated the preliminary
injunction. In July 2001, one plaintiff filed a motion to modify and expand the
preliminary injunction. The motion was denied in December 2001. In October 2001,
PM Inc. moved for summary judgment dismissing all of plaintiffs' claims.
Although no trial date has been set, the court has indicated a probable trial
date of May 2002.
- - 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. In August 2001,
the court granted PM Inc.'s motion for summary judgment and dismissed, with
prejudice, the claims of ten plaintiffs. In October 2001, the court certified
its decision for appeal to the United States Court of Appeals for the Sixth
Circuit following the stipulation of all plaintiffs that the district court's
dismissal would, if affirmed, be binding on all plaintiffs.
- - Tobacco Price Cases: As of December 31, 2001, there were 36 putative class
actions pending against PM Inc. and other domestic tobacco manufacturers, as
well as, in certain instances, the Company and PMI, alleging that 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 29 were filed in 14 states and
the District of Columbia by retail purchasers of tobacco products. In November
2001, the court granted plaintiff's motion for class certification and denied
defendant's motion to dismiss in a case pending in state court in Kansas. In
December 2001, the court denied plaintiff's motion for class certification in a
case pending in state court in Minnesota. 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 portions of the
consolidated complaint. The court has certified a class of plaintiffs who made
direct purchases between February 1996 and February 2000. In June 2001, the
court granted defendants' motion to dismiss the fraudulent concealment
allegations in the complaint.
- - 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 defendants, 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 program 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. In March 2001, the leaf
buyer defendants filed a motion to dismiss the case. In June 2001, the
manufacturing and leaf buyer defendants filed a joint memorandum in opposition
to plaintiffs' motion for class certification. In July 2001, the court denied
the manufacturer and leaf buyer defendants' motions to dismiss the case.
- - 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
57
<PAGE>
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 in March 2001.
Certain Other Actions
- - National Cheese Exchange Cases: Since 1996, seven putative class actions have
been filed by various dairy farmers alleging that Kraft Foods Inc., 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 unspecified treble
damages. Two of the actions were voluntarily dismissed by plaintiffs after class
certification was denied. Three cases were consolidated in state court in
Wisconsin, and in November 1999, the court granted Kraft's motion for summary
judgment. In June 2001, the Wisconsin Court of Appeals affirmed the trial
court's ruling. In October 2001, the Wisconsin Supreme Court granted plaintiffs'
petition for further review. 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. In January 2002, following the parties' settlement of the
matter, the Illinois case was dismissed with prejudice.
- - Italian Tax Matters: One hundred ninety-four tax assessments alleging the
nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1996 and
income taxes for the years 1987 to 1996) have been served upon certain
affiliates of the Company, including six new assessments (for the year 1996),
which were served in October and December 2001. The aggregate amount of alleged
unpaid taxes assessed to date is the euro equivalent of $2.1 billion. In
addition, the euro 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 188 of the assessments. The decisions to overturn 185
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 45 of
the 51 decisions of the regional appellate court to the Italian Supreme Court,
and a hearing on these cases was held in December 2001. Six of the 51 decisions
were not appealed and are now final. 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
against PM Inc. have been returned in the Engle smoking and health class action,
several individual smoking and health cases and a health care cost recovery case
and are being appealed. It is possible that there could be further adverse
developments in these cases and that additional cases could be decided
unfavorably. An unfavorable outcome or settlement of a pending smoking and
health or health care cost recovery case could encourage the commencement of
additional similar litigation. There have also been a number of adverse
legislative, regulatory, political and other developments concerning cigarette
smoking and the tobacco industry that have received widespread media attention.
These developments may negatively affect the perception of potential triers of
fact with respect to the tobacco industry, possibly to the detriment of certain
pending litigation, and may prompt the commencement of additional similar
litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of pending tobacco-related
litigation, and the Company has not provided any amounts in the consolidated
financial statements for unfavorable outcomes, if any. 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.
58
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Note 17.
Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
(in millions, except per share data) 2001 Quarters
- ------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $22,359 $23,188 $22,404 $21,973
============================================================================================================
Gross profit $ 9,757 $10,270 $ 9,972 $ 9,678
============================================================================================================
Earnings before cumulative effect
of accounting change $ 1,786 $ 2,288 $ 2,328 $ 2,164
Cumulative effect of accounting change (6)
- ------------------------------------------------------------------------------------------------------------
Net earnings $ 1,780 $ 2,288 $ 2,328 $ 2,164
============================================================================================================
Per share data:
Basic EPS $ 0.81 $ 1.04 $ 1.07 $ 1.00
============================================================================================================
Diluted EPS $ 0.80 $ 1.03 $ 1.06 $ 0.99
============================================================================================================
Dividends declared $ 0.53 $ 0.53 $ 0.58 $ 0.58
============================================================================================================
Market price--high $ 52.04 $ 53.88 $ 49.76 $ 51.72
--low $ 38.75 $ 44.00 $ 43.00 $ 44.70
============================================================================================================
</TABLE>
<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
============================================================================================================
</TABLE>
Basic and diluted EPS are computed independently for each of the periods
presented. Accordingly, the sum of the quarterly EPS amounts may not agree to
the total for the year.
During 2001, the Company recorded pre-tax charges as follows:
<TABLE>
<CAPTION>
(in millions) 2001 Quarters
- ------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Litigation-related expense $500
Loss on sale of a North American food factory 29
Nabisco integration costs $37 $16
Contract brewing agreement 19
- ------------------------------------------------------------------------------------------------------------
$529 $ -- $56 $16
============================================================================================================
</TABLE>
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.
------------------------
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, 2002, there were approximately 131,700 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, 2001
and 2000, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2001, 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 28, 2002
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>6
<FILENAME>y58476ex21.txt
<DESCRIPTION>SUBSIDIARIES OF THE COMPANY
<TEXT>
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE COMPANY
Certain active subsidiaries of the Company and their subsidiaries as
of December 31, 2001, are listed below. The names of certain subsidiaries, which
considered in the aggregate would not constitute a significant subsidiary, have
been omitted.
<TABLE>
<CAPTION>
State or
Country of
Name Organization
---- ------------
<S> <C>
152999 Canada Inc. .................................................................................. Canada
20th Century Denmark Limited ........................................................................ Liberia
A/S Maarud .......................................................................................... Norway
AB Estrella ......................................................................................... Sweden
AB Kraft Foods Lietuva .............................................................................. Lithuania
Abal Hermanos S.A. .................................................................................. Uruguay
AGF SP, Inc. ........................................................................................ Japan
Airco IHC, Inc. ..................................................................................... Delaware
Ajinomoto General Foods, Inc. ...............................................................