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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 1-8940
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PHILIP MORRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
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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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 917-663-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.33 1/3 par value New York Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
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The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant, computed by reference to the closing price of
such stock on February 28, 2001, was approximately $106 billion. At such date,
there were 2,206,007,834 shares of the registrant's Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to shareholders for the year
ended December 31, 2000, are incorporated in Part I, Part II and Part IV hereof
and made a part hereof. The registrant's definitive proxy statement for use in
connection with its annual meeting of shareholders to be held on April 26, 2001,
filed with the Securities and Exchange Commission on March 9, 2001, is
incorporated in Part III hereof and made a part hereof.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
GENERAL
Philip Morris Companies Inc. is a holding company whose principal
wholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris
International Inc., Kraft Foods Inc. and Miller Brewing Company, are engaged in
the manufacture and sale of various consumer products. A wholly-owned subsidiary
of the Company, Philip Morris Capital Corporation, engages in various leasing
and investment activities. As used herein, unless the context indicates
otherwise, the term "Company" means Philip Morris Companies Inc. and its
subsidiaries. The Company is the largest consumer packaged goods company in the
world.*
Philip Morris Incorporated ("PM Inc."), which conducts business under the
trade name "Philip Morris U.S.A.," is engaged in the manufacture and sale of
cigarettes. PM Inc. is the largest cigarette company in the United States.
Philip Morris International Inc. ("Philip Morris International" or "PMI") is a
holding company whose subsidiaries and affiliates and their licensees are
engaged primarily in the manufacture and sale of tobacco products (mainly
cigarettes) internationally. Marlboro, the principal cigarette brand of these
companies, has been the world's largest-selling cigarette brand since 1972.
Kraft Foods Inc. ("Kraft"), is the largest branded food and beverage company
headquartered in the United States. A wide variety of snacks, beverages, cheese,
packaged grocery products and convenient meals are manufactured and marketed in
the United States, Canada and Mexico by Kraft's direct subsidiary, Kraft Foods
North America, Inc. ("Kraft Foods North America"). Subsidiaries and affiliates
of Kraft Foods International, Inc. ("Kraft Foods International"), an indirect
subsidiary of Kraft, manufacture and market a wide variety of snacks, beverages,
cheese, packaged grocery products and convenient meals in Europe, the Middle
East and Africa, as well as the Latin America and Asia Pacific regions.
Miller Brewing Company ("Miller") is the second-largest brewing company in
the United States.
SOURCE OF FUNDS -- DIVIDENDS
Because the Company is a holding company, its principal source of funds is
dividends from its subsidiaries. The Company's principal wholly-owned
subsidiaries currently are not limited by long-term debt or other agreements in
their ability to pay cash dividends or make other distributions with respect to
their common stock.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's significant industry segments are domestic tobacco,
international tobacco, North American food, international food, beer and
financial services. Operating revenues and operating companies income (together
with a reconciliation to operating income) attributable to each such segment for
each of the last three years (along with total assets for each of tobacco, food,
beer and financial services at December 31, 2000, 1999 and 1998) are set forth
in Note 11 to the Company's consolidated financial statements and are
incorporated herein by reference to the Company's Annual Report to Shareholders
for the year ended December 31, 2000 (the "2000 Annual Report"). Effective in
2000, managerial responsibility for the Company's food operations in Mexico and
Puerto Rico was transferred from the international food segment to the North
American food segment. Accordingly, all prior period amounts have been
reclassified to reflect the transfer.
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* References to the Company's competitive ranking in its various businesses are
based on sales data or, in the case of cigarettes and beer, shipments, unless
otherwise indicated.
1
The relative percentages of operating companies income attributable to each
segment were as follows:
2000 1999 1998
---- ---- ----
Domestic tobacco................................... 33.0% 32.8% 13.1%
International tobacco.............................. 32.1 33.5 44.4
North American food................................ 21.9 21.5 27.6
International food................................. 7.4 7.2 9.3
Beer............................................... 4.0 3.5 4.0
Financial services................................. 1.6 1.5 1.6
----- ----- -----
100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
The above relative percentages were affected in 1998 by domestic tobacco
litigation settlement charges of $3.4 billion, discussed below in Item 3. Legal
Proceedings.
(c) NARRATIVE DESCRIPTION OF BUSINESS
TOBACCO PRODUCTS
PM Inc. manufactures, markets and sells cigarettes in the United States and
its territories, and exports tobacco products from the United States.
Subsidiaries and affiliates of Philip Morris International and their licensees
manufacture, market and sell tobacco products outside the United States.
Domestic Tobacco Products
PM Inc. is the largest tobacco company in the United States, with total
cigarette shipments in the United States of 211.9 billion units in 2000, an
increase of 1.8% over 1999. PM Inc. accounted for 50.5% of the domestic
cigarette industry's total shipments in 2000 (an increase of 0.9 share points
over 1999). The domestic industry's cigarette shipments increased by 0.1% in
2000. PM Inc.'s and the industry's volume growth during 2000 was largely driven
by wholesalers' decisions to rebuild their inventories after the January 1, 2000
federal excise tax increase. In contrast, wholesalers decreased their inventory
levels during 1999 as inventory held at the end of 1999 was subject to the
federal excise tax increase. PM Inc. estimates that after adjusting for this and
other factors, domestic industry volume declined approximately 1.0% to 2.0% in
2000, while PM Inc.'s shipment volume was essentially flat. The following table
sets forth the industry's cigarette shipments in the United States, PM Inc.'s
shipments and its share of domestic industry shipments:
YEARS ENDED PM INC.
DECEMBER 31 INDUSTRY* PM INC. SHARE OF INDUSTRY
----------- --------- ------- -----------------
(IN BILLIONS OF UNITS) (%)
2000..................... 419.8 211.9 50.5
1999..................... 419.3 208.2 49.6
1998..................... 460.8 227.6 49.4
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* Source: Management Science Associates.
PM Inc.'s major premium brands are Marlboro, Virginia Slims, Parliament,
Merit and Benson & Hedges. Its principal discount brands are Basic and
Cambridge. All of its brands are marketed to take into account differing
preferences of adult smokers. Marlboro is the largest-selling cigarette brand in
the United States, with shipments of 158.2 billion units in 2000 (up 3.5% from
1999), equating to 37.7% of the domestic market (up 1.3 share points over 1999).
In 2000 and 1999, the premium and discount segments accounted for
approximately 73.5% and 26.5%, respectively, of domestic cigarette industry
volume. PM Inc.'s share of the premium segment was 60.6% in 2000, an increase of
1.1 share points over 1999. Shipments of premium cigarettes accounted for 88.2%
of PM Inc.'s 2000 volume, up from 88.0% in 1999. In 2000, industry shipments
within the
2
discount category declined 0.1% from 1999 levels; PM Inc.'s 2000 shipments
within this category increased 0.2%, resulting in a share of 22.5% of the
discount category (up 0.1 share points over 1999).
PM Inc. cannot predict future change or rates of change in domestic tobacco
industry volume, the relative sizes of the premium and discount segments or in
PM Inc.'s shipments, shipment market share or retail market share; however, it
believes that PM Inc.'s shipments may be materially adversely affected by price
increases, including those related to tobacco litigation settlements and, if
enacted, by increased excise taxes or other tobacco legislation discussed below.
During 1999, PM Inc. announced plans to phase out cigarette production
capacity at its Louisville, Kentucky manufacturing plant by August 2000. The
closure of this facility was completed in 2000. PM Inc. recorded pre-tax charges
of $183 million during 1999 in connection with these actions. These charges
included enhanced severance, pension and postretirement benefits in accordance
with the terms of the underlying plans, affecting approximately 1,500 hourly and
salaried employees.
International Tobacco Products
Philip Morris International's total cigarette shipments decreased 0.1% in
2000 to 671.2 billion units. Comparisons to 1999 reflect an estimated shift of
4.2 billion units into the fourth quarter of 1999 from the first quarter of 2000
as customers purchased additional product in anticipation of business
disruptions due to the century date change. Excluding the estimated impact of
this shift in volume, Philip Morris International's total cigarette shipments
increased 1.1% over 1999. Philip Morris International estimates that its share
of the international cigarette market (which is defined as worldwide cigarette
volume excluding the United States and duty-free shipments) was 13.8% in 2000,
up from 13.5% in 1999. Philip Morris International estimates that international
cigarette market shipments were approximately 4.7 trillion units in 2000, down
slightly from 1999. Philip Morris International's leading brands -- Marlboro,
L&M, Philip Morris, Bond Street, Chesterfield, Parliament, Lark, Merit and
Virginia Slims -- collectively accounted for approximately 10.6% of the
international cigarette market, up from 10.2% in 1999. Shipments of Philip
Morris International's principal brand, Marlboro, increased 1.7% in 2000, and
represented more than 6% of the international cigarette market in 2000 and 1999.
Philip Morris International has a cigarette market share of at least 15%,
and in a number of instances substantially more than 15%, in more than 55
markets, including Argentina, Australia, Austria, Belgium, the Czech Republic,
Finland, France, Germany, Greece, Hong Kong, Hungary, Israel, Italy, Japan,
Mexico, the Netherlands, Poland, Portugal, Russia, Saudi Arabia, Singapore,
Spain, Switzerland and Turkey.
In 2000, Philip Morris International continued to invest in and expand its
international manufacturing base. Philip Morris International increased its
ownership interests in an affiliated company in Portugal and expanded facilities
in Argentina, Australia, Germany, Kazakhstan, the Netherlands, Poland, Portugal,
Romania, Russia and Switzerland.
In 1999, Philip Morris International announced the closure of a cigarette
factory and the corresponding reduction of cigarette production capacity in
Brazil. Prior to the factory closure, existing employees were offered voluntary
dismissal benefits. These benefits were accepted by one-half of the
approximately 1,000 employees at the facility. During the third quarter of 1999,
the factory was closed and the employment of the remaining employees was
terminated, and a pre-tax charge of $136 million was recorded by Philip Morris
International in connection with these actions.
Distribution, Competition and Raw Materials
PM Inc. sells its tobacco products principally to wholesalers (including
distributors), large retail organizations, including chain stores, and the armed
services. Subsidiaries and affiliates of Philip Morris International and their
licensees market cigarettes and other tobacco products worldwide, directly or
through export sales organizations and other entities with which they have
contractual arrangements.
The market for tobacco products is highly competitive, characterized by
brand recognition and loyalty, with product quality, price, marketing and
packaging constituting the significant methods of
3
competition. Promotional activities include, in certain instances and where
permitted by law, allowances, the distribution of incentive items, price
reductions and other discounts. The tobacco products of the Company's
subsidiaries, affiliates and their licensees are advertised and promoted through
various media, although television and radio advertising of cigarettes is
prohibited in the United States and is prohibited or restricted in many other
countries. In addition, as discussed below under Taxes, Legislation, Regulation
and Other Matters Regarding Tobacco and Smoking -- State Settlement Agreements,
PM Inc. and other domestic tobacco manufacturers have agreed to other marketing
restrictions in the United States as part of the settlements of state health
care cost recovery actions.
PM Inc. and Philip Morris International's subsidiaries and affiliates and
their licensees purchase domestic burley and flue-cured leaf tobaccos of various
grades and styles each year. In February 2000, in light of quota reductions in
the federal quota and price-support program for tobacco farmers, PM Inc. began a
pilot partnering program with a limited number of tobacco growers in order to
ensure an adequate supply of burley tobacco. Under the terms of the program,
PM Inc. agrees in advance to purchase certain amounts of burley tobacco directly
from growers participating in the program. In February 2001, this program was
expanded to include flue-cured tobacco. PM Inc. continues to purchase the
balance of domestic tobacco requirements at auction. In addition, oriental
tobacco and certain other tobaccos are purchased outside the United States. The
tobacco is then graded, stemmed and redried prior to its storage for aging up to
three years. Large quantities of leaf tobacco inventory are maintained to
support cigarette manufacturing requirements. Tobacco is an agricultural
commodity subject to United States government controls, including the
tobacco-price support (subject to Congressional review) and production control
programs administered by the United States Department of Agriculture (the
"USDA"), either of which can substantially affect market prices. PM Inc. and
Philip Morris International believe there is an adequate supply of tobacco in
the world markets to satisfy their current and anticipated production
requirements.
Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and Smoking
The tobacco industry, both in the United States and abroad, has faced, and
continues to face, a number of issues that may adversely affect the business,
volume, results of operations, cash flows and financial position of PM Inc.,
Philip Morris International and the Company.
These issues, some of which are more fully discussed below, include pending
and threatened smoking and health litigation and recent jury verdicts against
PM Inc., including the $74 billion punitive damages verdict in the Engle smoking
and health class action case discussed in Item 3. Legal Proceedings ("Item 3");
the civil lawsuit filed by the United States federal government against various
cigarette manufacturers and others discussed in Item 3; legislation or other
governmental action seeking to ascribe to the industry responsibility and
liability for the adverse health effects associated with both smoking and
exposure to environmental tobacco smoke ("ETS"); price increases in the United
States related to the settlement of certain tobacco litigation; actual and
proposed excise tax increases; an increase in diversion into the United States
market of products intended for sale outside the United States; foreign and
United States governmental investigations into illegal cigarette imports;
governmental investigations; actual and proposed requirements regarding
disclosure of cigarette ingredients and other proprietary information;
governmental and private bans and restrictions on smoking; actual and proposed
price controls and restrictions on imports in certain jurisdictions outside the
United States; actual and proposed restrictions affecting tobacco manufacturing,
marketing, advertising and sales outside the United States; actual and proposed
legislation in Congress, the state of New York and other states to require the
establishment of fire-safety standards for cigarettes; the diminishing social
acceptance of smoking and increased pressure from tobacco control advocates and
unfavorable press reports; and other tobacco legislation that may be considered
by Congress, the states and other jurisdictions inside and outside the United
States.
Excise Taxes: Cigarettes are subject to substantial federal, state and local
excise taxes in the United States and to similar taxes in most foreign markets.
The United States federal excise tax on cigarettes is currently $0.34 per pack
of 20 cigarettes and is scheduled to increase to $0.39 per pack on January 1,
2002. In general, excise taxes and other taxes on cigarettes have been
increasing. These taxes vary considerably and, when combined with sales taxes
and the current federal excise tax, may be as high as
4
$1.87 per pack in a given locality in the United States. Congress has considered
significant increases in the federal excise tax or other payments from tobacco
manufacturers, and increases in excise and other cigarette-related taxes have
been proposed at the state and local levels and in many jurisdictions outside
the United States.
In the opinion of PM Inc. and PMI, increases in excise and
similar taxes have had an adverse impact on sales of cigarettes. Any future
increases, the extent of which cannot be predicted, could result in volume
declines for the cigarette industry, including PM Inc. and PMI, and
might cause sales to shift from the premium segment to the discount segment.
Federal Trade Commission ("FTC"): In September 1997, the FTC issued a
request for public comment on its proposed revision of its "tar" and nicotine
test methodology and reporting procedures established by a 1970 voluntary
agreement among domestic cigarette manufacturers. In February 1998, PM Inc. and
three other domestic cigarette manufacturers filed comments on the proposed
revisions. In November 1998, the FTC wrote to the Department of Health and Human
Services requesting its assistance in developing specific recommendations on the
future of the FTC's program for testing the "tar," nicotine and carbon monoxide
content of cigarettes. The Department has not yet published its recommendations.
Food and Drug Administration ("FDA") Regulations: In August 1996, the FDA
promulgated regulations asserting jurisdiction over cigarettes as "drugs" or
"medical devices" under the provisions of the Food, Drug and Cosmetic Act
("FDCA"). The regulations, which included severe restrictions on the
distribution, marketing and advertising of cigarettes, and would have required
the industry to comply with a wide range of labeling, reporting, record-keeping,
manufacturing and other requirements, were declared invalid by the United States
Supreme Court in March 2000. The Company has stated that while it continues to
oppose FDA regulation over cigarettes as "drugs" or "medical devices" under the
provisions of FDCA, it would support new legislation that would provide for
reasonable regulation by the FDA of cigarettes as cigarettes. Currently, there
are several bills pending in Congress that, if enacted, would give the FDA
authority to regulate tobacco products. The bills take a variety of approaches
to the issue of the FDA's proposed regulation of tobacco products ranging from
codification of the original FDA regulations under the "drug" and "medical
device" provisions of the FDCA to the creation of provisions that would apply
uniquely to tobacco products. All of the pending legislation could result in
substantial federal regulation of the design, performance, manufacture and
marketing of cigarettes. The ultimate outcome of the pending bills cannot be
predicted.
Ingredient Disclosure Laws: The Commonwealth of Massachusetts has enacted
legislation to require cigarette manufacturers to report the flavorings and
other ingredients used in each brand of cigarettes sold in the Commonwealth, and
on a qualified, by-brand basis to provide "nicotine-yield ratings" for their
products based on standards established by the Commonwealth. Cigarette
manufacturers sued to have the statute declared unconstitutional, arguing that
it could result in the public disclosure of valuable proprietary information. In
September 2000, the district court granted the plaintiffs' motion for summary
judgment and permanently enjoined the defendants from requiring cigarette
manufacturers to disclose brand-specific information on ingredients in their
products. Defendants have appealed the district court's ruling. The ultimate
outcome of this lawsuit cannot be predicted. Similar legislation has been
enacted or proposed in other states. Some jurisdictions outside the United
States have also enacted or proposed ingredient disclosure legislation or
regulation.
Health Effects of Smoking and Exposure to ETS: Reports with respect to the
health risks of cigarette smoking have been publicized for many years, and the
sale, promotion and use of cigarettes continue to be subject to increasing
governmental regulation. Since 1964, the Surgeon General of the United States
and the Secretary of Health and Human Services have released a number of reports
linking cigarette smoking with a broad range of health hazards, including
various types of cancer, coronary heart disease and chronic lung disease, and
recommending various governmental measures to reduce the incidence of smoking.
The 1988, 1990, 1992 and 1994 reports focus upon the addictive nature of
cigarettes, the effects of smoking cessation, the decrease in smoking in the
United States, the economic and regulatory aspects of smoking in the Western
Hemisphere, and cigarette smoking by adolescents, particularly the addictive
nature of cigarette smoking during adolescence.
5
Studies with respect to the health risks of ETS to nonsmokers (including
lung cancer, respiratory and coronary illnesses, and other conditions) have also
received significant publicity. In 1986, the Surgeon General of the United
States and the National Academy of Sciences reported that nonsmokers were at
increased risk of lung cancer and respiratory illness due to ETS. Since then, a
number of government agencies around the world have concluded that ETS causes
disease -- including lung cancer and heart disease -- in nonsmokers.
In October 1997, at the request of the United States Senate Judiciary
Committee, the Company provided the Committee with a document setting forth the
Company's position on a number of issues. On the issues of the role played by
cigarette smoking in the development of lung cancer and other diseases in
smokers, and whether nicotine, as found in cigarette smoke, is addictive, the
Company stated that it would, in order to ensure that there will be a single,
consistent public health message on these issues, refrain from debating the
issues other than as necessary to defend itself and its opinions in the courts
and other forums in which it is required to do so. The Company also stated that
in relation to these issues, and the health effects of exposure to ETS, the
Company is prepared to defer to the judgment of public health authorities as to
what health warning messages that will best serve the public interest.
In 1999, PM Inc. and PMI established web sites that include,
among other things, views of public health authorities on smoking, disease
causation in smokers, addiction and ETS. In October 2000, the sites were updated
to reflect PM Inc.'s and PMI's agreement with the overwhelming
medical and scientific consensus that cigarette smoking is addictive, and causes
lung cancer, heart disease, emphysema and other serious diseases in smokers.
Consistent with the Company's position set forth in its October 1997 submission
to the United States Senate Judiciary Committee (discussed above), the web sites
advise smokers and potential smokers to rely on the messages of public health
authorities in making all smoking-related decisions. The sites further
PM Inc.'s and PMI's efforts to implement this position.
The sites also state that PM Inc. and PMI recognize and accept
that many people have health concerns regarding ETS. In addition, because of
concerns relating to conditions such as asthma and respiratory infections,
PM Inc. and PMI believe that particular care should be exercised
where children are concerned, and that smokers who have children -- particularly
young ones -- should seek to minimize their exposure to ETS.
The World Health Organization's Framework Convention for Tobacco Control:
The World Health Organization has begun negotiations regarding a proposed
Framework Convention for Tobacco Control. The proposed treaty would require
signatory nations to enact legislation that would require, among other things,
specific actions to prevent youth smoking; restrict tobacco product marketing;
inform the public about the health consequences of smoking and the benefits of
quitting; regulate the content of tobacco products; impose new package labeling
requirements; eliminate cigarette smuggling and counterfeit cigarettes; restrict
smoking in public places; increase and harmonize cigarette excise taxes; abolish
duty-free tobacco sales; and permit and encourage litigation against tobacco
product manufacturers. PM Inc. and PMI have stated that they would
support a treaty that member states could consider for ratification, based on
the following four principles: (1) smoking-related decisions should be made on
the basis of a consistent public health message; (2) effective measures should
be taken to prevent minors from smoking; (3) the right of adults to choose to
smoke should be preserved; and (4) all manufacturers of tobacco products should
compete on a level playing field. The outcome of the treaty negotiations cannot
be predicted.
Other Legislative Initiatives: In recent years, various members of Congress
have introduced legislation, some of which has been the subject of hearings or
floor debate, that would subject cigarettes to various regulations under the
Department of Health and Human Services or regulation under the Consumer
Products Safety Act, establish educational campaigns relating to tobacco
consumption or tobacco control programs, or provide additional funding for
governmental tobacco control activities, further restrict the advertising of
cigarettes, require additional warnings, including graphic warnings, on packages
and in advertising, eliminate or reduce the tax deductibility of tobacco
advertising, provide that the Federal Cigarette Labeling and Advertising Act and
the Smoking Education Act not be used as a defense against liability under state
statutory or common law, and allow state and local governments
6
to restrict the sale and distribution of cigarettes. Legislative initiatives
affecting the regulation of the tobacco industry have also been considered in a
number of jurisdictions outside the United States. The European Union has issued
a directive on tobacco product regulation that would, among other things, reduce
maximum permitted levels of tar, nicotine and carbon monoxide yields, require
manufacturers to disclose ingredients and toxicological data on ingredients,
require health warnings to cover 30% of the front of a pack of cigarettes and
40% of the back, and prohibit the use on packaging of texts, names, trademarks
and figurative or other signs suggesting that a particular tobacco product is
less harmful than others.
In August 2000, New York State enacted legislation that requires the State's
Office of Fire Prevention and Control to promulgate by January 1, 2003
fire-safety standards for cigarettes sold in New York. The legislation requires
that cigarettes sold in New York stop burning within a time period to be
specified by the standards or meet other performance standards set by the Office
of Fire Prevention and Control. All cigarettes sold in New York will be required
to meet the established standards within 180 days after the standards are
promulgated. It is not possible to predict the impact of this law on PM Inc.
until the standards are published. Similar legislation has been proposed in
other states and localities and at the federal level.
It is not possible to predict what, if any, additional foreign or domestic
governmental legislation or regulations will be adopted relating to the
manufacturing, advertising, sale or use of cigarettes, or to the tobacco
industry generally. However, if any or all of the foregoing were to be
implemented, the business, volume, results of operations, cash flows and
financial position of PM Inc., PMI and the Company could be materially adversely
affected.
Governmental Investigations: PMI and its subsidiary, Philip Morris Duty Free
Inc. have received subpoenas requesting documents in connection with an
investigation by Canadian authorities into allegations of contraband shipments
of cigarettes manufactured in Canada in the early 1990s. While the outcome of
this investigation cannot be predicted, PMI and Philip Morris Duty Free Inc.
believe they have acted lawfully.
Tobacco-Related Litigation: There is substantial litigation pending related
to tobacco products in the United States and certain foreign jurisdictions,
including the Engle class action case in Florida, in which PM Inc. is a
defendant, and a civil health care cost recovery action filed by the United
States Department of Justice in September 1999 against domestic tobacco
manufacturers and others, including the Company and PM Inc. (See Item 3 for a
discussion of such litigation.)
State Settlement Agreements: As discussed in Item 3, during 1997 and 1998,
PM Inc. and other major domestic tobacco product manufacturers entered into
agreements with states and various United States jurisdictions settling asserted
and unasserted health care cost recovery and other claims. These settlements
provide for substantial annual payments. They also place numerous restrictions
on the tobacco industry's conduct of its business operations, including
restrictions on the advertising and marketing of cigarettes. Among these are
restrictions or prohibitions on the following: targeting youth; use of cartoon
characters; use of brand name sponsorships and brand name non-tobacco products;
outdoor and transit brand advertising; payments for product placement; and free
sampling. In addition, the settlement agreements require companies to affirm
corporate principles to reduce underage use of cigarettes; impose requirements
regarding lobbying activities; mandate public disclosure of certain industry
documents; limit the industry's ability to challenge certain tobacco control and
underage use laws; and provide for the dissolution of certain tobacco-related
organizations and place restrictions on the establishment of any replacement
organizations.
FOOD PRODUCTS
Kraft Foods North America and Kraft Foods International have made a number
of acquisitions and divestures during the past three years.
On December 11, 2000, the Company acquired all of the outstanding shares of
Nabisco Holdings Corp. ("Nabisco") for $55 per share in cash. During 2001,
Nabisco's operations are being integrated with those of Kraft Foods North
America and Kraft Foods International. The aggregate cost to purchase Nabisco's
outstanding shares, retire employee stock options and other payments was
7
approximately $15.2 billion. In addition, the acquisition included the
assumption of approximately $4.0 billion of existing Nabisco debt. For a
discussion of the Nabisco acquisition, see Note 3 to the Company's consolidated
financial statements which is incorporated herein by reference to the 2000
Annual Report.
By combining Nabisco's operations with the operations of Kraft Foods North
America and Kraft Foods International, the Company currently expects to generate
annual cost synergies in excess of $400 million in 2002, growing to more than
$550 million in 2003. The Company's statement of earnings charges to obtain
these synergies will consist principally of systems integration, employee
training and benefit costs, and will aggregate approximately $300 million from
2001 to 2003. Consequently, the Company expects to achieve net cost synergies of
approximately $100 million in 2001, $300 million in 2002 and $475 million in
2003. In addition, the Company expects to achieve increased operating companies
income from revenue synergies of approximately $25 million in 2002, increasing
to approximately $50 million in 2003.
During the first quarter of 2000, Kraft Foods North America purchased the
outstanding common stock of Balance Bar Co., a maker of energy and nutrition
snack products. In a separate transaction, Kraft Foods North America also
acquired Boca Burger, Inc., a privately-held manufacturer and marketer of
soy-based meat alternatives. During 2000, Kraft Foods International sold a
French confectionery business and Kraft Foods North America sold two small food
businesses. During 1999, Kraft Foods International sold three international food
businesses. During 1998, Kraft Foods International sold four international food
businesses.
The impact of these acquisitions and divestitures, excluding Nabisco, has
not had a material effect on the Company's results of operations.
North America
Kraft Foods North America's principal products are snacks, beverages,
cheese, grocery and convenient meals which include:
SNACKS: Oreo, Chips Ahoy!, Newtons, Nilla, Nutter Butter,
Stella D'oro and SnackWell's cookies; Ritz, Premium, Triscuit,
Wheat Thins, Cheese Nips, Better Cheddars, Nabisco Honey Maid
Grahams and Teddy Grahams crackers; Planters nuts and salty
snacks; Life Savers, Creme Savers, Altoids and Gummi Savers sugar
confectionery products; Terry's and Toblerone chocolate
confectionery products; Handi-Snacks two-compartment snacks;
Balance Bar nutrition and energy snacks; and Jell-O ready-to-eat
refrigerated desserts.
BEVERAGES: Maxwell House, General Foods International Coffees,
Starbucks, Yuban and Gevalia coffees; Capri Sun, Tang and Crystal
Light aseptic juice drinks; and Kool-Aid, Tang, Capri Sun, Crystal
Light and Country Time powdered soft drinks.
CHEESE: Kraft and Cracker Barrel natural cheeses; Philadelphia
cream cheese; Kraft and Velveeta process cheeses; Kraft grated
cheeses; Cheez Whiz process cheese sauce; Easy Cheese aerosol
cheese spread; and Knudsen and Breakstone's cottage cheese and
sour cream.
GROCERY: Jell-O dry packaged desserts; Cool Whip frozen
whipped topping; Post ready-to-eat cereals; Cream of Wheat and
Cream of Rice hot cereals; Kraft and Miracle Whip spoonable
dressings; Kraft salad dressings; A-1 steak sauce; Kraft and
Bull's-Eye barbecue sauces; Grey Poupon premium mustards; and
Shake 'N Bake coatings.
CONVENIENT MEALS: DiGiorno, Tombstone, Jack's, California
Pizza Kitchen and Delissio frozen pizzas; Kraft macaroni & cheese
dinners; Taco Bell and Stove Top Oven Classics meal kits;
Lunchables lunch combinations; Oscar Mayer and Louis Rich cold
cuts, hot dogs and bacon; Boca Burger soy-based meat alternatives;
Stove Top stuffing mix; and Minute rice.
8
International
Kraft Foods International's principal products are snacks, beverages,
cheese, grocery and convenient meals which include:
SNACKS: Milka, Suchard, Cote d'Or, Marabou, Toblerone, Freia,
Terry's, Daim, Figaro, Korona, Poiana, Prince Polo, Siesta, Lacta
and Gallito chocolate confectionery products; Estrella, Maarud and
Lyux salty snacks; Oreo, Chips Ahoy!, Ritz, Terrabusi, Canale,
Club Social, Cerealitas, Trakinas and Lucky biscuits; and Sugus
and Artic sugar confectionery products.
BEVERAGES: Jacobs, Gevalia, Carte Noire, Jacques Vabre, Kaffee
HAG, Grand' Mere, Kenco, Saimaza, Maxwell House and Dadak coffees;
Suchard Express, O'Boy, Milka and Kaba chocolate drinks; and Tang,
Clight, Kool-Aid, Royal, Verao, Fresh, Frisco, Q-Refres-Ko and
Ki-Suco powdered soft drinks.
CHEESE: Philadelphia cream cheese; Kraft Sottilette, Dairylea
and Eden process cheeses; El Caserio and Invernizzi cheeses; and
Cheese Whiz process cheese sauce.
GROCERY: Kraft pourable and spoonable salad dressings; Miracel
Whip spoonable dressing; Royal dry packaged desserts and baking
powder; Kraft and ETA peanut butter; and Vegemite yeast spread.
CONVENIENT MEALS: Lunchables lunch combinations; Kraft and
Miracoli pasta dinners and sauces; and Simmenthal meats in Italy.
Distribution, Competition and Raw Materials
Kraft Foods North America's products are generally sold to supermarket
chains, wholesalers, club stores, mass merchandisers, distributors, convenience
stores, gasoline stations and other retail food outlets. In general, the retail
trade for food products is consolidating. Food products are distributed through
distribution centers, satellite warehouses, company-operated and public
cold-storage facilities, depots and other facilities. Most distribution in North
America is in the form of warehouse delivery, but snacks and frozen pizza are
distributed through two direct-store-delivery systems. Selling efforts are
supported by national and regional advertising on television and radio and in
magazines and newspapers, as well as by sales promotions, product displays,
trade incentives, informative material offered to customers and other
promotional activities. Subsidiaries and affiliates of Kraft Foods International
sell their food products primarily in the same manner and also engage the
services of independent sales offices and agents.
Kraft Foods North America, Kraft Foods International and their subsidiaries
are subject to highly competitive conditions in all aspects of their business.
Competitors include large national and international companies and numerous
local and regional companies. Certain of their competitors may have different
profit objectives and some international competitors may be less susceptible to
currency exchange rates. In addition, certain of their international competitors
benefit from government subsidies. Their food products also compete with generic
products and private-label products of food retailers, wholesalers and
cooperatives. Kraft Foods North America, Kraft Foods International and their
subsidiaries compete primarily on the basis of product quality, brand
recognition, brand loyalty, service, marketing, advertising and price.
Substantial advertising and promotional expenditures are required to maintain or
improve a brand's market position or to introduce a new product.
Kraft Foods North America, Kraft Foods International and their subsidiaries
are major purchasers of milk, cheese, nuts, green coffee beans, cocoa, corn
products, wheat, rice, poultry, beef, vegetable oil, and sugar and other
sweeteners. They also use significant quantities of glass, plastic and cardboard
to package their products. They continuously monitor worldwide supply and cost
trends of these commodities to enable them to take appropriate action to obtain
ingredients and packaging needed for production.
Kraft Foods North America, Kraft Foods International and their subsidiaries
purchase a substantial portion of their milk requirements from independent
agricultural cooperatives and individual producers,
9
and a substantial portion of their cheese requirements from independent sources.
The prices for milk and other dairy product purchases are substantially
influenced by government programs, as well as by market supply and demand.
During 2000, dairy commodity costs in the United States were below the levels
seen in 1999.
The most significant cost item in coffee products is green coffee beans,
which are purchased on world markets. Green coffee bean prices are affected by
the quality and availability of supply, trade agreements among producing and
consuming nations, the unilateral policies of the producing nations, changes in
the value of the United States dollar in relation to certain other currencies
and consumer demand for coffee products. Coffee bean prices during 2000 were
lower than 1999.
A significant cost item in chocolate confectionery products is cocoa, which
is purchased on world markets, and the price of which is affected by the quality
and availability of supply and changes in the value of the British pound
sterling and the United States dollar relative to certain other currencies.
Cocoa bean prices during 2000 were lower than 1999.
The prices paid for raw materials and agricultural materials used in food
products generally reflect external factors such as weather conditions,
commodity market fluctuations, currency fluctuations and the effects of
governmental agricultural programs. Although the prices of the principal raw
materials can be expected to fluctuate as a result of these factors, Kraft
believes such raw materials to be in adequate supply and generally available
from numerous sources. However, Kraft and its subsidiaries use hedging
techniques to minimize the impact of price fluctuations in their principal raw
materials. They do not fully hedge against changes in commodity prices and these
strategies may not protect Kraft or its subsidiaries from sharp increases in
specific raw material costs, which have been experienced in the past.
Regulation
All of Kraft Foods North America's United States food products and packaging
materials are subject to regulations administered by the FDA or, with respect to
products containing meat and poultry, the USDA. Among other things, these
agencies enforce statutory prohibitions against misbranded and adulterated
foods, establish safety standards for food processing, establish ingredients and
manufacturing procedures for certain foods, establish standards of identity for
certain foods, determine the safety of food additives and establish labeling
standards and nutrition labeling requirements for food products.
In addition, various states regulate the business of Kraft Foods North
America's operating units by licensing dairy plants, enforcing federal and state
standards of identity for selected food products, grading food products,
inspecting plants, regulating certain trade practices in connection with the
sale of dairy products and imposing their own labeling requirements on food
products.
Many of the food commodities on which Kraft Foods North America's United
States businesses rely are subject to governmental agricultural programs. These
programs have substantial effects on prices and supplies and are subject to
Congressional and administrative review.
Almost all of the activities of the Company's food operations outside of the
United States are subject to local and national regulations similar to those
applicable to Kraft Foods North America's United States businesses and, in some
cases, international regulatory provisions, such as those of the European Union
relating to labeling, packaging, food content, pricing, marketing and
advertising, and related areas.
The European Union and certain individual countries require that food
products containing genetically modified organisms or classes of ingredients
derived from them be labeled accordingly. Other countries may adopt similar
regulations. The FDA has concluded that there is no basis for similar mandatory
labeling under current United States law.
10
BEER
Products
Miller's brands include Miller Lite, Miller Genuine Draft, Miller Genuine
Draft Light, Icehouse, Foster's, the Miller High Life franchise, Leinenkugel's,
Olde English 800 and Mickey's in the premium/near premium segment; Milwaukee's
Best, Red Dog, Hamm's and Magnum in the below-premium segment; and Sharp's
non-alcoholic brew. In December 2000, Miller sold its rights to Molson
trademarks in the United States. During 1999, Miller purchased four trademarks
from the Pabst Brewing Company ("Pabst") and the Stroh Brewery Company
("Stroh"). Miller began brewing and shipping the newly acquired brands, Henry
Weinhard's, Olde English 800, Mickey's and Hamm's during the second quarter of
1999. Miller's license agreement for the rights to brew and sell Lowenbrau in
the United States expired on September 30, 1999.
Miller's total shipment volume (which excludes international shipments of
Miller products by other brewers under license and contract-brewing
arrangements) of 42.5 million barrels for 2000 decreased 3.7% from 1999. Export
shipments decreased 0.4%, with a planned, corresponding increase in licensee
volume. Domestic shipments of 41.6 million barrels decreased 3.8% from 1999 due
to higher pricing, discontinued brands (primarily Molson and Lowenbrau) and
Miller's continuing efforts to reduce distributor inventories. Miller's
estimated market share of the United States malt beverage industry (based on
shipments) was 20.7% in 2000, down from 21.6% in 1999. Wholesalers' sales of
Miller's products to retailers in 2000 decreased 3.3% from 1999. Domestic
shipments of premium/near premium-priced brands in 2000 increased 1.0 percentage
point to 79.2% of total domestic shipments due primarily to the impact of the
brands acquired during 1999.
The following table sets forth, based on shipments (including imports and
exports), the United States industry's sales of beer and brewed non-alcoholic
beverages, as estimated by Miller; Miller's unit sales; and Miller's estimated
share of industry sales:
YEARS ENDED MILLER'S
DECEMBER 31 INDUSTRY MILLER SHARE OF INDUSTRY
----------- -------- ------ -----------------
(IN THOUSANDS (%)
OF BARRELS)
2000.................................... 205,628 42,532 20.7
1999.................................... 204,593 44,175 21.6
1998.................................... 201,717 42,674 21.2
During 1999, Miller acquired a brewery in Tumwater, Washington as part of
the purchase of brands from Pabst and Stroh. In addition, Miller recorded a
pre-tax charge of $29 million to write down three other breweries to their
estimated fair values. During 2000, one of the breweries was closed, while the
remaining two breweries were sold.
Distribution, Competition and Raw Materials
Beer is distributed primarily through independent wholesalers. The United
States malt beverage industry is highly competitive, with the principal methods
of competition being product quality, price, distribution, marketing and
advertising. Miller engages in a wide variety of advertising and sales promotion
activities. Barley malt, hops, corn syrup and water represent the principal
ingredients used in manufacturing Miller's products, and are generally available
in the market. The production process, which includes fermentation and aging
periods, is conducted throughout the year. Containers (bottles, cans and kegs)
for beer are purchased from various suppliers.
Regulation
The malt beverage industry is highly regulated at both the state and federal
levels. The Alcoholic Beverage Labeling Act of 1988 requires all alcoholic
beverages manufactured for sale in the United States to include the following
statement on containers: "GOVERNMENT WARNING: (1) According to the Surgeon
General, women should not drink alcoholic beverages during pregnancy because of
the risk of birth defects. (2) Consumption of alcoholic beverages impairs your
ability to drive a car or
11
operate machinery, and may cause health problems." The statute empowers the
Bureau of Alcohol, Tobacco and Firearms to regulate the size and format of the
warning.
The federal excise tax is 32 cents per package of six 12-ounce containers.
Excise taxes, sales taxes and other taxes affecting beer are also levied by
various states, counties and municipalities. In the opinion of Miller, increases
in excise taxes have had, and could continue to have, an adverse effect on
shipments.
Advertising of alcoholic beverages, including beer, has come under increased
scrutiny by governmental agencies and others. In 1999, the Federal Trade
Commission issued a report to Congress entitled Self-Regulation in the Alcohol
Industry: A Review of Industry Efforts to Avoid Promoting Alcohol to Underage
Consumers. The report discusses the benefits of self-regulation in general,
describes key provisions of the alcohol industry's voluntary advertising codes,
considers those areas where self-regulation is successful and where it falls
short, and recommends steps the industry could take to strengthen member
compliance with the codes.
FINANCIAL SERVICES
Philip Morris Capital Corporation ("PMCC") invests in leveraged and direct
finance leases, other tax-oriented financing transactions and third-party
financings. Total assets of PMCC were $8.4 billion at December 31, 2000, up from
$7.7 billion at December 31, 1999, reflecting an increase in net finance assets.
OTHER MATTERS
Customers
None of the Company's business segments is dependent upon a single customer
or a few customers, the loss of which would have a material adverse effect on
the Company's results of operations.
Employees
At December 31, 2000, the Company employed approximately 178,000 people
worldwide.
Trademarks
Trademarks are of material importance to all three of the Company's consumer
products businesses and are protected by registration or otherwise in the United
States and most other markets where the related products are sold.
Environmental Regulation
The Company and its subsidiaries are subject to various federal, state and
local laws and regulations concerning the discharge of materials into the
environment, or otherwise related to environmental protection, including the
Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act
and the Comprehensive Environmental Response, Compensation and Liability Act
(commonly known as "Superfund"), which imposes joint and several liability on
each responsible party. In 2000, subsidiaries (or former subsidiaries) of the
Company were involved in approximately 110 active matters subjecting them to
potential remediation costs under Superfund or otherwise. The Company and its
subsidiaries expect to continue to make capital and other expenditures in
connection with environmental laws and regulations. Although it is not possible
to predict precise levels of environmental-related expenditures, compliance with
such laws and regulations, including the payment of any remediation costs and
the making of such expenditures, has not had, and is not expected to have, a
material adverse effect on the Company's results of operations, capital
expenditures, financial position, earnings and competitive position.
12
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders, including this Annual Report on Form 10-K. One can identify these
forward-looking statements by use of words such as "strategy," "expects,"
"plans," "believes," "will," "estimates," "intends," "projects," "goals,"
"targets" and other words of similar meaning. One can also identify them by the
fact that they do not relate strictly to historical or current facts. In
connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby identifying important
factors that could cause actual results and outcomes to differ materially from
those contained in any forward-looking statement. Any such statement is
qualified by reference to the following cautionary statements.
The tobacco industry continues to be subject to health concerns relating to
the use of tobacco products and exposure to ETS; legislation, including actual
and potential excise tax increases; increasing marketing and regulatory
restrictions; governmental regulation; privately imposed smoking restrictions;
governmental and grand jury investigations; litigation, including risks
associated with adverse jury and judicial determinations, courts reaching
conclusions at variance with the Company's understanding of applicable law,
bonding requirements and the absence of adequate appellate remedies to get
timely relief from any of the foregoing; and the effects of price increases
related to concluded tobacco litigation settlements and excise tax increases on
consumption rates. Each of the Company's consumer products subsidiaries is
subject to intense competition, changes in consumer preferences, and local
economic conditions. Their results are dependent upon their continued ability to
promote brands successfully; to anticipate and respond to new consumer trends;
to develop new products and markets; to broaden brand portfolios; to improve
productivity; and to respond to changing prices for their raw materials. In
addition, Philip Morris International, Kraft Foods International and Kraft Foods
North America are subject to the effects of foreign economies and the related
shifts in consumer preferences, and currency movements. Developments in any of
these areas, which are more fully described elsewhere in Part I hereof and in
the Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 20 to 34 of the 2000 Annual Report, and which descriptions
are incorporated into this section by reference, could cause the Company's
results to differ materially from results that have been or may be projected.
The Company cautions that the above list of important factors is not exclusive.
The Company does not undertake to update any forward-looking statement that may
be made from time to time by it or on its behalf.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The amounts of operating revenues and long-lived assets attributable to each
of the Company's geographic segments and the amount of export sales from the
United States for each of the last three fiscal years are set forth in Note 11
to the Company's consolidated financial statements, incorporated herein by
reference to the 2000 Annual Report.
Subsidiaries of the Company export tobacco and tobacco-related products,
coffee products, grocery products, cheese, processed meats and beer. In 2000,
the value of all exports from the United States by these subsidiaries amounted
to approximately $4 billion.
ITEM 2. DESCRIPTION OF PROPERTY.
TOBACCO PRODUCTS
PM Inc. owns and operates six tobacco manufacturing and processing
facilities -- four in the Richmond, Virginia area, one in Louisville, Kentucky
and one in Cabarrus County, North Carolina. Subsidiaries and affiliates of
Philip Morris International own, lease or have an interest in 57 cigarette or
component manufacturing facilities in 31 countries outside the United States,
including cigarette manufacturing facilities in Bergen Op Zoom, the Netherlands
and in Berlin, Germany.
13
FOOD PRODUCTS
Kraft has 228 manufacturing and processing facilities, 81 of which are
located in the United States. Outside the United States, Kraft has 147
manufacturing and processing facilities located in 46 countries. Kraft owns 213
and leases 15 of these facilities. In addition, Kraft has 550 distribution
centers and depots, of which 179 are located outside the United States. Kraft
owns 114 distribution centers and depots, with the remainder being leased.
Kraft anticipates closing or selling a number of Nabisco facilities that do
not align strategically with Kraft's business. In addition, the integration of
Nabisco's operations may result in the closure or sale of a number of Kraft
facilities.
BEER
Miller owns and operates nine breweries, located in Milwaukee, Wisconsin
(2); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia; Irwindale,
California; Trenton, Ohio; Chippewa Falls, Wisconsin; and Tumwater, Washington.
Miller also owns the Celis Brewery in Austin, Texas, where Miller ceased
production of Celis brands as of December 31, 2000. Miller also owns a
hops-processing facility in Wisconsin and owns or leases warehouses in several
locations.
During 1999, Miller recorded a pre-tax charge of $29 million to write-down
the book value of three brewing facilities to their estimated fair values.
During 2000, one of the facilities was closed while the remaining two facilities
were sold.
GENERAL
The plants and properties owned and operated by the Company's subsidiaries
are maintained in good condition and are believed to be suitable and adequate
for present needs.
ITEM 3. LEGAL PROCEEDINGS.
Legal proceedings covering a wide range of matters are pending or threatened
in various United States and foreign jurisdictions against the Company, its
subsidiaries and affiliates, including PM Inc., PMI and their respective
indemnitees. Various types of claims are raised in these proceedings, including
product liability, consumer protection, antitrust, tax, patent infringement,
employment matters, claims for contribution and claims of competitors and
distributors.
OVERVIEW OF TOBACCO-RELATED LITIGATION
Types and Number of Cases
Pending claims related to tobacco products generally fall within the
following categories: (i) smoking and health cases alleging personal injury
brought on behalf of individual plaintiffs, (ii) smoking and health cases
primarily alleging personal injury and purporting to be brought on behalf of a
class of individual plaintiffs, (iii) health care cost recovery cases brought by
governmental (both domestic and foreign) and non-governmental plaintiffs seeking
reimbursement for health care expenditures allegedly caused by cigarette smoking
and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other
tobacco-related litigation includes suits by former asbestos manufacturers
seeking contribution or reimbursement for amounts expended in connection with
the defense and payment of asbestos claims that were allegedly caused in whole
or in part by cigarette smoking and suits by foreign governments seeking to
recover damages for taxes lost as a result of the allegedly illegal importation
of cigarettes into their jurisdictions. Damages claimed in some of the smoking
and health class actions, health care cost recovery cases and other
tobacco-related litigation range into the billions of dollars. In July 2000, a
jury in a Florida smoking and health class action returned a punitive damages
award of approximately $74 billion against PM Inc. (See discussion of the Engle
case below.) Plaintiffs' theories of recovery and the defenses raised in the
smoking and health and health care cost recovery cases are discussed below.
Exhibit 99.1 hereto lists the smoking and health class actions, health care cost
14
recovery and certain other actions pending as of February 15, 2001, and
discusses certain developments in such cases since November 1, 2000.
As of February 15, 2001, there were approximately 1,500 smoking and health
cases filed and served on behalf of individual plaintiffs in the United States
against PM Inc. and, in some instances, the Company, compared with approximately
380 such cases on December 31, 1999, and approximately 510 such cases on
December 31, 1998. Approximately 1,200 of these cases are pending before a
single West Virginia state court in a consolidated proceeding. An estimated 17
of the individual cases involve allegations of various personal injuries
allegedly related to exposure to ETS. In addition, approximately 3,065
additional individual cases are pending in Florida by current and former flight
attendants claiming personal injuries allegedly related to ETS. The flight
attendants allege that they are members of an ETS smoking and health class
action which was settled in 1997. The terms of the court-approved settlement in
that case allow class members to file individual lawsuits seeking compensatory
damages, but prohibit them from seeking punitive damages.
As of February 15, 2001, there were an estimated 34 smoking and health
putative class actions pending in the United States against PM Inc. and, in some
cases, the Company (including eight that involve allegations of various personal
injuries related to exposure to ETS), compared with approximately 50 such cases
on December 31, 1999, and approximately 60 such cases on December 31, 1998. Some
of these actions purport to constitute statewide class actions and were filed
after May 1996, when the United States Court of Appeals for the Fifth Circuit,
in the Castano case, reversed a federal district court's certification of a
purported nationwide class action on behalf of persons who were allegedly
"addicted" to tobacco products.
As of February 15, 2001, there were an estimated 53 health care cost
recovery actions pending in the United States (excluding the cases covered by
the 1998 Master Settlement Agreement discussed below), compared with
approximately 60 such cases pending on December 31, 1999, and 140 such cases on
December 31, 1998.
There are also a number of tobacco-related actions pending outside the
United States against PMI and its affiliates and subsidiaries, including an
estimated 67 smoking and health cases brought on behalf of individuals
(Argentina (47), Brazil (8), Canada (1), Germany (3), Hong Kong (1), Ireland
(1), Israel (1), Italy (2), Japan (1), the Philippines (1), and Spain (1)),
compared with approximately 55 such cases on December 31, 1999 and 27 such cases
on December 31, 1998. In addition, there are 11 smoking and health putative
class actions pending outside the United States (Brazil (2), Canada (4), Israel
(2), and Spain (3)), compared with 10 such cases on December 31, 1999. In
addition, health care cost recovery actions have been brought in Israel, the
Marshall Islands, the Province of British Columbia, Canada and France (by a
local agency of the French social security health insurance system) and, in the
United States, by Bolivia, Ecuador, Guatemala (dismissed, as discussed below),
Honduras, the Kyrgyz Republic, Nicaragua (dismissed, as discussed below), the
Province of Ontario, Canada (dismissed, as discussed below), Panama, the Russian
Federation, Tajikistan, Thailand (voluntarily dismissed), Ukraine (dismissed, as
discussed below), Venezuela, and seven Brazilian states.
Federal Government's Lawsuit
In 1999, the United States government filed a lawsuit in the United States
District Court for the District of Columbia against various cigarette
manufacturers and others, including the Company and PM Inc., asserting claims
under three federal statutes, the Medical Care Recovery Act ("MCRA"), the
Medicare Secondary Payer ("MSP") provisions of the Social Security Act and the
Racketeer Influenced and Corrupt Organizations Act ("RICO"). The lawsuit seeks
to recover an unspecified amount of health care costs for tobacco-related
illnesses allegedly caused by defendants' fraudulent and tortious conduct and
paid for by the government under various federal health care programs, including
Medicare, military and veterans' health benefits programs, and the Federal
Employees Health Benefits Program. The complaint alleges that such costs total
more than $20 billion annually. It also seeks various types of equitable and
declaratory relief, including disgorgement, an injunction prohibiting certain
actions by the defendants, and a declaration that the defendants are liable for
the federal government's future costs of providing health care resulting from
defendants' alleged past tortious and wrongful conduct. The Company and PM Inc.
moved to dismiss this lawsuit on numerous grounds,
15
including that the statutes invoked by the government do not provide a basis for
the relief sought. In September 2000, the trial court dismissed the government's
MCRA and MSP claims, but permitted discovery to proceed on the government's
claims for equitable relief under RICO. In October 2000, the government moved
for reconsideration of the trial court's order to the extent that it dismissed
the MCRA claims for health care costs paid pursuant to government health benefit
programs other than Medicare and the Federal Employees Health Benefits Act. The
motion remains pending. In February 2001, the government filed an amended
complaint attempting to replead the MSP claim. In February 2001, two Native
American tribes moved to intervene and file a class action complaint on behalf
of federally recognized Native American tribes seeking to recover costs spent on
providing health care to tribal members. The motion remains pending. Trial is
scheduled for July 2003, although trial dates are subject to change. The Company
and PM Inc. believe that they have a number of valid defenses to the lawsuit and
will continue to vigorously defend it.
Recent Industry Trial Results
There have been several jury verdicts in tobacco-related litigation during
the past two years. In July 2000, the jury in the Engle smoking and health class
action in Florida returned a verdict assessing punitive damages totaling
approximately $145 billion against all defendants in the case, including
approximately $74 billion against PM Inc. (See "Engle Trial," below.)
In March 2001, a Texas jury returned a verdict in favor of defendant in an
individual smoking and health case against another cigarette manufacturer. In
February 2001, a South Carolina jury returned a verdict in favor of defendant in
an individual smoking and health case against another cigarette manufacturer,
and plaintiffs have appealed. In January 2001, a mistrial was declared in a case
in New York in which an asbestos manufacturers' personal injury settlement trust
sought contribution or reimbursement from cigarette manufacturers, including PM
Inc., for amounts expended in connection with the defense and payment of
asbestos claims that were allegedly caused in whole or in part by cigarette
smoking. In January 2001, a New York jury returned a verdict in favor of
defendants, including PM Inc., in an individual smoking and health case.
In October 2000, a Florida jury awarded plaintiff in an individual smoking
and health case $200,000 in compensatory damages against another cigarette
manufacturer. In December 2000, the trial court vacated the jury's verdict and
granted defendant's motion for a new trial; plaintiff and defendant have
appealed. In July 2000, a Mississippi jury returned a verdict in favor of
defendant in an individual smoking and health case. Plaintiffs' post-trial
motions challenging the verdict are currently pending. In June 2000, a New York
jury returned a verdict in favor of all defendants, including PM Inc., in
another individual smoking and health case, and plaintiffs have appealed the
verdict. In March 2000, a California jury awarded a former smoker with lung
cancer $1.72 million in compensatory damages against PM Inc. and another
cigarette manufacturer, and $10 million in punitive damages against PM Inc. as
well as an additional $10 million against the other defendant. PM Inc. is
appealing the verdict and damages award.
In July 1999, a Louisiana jury returned a verdict in favor of defendants in
an individual smoking and health case against another cigarette manufacturer. In
June 1999, a Mississippi jury returned a verdict in favor of defendants,
including PM Inc., in an action brought on behalf of an individual who died
allegedly as a result of exposure to ETS. In May 1999, a Missouri jury returned
a verdict in favor of defendant in an individual smoking and health case against
another cigarette manufacturer. Also in May 1999, a Tennessee jury returned a
verdict in favor of defendants, including PM Inc., in two of three individual
smoking and health cases consolidated for trial. In the third case (not
involving PM Inc.), the jury found liability against defendants and apportioned
fault equally between plaintiff and defendants. Under Tennessee's system of
modified comparative fault, because the jury found plaintiff's fault equal to
that of defendants', recovery was not permitted.
In March 1999, an Oregon jury awarded the estate of a deceased smoker
$800,000 in actual damages, $21,500 in medical expenses and $79.5 million in
punitive damages against PM Inc. In February 1999, a California jury awarded a
former smoker $1.5 million in compensatory damages and $50 million in punitive
damages against PM Inc. The punitive damages awards in the Oregon and
16
California actions have been reduced to $32 million and $25 million,
respectively. PM Inc. is appealing the verdicts and the damages awards in these
cases.
In March 1999, a jury returned a verdict in favor of defendants, including
PM Inc., in a union health care cost recovery action brought on behalf of
approximately 114 employer-employee trust funds in Ohio.
In December 1999, a French court, in an action brought on behalf of a
deceased smoker, found that another cigarette manufacturer had a duty to warn
him about risks associated with smoking prior to 1976, when the French
government required warning labels on cigarette packs, and failed to do so. The
court did not determine causation or liability, which shall be considered in
future proceedings. Neither the Company nor its affiliates are parties to this
action.
Engle Trial
Verdicts have been returned and judgment has been entered against PM Inc.
and other defendants in the first two phases of this three-phase smoking and
health class action trial in Florida. The class consists of all Florida
residents and citizens, and their survivors, "who have suffered, presently
suffer or have died from diseases and medical conditions caused by their
addiction to cigarettes that contain nicotine."
In July 1999, the jury returned a verdict against defendants in phase one of
the trial concerning certain issues determined by the trial court to be "common"
to the causes of action of the plaintiff class. Among other things, the jury
found that smoking cigarettes causes 20 diseases or medical conditions, that
cigarettes are addictive or dependence-producing, defective and unreasonably
dangerous, that defendants made materially false statements with the intention
of misleading smokers, that defendants concealed or omitted material information
concerning the health effects and/or the addictive nature of smoking cigarettes,
and that defendants were negligent and engaged in extreme and outrageous conduct
or acted with reckless disregard with the intent to inflict emotional distress.
During phase two of the trial, the claims of three of the named plaintiffs
were adjudicated in a consolidated trial before the same jury that returned the
verdict in phase one. In April 2000, the jury determined liability against the
defendants and awarded $12.7 million in compensatory damages to the three named
plaintiffs.
In July 2000, the same jury returned a verdict assessing punitive damages on
a lump sum basis for the entire class totaling approximately $145 billion
against the various defendants in the case, including approximately $74 billion
severally against PM Inc. PM Inc. believes that the punitive damages award was
determined improperly and that it should ultimately be set aside on any one of
numerous grounds. Included among these grounds are the following: under
applicable law, (i) defendants are entitled to have liability and damages for
each plaintiff tried by the same jury, an impossibility due to the jury's
dismissal; (ii) punitive damages cannot be assessed before the jury determines
entitlement to, and the amount of, compensatory damages for all class members;
(iii) punitive damages must bear a reasonable relationship to compensatory
damages, a determination that cannot be made before compensatory damages are
assessed for all class members; and (iv) punitive damages can "punish" but
cannot "destroy" the defendant. In March 2000, at the request of the Florida
legislature, the Attorney General of Florida issued an advisory legal opinion
stating that "Florida law is clear that compensatory damages must be determined
prior to an award of punitive damages" in cases such as Engle. As noted above,
compensatory damages for all but three members of the class have not been
determined.
Following the verdict in the second phase of the trial, the jury was
dismissed, notwithstanding that liability and compensatory damages for all but
three class members have not yet been determined. According to the trial plan,
phase three of the trial will address other class members' claims, including
issues of specific causation, reliance, affirmative defenses and other
individual-specific issues regarding entitlement to damages, in individual
trials before separate juries.
It is unclear how the trial plan will be further implemented. The trial plan
provides that the punitive damages award should be standard as to each class
member and acknowledges that the actual size of the class will not be known
until the last class member's case has withstood appeal, i.e., the
17
punitive damages amount would be divided equally among those plaintiffs who, in
addition to the successful phase two plaintiffs, are ultimately successful in
phase three of the trial and in any appeal.
Following the jury's punitive damages verdict in July 2000, defendants
removed the case to federal district court following the intervention
application of a union health fund that raised federal issues in the case. In
November 2000, the federal district court remanded the case to state court on
the grounds that the removal was premature.
The trial judge in the state court, without a hearing, then immediately
denied the defendants' post-trial motions and entered judgment on the
compensatory and punitive damages awarded by the jury. PM Inc. and the Company
believe that the entry of judgment by the trial court is unconstitutional and
violates Florida law. PM Inc. has filed an appeal with respect to the entry of
judgment, class certification and numerous other reversible errors that have
occurred during the trial. PM Inc. has also posted a $100 million bond to stay
execution of the judgment with respect to the $74 billion in punitive damages
that has been awarded against it. The bond was posted pursuant to legislation
that was enacted in Florida in May 2000 that limits the size of the bond that
must be posted in order to stay execution of a judgment for punitive damages in
a certified class action to no more than $100 million, regardless of the amount
of punitive damages ("bond cap legislation"). Plaintiffs have indicated that
they believe the bond cap legislation is unconstitutional and may seek to
challenge the $100 million bond. If the bond were found to be invalid, it would
be commercially impossible for PM Inc. to post a bond in the full amount of the
judgment and, absent appellate relief, PM Inc. would not be able to stay any
attempted execution of the judgment in Florida. PM Inc. and the Company will
take all appropriate steps to seek to prevent this worst-case scenario from
occurring and believe these efforts should be successful.
In other developments, in August 1999, the trial judge denied a motion filed
by PM Inc. and other defendants to disqualify the judge. The motion asserted,
among other things, that the trial judge was required to disqualify himself
because he is a former smoker who has a serious medical condition of a type that
the plaintiffs claim, and the jury has found, is caused by smoking, making him
financially interested in the result of the case and, under plaintiffs' theory
of the case, a member of the plaintiff class. The Third District Court of
Appeals denied defendants' petition to disqualify the trial judge. In January
2000, defendants filed a petition for a writ of certiorari to the United States
Supreme Court requesting that it review the issue of the trial judge's
disqualification, and in May 2000 the writ of certiorari was denied.
PM Inc. and the Company remain of the view that the Engle case should not
have been certified as a class action. The certification is inconsistent with
the overwhelming majority of federal and state court decisions that have held
that mass smoking and health claims are inappropriate for class treatment. As
indicated above, PM Inc. has filed an appeal challenging the class certification
and the compensatory and punitive damages awards, as well as numerous other
reversible errors that it believes occurred during the trial to date.
Pending and Upcoming Trials
On March 19, 2001, trial commenced in New York in a health care cost
recovery action in which PM Inc. is a defendant, and trial commenced in Florida
in an individual case brought by a flight attendant claiming damages from ETS in
which PM Inc. is a defendant. Also, on March 19, 2001, trial commenced in
California in an individual smoking and health case in which PM Inc. is a
defendant. In early April, trial is scheduled to begin in New Jersey in another
individual smoking and health case in which PM Inc. is a defendant.
In January 2001, the court granted defendants' motion for a mistrial in a
smoking and health class action in West Virginia in which PM Inc. is a
defendant, and in which plaintiffs seek creation of a trust fund to pay the
costs of monitoring the medical conditions of members of the purported class to
detect possible smoking-related illnesses. In March 2001, the court denied the
defendants' motion to decertify the class, and scheduled retrial of the case
beginning in September 2001.
As set forth in Exhibit 99.3 hereto, additional cases against PM Inc. and,
in some instances, the Company, are scheduled for trial through the end of 2001,
including two health care cost recovery actions; two asbestos contribution
cases; two purported smoking and health class actions and a
18
purported Lights/Ultra Lights class action (discussed below); and an estimated
12 individual smoking and health cases, including a consolidated trial of
approximately 1,200 individual smoking and health cases scheduled to begin in
June 2001 in West Virginia. In addition, to date, approximately 25 cases
involving flight attendants' claims for damages from ETS are currently scheduled
for trial during 2001. Cases against other tobacco companies are also scheduled
for trial through the end of 2001. Trial dates, however, are subject to change.
Litigation Settlements
In November 1998, PM Inc. and certain other United States tobacco product
manufacturers entered into the Master Settlement Agreement (the "MSA") with 46
states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the
United States Virgin Islands, American Samoa and the Northern Marianas to settle
asserted and unasserted health care cost recovery and other claims. PM Inc. and
certain other United States tobacco product manufacturers had previously settled
similar claims brought by Mississippi, Florida, Texas and Minnesota (together
with the MSA, the "State Settlement Agreements") and an ETS smoking and health
class action brought on behalf of airline flight attendants. The State
Settlement Agreements and certain ancillary agreements are filed as exhibits to
various of the Company's reports filed with the Securities and Exchange
Commission, and such agreements and the ETS settlement are discussed in detail
therein. As set forth in Exhibit 99.2, to date, the MSA has received final
judicial approval in 51 of the 52 settling jurisdictions.
The State Settlement Agreements require that the domestic tobacco industry
make substantial annual payments in the following amounts (excluding future
annual payments contemplated by the agreement with tobacco growers discussed
below), subject to adjustment for several factors, including inflation, market
share and industry volume: 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9
billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4
billion each year. In addition, the domestic tobacco industry is required to pay
settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million,
as well as additional amounts as follows: 2001 through 2003, $250 million each
year. These payment obligations are the several and not joint obligations of
each settling defendant. PM Inc.'s portion of ongoing adjusted payments and
legal fees is based on its share of domestic cigarette shipments in the year
preceding that in which the payment is due. Accordingly, PM Inc. records its
portions of ongoing settlement payments as part of cost of sales as product is
shipped.
The State Settlement Agreements also include provisions relating to
advertising and marketing restrictions, public disclosure of certain industry
documents, limitations on challenges to certain tobacco control and underage use
laws, restrictions on lobbying activities and other provisions. See Item 1 (c).
Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and
Smoking -- State Settlement Agreements.
As part of the MSA, the settling defendants committed to work cooperatively
with the tobacco-growing states to address concerns about the potential adverse
economic impact of the MSA on tobacco growers and quota-holders. To that end,
four of the major domestic tobacco product manufacturers, including PM Inc., and
the grower states, have established a trust fund to provide aid to tobacco
growers and quota-holders. The trust will be funded by these four manufacturers
over 12 years with payments, prior to application of various adjustments,
scheduled to total $5.15 billion. Future industry payments (in 2001, $400
million; 2002 through 2008, $500 million each year; 2009 and 2010, $295 million
each year) are subject to adjustment for several factors, including inflation,
United States cigarette volume and certain other contingent events, and, in
general, are to be allocated based on each manufacturer's relative market share.
PM Inc. records its portion of these payments as part of cost of sales as
product is shipped.
The State Settlement Agreements have materially adversely affected the
volumes of PM Inc. and the Company; the Company believes that they may
materially adversely affect the business, volumes, results of operations, cash
flows or financial position of PM Inc. and the Company in future periods. The
degree of the adverse impact will depend, among other things, on the rates of
decline in United States cigarette sales in the premium and discount segments,
PM Inc.'s share of the domestic premium and discount cigarette segments, and the
effect of any resulting cost advantage of manufacturers not subject
19
to the MSA and the other State Settlement Agreements. Manufacturers representing
almost all domestic shipments in 1998 have agreed to become subject to the terms
of the MSA.
Certain litigation, described in Exhibit 99.1, has arisen, challenging the
validity of the MSA and alleging violations of the antitrust laws.
SMOKING AND HEALTH LITIGATION
Plaintiffs' allegations of liability in smoking and health cases are based
on various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, breach of special duty, conspiracy, concert of
action, violations of deceptive trade practice laws and consumer protection
statutes, and claims under the federal and state RICO statutes. In certain of
these cases, plaintiffs claim that cigarette smoking exacerbated the injuries
caused by their exposure to asbestos. Plaintiffs in the smoking and health
actions seek various forms of relief, including compensatory and punitive
damages, treble/multiple damages and other statutory damages and penalties,
creation of medical monitoring and smoking cessation funds, disgorgement of
profits, and injunctive and equitable relief. Defenses raised in these cases
include lack of proximate cause, assumption of the risk, comparative fault
and/or contributory negligence, statutes of limitations and preemption by the
Federal Cigarette Labeling and Advertising Act.
In May 1996, the United States Court of Appeals for the Fifth Circuit held
in the Castano case that a class consisting of all "addicted" smokers nationwide
did not meet the standards and requirements of the federal rules governing class
actions. Since this class decertification, lawyers for plaintiffs have filed
numerous putative smoking and health class action suits in various state and
federal courts. In general, these cases purport to be brought on behalf of
residents of a particular state or states (although a few cases purport to be
nationwide in scope) and raise "addiction" claims similar to those raised in the
Castano case and, in many cases, claims of physical injury as well. As of
February 15, 2001, smoking and health putative class actions were pending in
Alabama, California, Florida, Hawaii, Illinois, Indiana, Iowa, Louisiana,
Massachusetts, Michigan, Missouri, Nevada, New Jersey, New Mexico, New York,
North Carolina, Pennsylvania, Tennessee, Texas, Utah and West Virginia, as well
as in Australia, Brazil, Canada and Israel. Class certification has been denied
or reversed by courts in 24 smoking and health class actions involving PM Inc.
in Arkansas, California (1), the District of Columbia, Illinois, Kansas,
Louisiana, Maryland, Michigan, Minnesota, New Jersey (6), New York (2), Ohio,
Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin, while
classes remain certified in the Engle case in Florida (discussed above), a
medical monitoring case in Louisiana, a medical monitoring case in West Virginia
(discussed above) and a case in California. Some of the decisions denying the
plaintiffs' motions for class certification are on appeal. In May 1999, the
United States Supreme Court declined to review the decision of the United States
Court of Appeals for the Third Circuit affirming a lower court's decertification
of a class.
HEALTH CARE COST RECOVERY LITIGATION
In certain of the pending proceedings, domestic and foreign governmental
entities and non-governmental plaintiffs, including union health and welfare
funds ("unions"), Native American tribes, insurers and self-insurers such as
Blue Cross and Blue Shield Plans, hospitals, taxpayers and others, are seeking
reimbursement of health care cost expenditures allegedly caused by tobacco
products and, in some cases, of future expenditures and damages as well. Certain
of these cases purport to be brought on behalf of a class of plaintiffs. Other
relief sought by some but not all plaintiffs includes punitive damages, multiple
damages and other statutory damages and penalties, injunctions prohibiting
alleged marketing and sales to minors, disclosure of research, disgorgement of
profits, funding of anti-smoking programs, disclosure of nicotine yields, and
payment of attorney and expert witness fees.
The claims asserted in these health care cost recovery actions include the
equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs'
payment of health care costs allegedly attributable to smoking, the equitable
claim of indemnity, common law claims of negligence, strict liability, breach of
express and implied warranty, violation of a voluntary undertaking or special
duty,
20
fraud, negligent misrepresentation, conspiracy, public nuisance, claims under
federal and state statutes governing consumer fraud, antitrust, deceptive trade
practices and false advertising, and claims under federal and state RICO
statutes.
Defenses raised include lack of proximate cause, remoteness of injury,
failure to state a valid claim, lack of benefit, adequate remedy at law,
"unclean hands" (namely, that plaintiffs cannot obtain equitable relief because
they participated in, and benefited from, the sale of cigarettes), lack of
antitrust standing and injury, federal preemption, lack of statutory authority
to bring suit and statute of limitations. In addition, defendants argue that
they should be entitled to "set off" any alleged damages to the extent the
plaintiff benefits economically from the sale of cigarettes through the receipt
of excise taxes or otherwise. Defendants also argue that these cases are
improper because plaintiffs must proceed under principles of subrogation and
assignment. Under traditional theories of recovery, a payor of medical costs
(such as an insurer) can seek recovery of health care costs from a third party
solely by "standing in the shoes" of the injured party. Defendants argue that
plaintiffs should be required to bring any actions as subrogees of individual
health care recipients and should be subject to all defenses available against
the injured party.
Excluding the cases covered by the MSA, as of February 15, 2000, there were
an estimated 53 health care cost recovery cases pending in the United States
against PM Inc. and, in some cases, the Company, of which approximately 20 were
filed by union trust funds. As discussed above under "Federal Government's
Lawsuit," in 1999, the United States government filed a health care cost
recovery action against various cigarette manufacturers and others, including
the Company and PM Inc., asserting claims under three federal statutes. Health
care cost recovery actions have also been brought in Israel, the Marshall
Islands, the Province of British Columbia, Canada and France and, in the United
States, by Bolivia, Ecuador, Guatemala, Honduras, the Kyrgyz Republic,
Nicaragua, the Province of Ontario, Canada, Panama, the Russian Federation,
Tajikistan, Thailand (voluntarily dismissed), Ukraine, Venezuela and seven
Brazilian states. The actions brought by Bolivia, Ecuador, Guatemala, Honduras,
Nicaragua, the Province of Ontario, Panama, the Russian Federation, Ukraine,
Venezuela and five Brazilian states were consolidated for pre-trial purposes and
transferred to the United States District Court for the District of Columbia. As
described below, the court has dismissed the claims of Guatemala, Nicaragua, the
Province of Ontario and Ukraine. The court remanded cases of Venezuela, Ecuador
and two Brazilian states to state court in Florida. Other entities have stated
that they are considering filing health care cost recovery actions.
Seven federal circuit courts of appeals, the Second, Third, Fifth, Seventh,
Eighth, Ninth and Eleventh circuits, as well as the Tennessee intermediate
appellate court, relying primarily on grounds that plaintiffs' claims were too
remote, have affirmed dismissals of, or reversed trial courts that had refused
to dismiss, such actions. In addition, in January 2000, the United States
Supreme Court refused to consider plaintiffs' appeals from the cases decided by
the courts of appeals for the Second, Third and Ninth Circuits.
Although there have been some decisions to the contrary, to date, most lower
courts that have decided motions in these cases have dismissed all or most of
the claims against the industry. In December 1999, in the first ruling on a
motion to dismiss a health care cost recovery case brought in the United States
by a foreign governmental plaintiff, the district court for the District of
Columbia dismissed a lawsuit filed by Guatemala, ruling that the claimed
injuries were too remote. Subsequently, in March 2000, the court also dismissed
the claims of Nicaragua and Ukraine. Guatemala, Nicaragua and Ukraine each have
appealed these decisions to the United States Court of Appeals for the District
of Columbia Circuit. In August 2000, the federal district court for the District
of Columbia dismissed the claims of the Province of Ontario, and the Province
has appealed. In January 2001, the Superior Court of the District of Columbia
dismissed a suit brought by Argentine health plans finding that plaintiff's
claims were too remote to permit recovery. In March 1999, in the only union case
to go to trial thus far, the jury returned a verdict in favor of defendants on
all counts. In December 1999, the federal district court in the District of
Columbia denied defendants' motion to dismiss a suit filed by union and welfare
funds seeking reimbursement of health care expenditures allegedly caused by
tobacco products. Defendants are appealing this decision.
21
CERTAIN OTHER TOBACCO-RELATED LITIGATION
Asbestos Contribution Cases: As of February 15, 2001, an estimated 10 suits
were pending on behalf of former asbestos manufacturers, asbestos manufacturers'
personal injury settlement trusts and an insurance company against domestic
tobacco manufacturers, including PM Inc. and others, and an additional eight
such suits had been filed but not yet served. These cases seek, among other
things, contribution or reimbursement for amounts expended in connection with
the defense and payment of asbestos claims that were allegedly caused in whole
or in part by cigarette smoking. Plaintiffs in most of these cases also seek
punitive damages. The aggregate amounts claimed in these cases range into the
billions of dollars. In January 2001, a mistrial was declared in an asbestos
contribution case in New York.
Lights/Ultra Lights Cases: As of February 15, 2001, there were nine putative
class actions pending against PM Inc. and the Company, in Arizona, Florida,
Illinois, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania and Tennessee,
on behalf of individuals who purchased and consumed various brands of
cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims
Lights and Superslims, Merit Lights and Cambridge Lights. These cases allege, in
connection with the use of the term "Lights" and/or "Ultra Lights," among other
things, deceptive and unfair trade practices and unjust enrichment, and seek
injunctive and equitable relief, including restitution. In February 2001, an
Illinois state court granted plaintiff's motion for class certification, and
trial in this case is scheduled for November 2001.
Retail Leaders Case: Three domestic tobacco manufacturers have filed suit
against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that
became available to retailers in October 1998. The complaint alleges that this
retail merchandising program is exclusionary, creates an unreasonable restraint
of trade and constitutes unlawful monopolization. In addition to an injunction,
plaintiffs seek unspecified treble damages, attorneys' fees, costs and interest.
In June 1999, the court issued a preliminary injunction enjoining PM Inc. from
prohibiting retail outlets that participate in the program at one of the levels
from installing competitive permanent signage in any section of the "industry
fixture" that displays or holds packages of cigarettes manufactured by a firm
other than PM Inc., or requiring those outlets to allocate a percentage of
cigarette-related permanent signage to PM Inc. greater than PM Inc.'s market
share. The court also enjoined PM Inc. from prohibiting retailers participating
in the program from advertising or conducting promotional programs of cigarette
manufacturers other than PM Inc. The preliminary injunction does not affect any
other aspect of the Retail Leaders program. In February 2001, one plaintiff
moved for an order to show cause why PM Inc. should not be held in contempt of
court for allegedly violating the provision of the court's preliminary
injunction enjoining PM Inc. from precluding retailers from advertising or
conducting promotional programs for competitors.
Vending Machine Case: Plaintiffs, who began their case as a purported
nationwide class of cigarette vending machine operators, allege that PM Inc. has
violated the Robinson-Patman Act in connection with its promotional and
merchandising programs available to retail stores and not available to cigarette
vending machine operators. Plaintiffs request actual damages, treble damages,
injunctive relief, attorneys' fees and costs, and other unspecified relief. In
June 1999, the court denied plaintiffs' motion for a preliminary injunction.
Plaintiffs have withdrawn their request for class action status. Trial on the
claims of ten plaintiffs, which was set for November 2000, has been continued
without a new trial date being set, and the court heard PM Inc.'s motion for
summary judgment on those claims in November 2000. The claims of remaining
plaintiffs have been stayed pending disposition of the ten claims previously
scheduled for trial.
Cases Under the California Business and Professions Code: In July 1998, two
suits were filed in California courts alleging that domestic cigarette
manufacturers, including PM Inc. and others, have violated a California statute
known as "Proposition 65" by not informing the public of the alleged risks of
ETS to non-smokers. Plaintiffs also alleged violations of California's Business
and Professions Code regarding unfair and fraudulent business practices.
Plaintiffs sought statutory penalties, injunctions barring the sale of
cigarettes or requiring issuance of appropriate warnings, restitution,
disgorgement of profits and other relief. Defendants' motion for summary
judgment was granted in part, and plaintiffs' "Proposition 65" claims were
dismissed. In August 2000, the parties to one of the cases entered into a
22
settlement agreement, which was expressly conditioned upon a finding by the
California Attorney General that the settlement was in the public interest. The
Attorney General made that finding in October 2000. The parties to the remaining
action entered into a separate settlement agreement in October 2000. The two
settlement agreements, which together require PM Inc. to pay approximately
$245,000 to the plaintiffs as costs, collectively resolve all claims that were,
or could have been, brought in these two actions. In November 2000, the court
granted defendants' motion seeking approval of both settlements and entry of a
final judgment in both cases.
Tobacco Price Cases: As of February 15, 2001, there were 39 putative class
actions pending against PM Inc. and other domestic tobacco manufacturers as well
as, in certain instances, the Company and PMI alleging that the defendants
conspired to fix cigarette prices in violation of antitrust laws. Seven of the
putative class actions were filed in various federal district courts by direct
purchasers of tobacco products and the remaining 32 were filed in 15 states and
the District of Columbia by retail purchasers of tobacco products. The seven
federal class actions have been consolidated; in November 2000, the court
hearing the consolidated cases granted in part and denied in part defendants'
motion to dismiss and to strike portions of the consolidated complaint. The
court has ordered the provisional certification of a class of plaintiffs who
made direct purchases between February 1996 and February 2000. On March 12,
defendants filed a motion to dismiss the fraudulent concealment allegations in
the second amended complaint. The cases are listed in Exhibit 99.1.
Tobacco Growers' Case: In February 2000, a suit was filed on behalf of a
purported class of tobacco growers and quota-holders and amended complaints were
filed in May 2000 and in August 2000. The second amended complaint alleges that
cigarette manufacturers, including PM Inc., violated antitrust laws by
bid-rigging and allocating purchases at tobacco auctions and by conspiring to
undermine the tobacco quota and price-support system administered by the federal
government. In October 2000, defendants filed motions to dismiss the amended
complaint and to transfer the case, and plaintiffs filed a motion for class
certification. In November 2000, the court granted defendants' motion to
transfer the case to the United States District Court for the Middle District of
North Carolina. In December 2000, plaintiffs served a motion for leave to file a
third amended complaint to add tobacco leaf buyers as defendants. This motion
was granted and the additional parties were served in February 2001.
Cigarette Importation Cases: As of February 15, 2001, the European
Community, various Departments of Colombia and Ecuador had filed suits in the
United States against the Company and certain of its subsidiaries, including PM
Inc. and PMI, and other cigarette manufacturers and their affiliates, alleging
that defendants illegally imported cigarettes into the plaintiff jurisdictions
in an effort to evade taxes. The claims asserted in these cases include
negligence, negligent misrepresentation, unjust enrichment, violations of RICO
and its state-law equivalents and conspiracy. Plaintiffs in these cases seek
actual damages, treble damages and undisclosed injunctive relief. Ecuador's
lawsuit has not been served. In January 2001, the Company and certain
subsidiaries moved to dismiss the complaints filed in the European Community and
Colombia cases on the grounds of lack of standing, failure to join indispensable
parties, and failure to state a claim for relief.
Consolidated Putative Punitive Damages Cases: In September 2000, a putative
class action was filed in the federal district court in the Eastern District of
New York that purports to consolidate punitive damages claims in ten
tobacco-related actions currently pending in the federal district court in the
Eastern Districts of New York and Pennsylvania. In November 2000, the court
hearing this case indicated that, in its view, it appears likely that plaintiffs
will be able to demonstrate a basis for certification of an opt-out compensatory
damages class and a non-opt-out punitive damages class. In December 2000,
plaintiffs served a motion for leave to file an amended complaint and a motion
for class certification. A hearing on plaintiffs' motion for class certification
was held on March 15, 2001.
CERTAIN OTHER ACTIONS
National Cheese Exchange Cases: Since 1996, seven putative class actions
have been filed by various dairy farmers alleging that Kraft, its subsidiaries
and others engaged in a conspiracy to fix and depress the prices of bulk cheese
and milk through their trading activity on the National Cheese Exchange.
Plaintiffs seek injunctive and equitable relief and treble damages. Two of the
actions were voluntarily dismissed by plaintiffs after class certification was
denied. Three cases were consolidated in state court
23
in Wisconsin, and in November 1999, the court granted Kraft's motion for summary
judgment. The plaintiffs' appeal is now pending before the Wisconsin Court of
Appeals. Kraft's motions to dismiss were granted in the cases pending in
Illinois state court and in the United States District Court for the Central
District of California. Appellate courts have reversed and remanded both cases
for further proceedings. No classes have been certified in any of the cases.
Italian Tax Matters: One hundred eighty-eight tax assessments alleging the
nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1995 and
income taxes for the years 1987 to 1995) have been served upon certain
affiliates of the Company. The aggregate amount of alleged unpaid taxes assessed
to date is the Italian lira equivalent of $2.1 billion. In addition, the Italian
lira equivalent of $3.1 billion in interest and penalties has been assessed. The
Company anticipates that value-added and income tax assessments may also be
received with respect to subsequent years. All of the assessments are being
vigorously contested. To date, the Italian administrative tax court in Milan has
overturned 184 of the assessments. The decisions to overturn 163 assessments
have been appealed by the tax authorities to the regional appellate court in
Milan. To date, the regional appellate court has rejected 51 of the appeals
filed by the tax authorities. The tax authorities have appealed 31 of the 51
decisions of the regional appellate court to the Italian Supreme Court. The
remaining 20 decisions are expected to be appealed as well. In a separate
proceeding in October 1997, a Naples court dismissed charges of criminal
association against certain present and former officers and directors of
affiliates of the Company, but permitted tax evasion and related charges to
remain pending. In February 1998, the criminal court in Naples determined that
jurisdiction was not proper, and the case file was transmitted to the public
prosecutor in Milan. In December 2000, the Milan prosecutor took certain
procedural steps that may indicate his intention to recommend that charges be
pursued against certain of these present and former officers and directors. The
Company, its affiliates and the officers and directors who are subject to the
proceedings believe they have complied with applicable Italian tax laws and are
vigorously contesting the pending assessments and proceedings.
-------------------
It is not possible to predict the outcome of the litigation pending against
the Company and its subsidiaries. Litigation is subject to many uncertainties.
Unfavorable verdicts awarding compensatory and punitive damages have been
returned in the Engle smoking and health class action trial, and judgment has
been entered against PM Inc. It is possible that additional cases could be
decided unfavorably and that there could be further adverse developments in the
Engle case. Three individual smoking and health cases in which PM Inc. is a
defendant have been decided unfavorably at the trial court level and are in the
process of being appealed. An unfavorable outcome or settlement of a pending
smoking and health or health care cost recovery case could encourage the
commencement of additional similar litigation. There have also been a number of
adverse legislative, regulatory, political and other developments concerning
cigarette smoking and the tobacco industry that have received widespread media
attention. These developments may negatively affect the perception of potential
triers of fact with respect to the tobacco industry, possibly to the detriment
of certain pending litigation, and may prompt the commencement of additional
similar litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of pending litigation. The
present legislative and litigation environment is substantially uncertain, and
it is possible that the Company's business, volume, results of operations, cash
flows or financial position could be materially affected by an unfavorable
outcome or settlement of certain pending litigation or by the enactment of
federal or state tobacco legislation. The Company and each of its subsidiaries
named as a defendant believe, and each has been so advised by counsel handling
the respective cases, that it has a number of valid defenses to all litigation
pending against it, as well as valid bases for appeal of adverse verdicts
against it. All such cases are, and will continue to be, vigorously defended.
However, the Company and its subsidiaries may enter into discussions in an
attempt to settle particular cases if they believe it is in the best interests
of the Company's stockholders to do so.
Reference is made to Note 15 to the Company's consolidated financial
statements which are incorporated herein by reference to the 2000 Annual Report
for a description of certain pending legal proceedings. Reference is also made
to Exhibit 99.1 to this Form 10-K for a list of pending smoking and
24
health class actions, health care cost recovery actions, and certain other
actions, and for a description of certain developments in such proceedings;
Exhibit 99.2 for the status of the MSA in each of the settling jurisdictions;
and Exhibit 99.3 for a schedule of smoking and health class actions, health care
cost recovery and certain other actions that are currently scheduled for trial
through 2001. Copies of Note 15 and Exhibits 99.1, 99.2 and 99.3 are available
upon written request to the Corporate Secretary, Philip Morris Companies Inc.,
120 Park Avenue, New York, NY 10017.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following are the executive officers of the Company as of February 28,
2001:
NAME OFFICE AGE
---- ------ ---
Geoffrey C. Bible............. Chairman of the Board and Chief Executive Officer 63
John D. Bowlin................ President and Chief Executive Officer of Miller Brewing 50
Company
Bruce S. Brown................ Vice President, Taxes 61
Louis C. Camilleri............ Senior Vice President and Chief Financial Officer 46
Nancy J. De Lisi.............. Vice President and Treasurer 50
Roger K. Deromedi............. Director and Co-Chief Executive Officer of Kraft Foods 47
Inc.; and President and Chief Executive Officer of
Kraft Foods International Inc.
Betsy D. Holden............... Director and Co-Chief Executive Officer of Kraft Foods 45
Inc.; and President and Chief Executive Officer of
Kraft Foods North America Inc.
John R. Nelson................ President and Chief Executive Officer of Philip Morris 48
International Inc.
G. Penn Holsenbeck............ Vice President, Associate General Counsel and Corporate 54
Secretary
George R. Lewis............... President and Chief Executive Officer of Philip Morris 59
Capital Corporation
Steven C. Parrish............. Senior Vice President, Corporate Affairs 50
Timothy A. Sompolski.......... Senior Vice President, Human Resources and 48
Administration
Michael E. Szymanczyk......... President and Chief Executive Officer of Philip Morris 52
Incorporated
Joseph A. Tiesi............... Vice President and Controller 42
Charles R. Wall............... Senior Vice President and General Counsel 55
William H. Webb............... Chief Operating Officer 61
All of the above-mentioned officers have been employed by the Company in
various capacities during the past five years.
25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information called for by this Item is hereby incorporated by reference
to the paragraph captioned "Quarterly Financial Data (Unaudited)" on page 59 of
the 2000 Annual Report and made a part hereof.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this Item is hereby incorporated by reference
to the information with respect to 1996-2000 appearing under the caption
"Selected Financial Data" on page 35 of the 2000 Annual Report and made a part
hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this Item is hereby incorporated by reference
to the paragraphs captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 20 to 34 of the 2000 Annual Report
and made a part hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information called for by this Item is hereby incorporated by reference
to the paragraphs in the MD&A captioned "Market Risk" and "Value at Risk" on
pages 32 to 33 of the 2000 Annual Report and made a part hereof.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is hereby incorporated by reference
to the 2000 Annual Report as set forth under the caption "Quarterly Financial
Data (Unaudited)" on page 59 and in the Index to Consolidated Financial
Statements and Schedules (see Item 14) and made a part hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Except for the information relating to the executive officers of the Company
set forth in Part I of this Report, the information called for by Items 10-13 is
hereby incorporated by reference to the Company's definitive proxy statement for
use in connection with its annual meeting of stockholders to be held on April
26, 2001, filed with the Securities and Exchange Commission on March 9, 2001,
and is made a part hereof.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Index to Consolidated Financial Statements and Schedules
REFERENCE
-----------------------------
FORM 10-K 2000
ANNUAL REPORT ANNUAL REPORT
PAGE PAGE
---- ----
Data incorporated by reference to the Company's 2000 Annual
Report:
Consolidated Balance Sheets at December 31, 2000 and
1999.................................................. -- 36-37
Consolidated Statements of Earnings for the years ended
December 31, 2000, 1999 and 1998...................... -- 38
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998.......... -- 40
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998................ -- 38-39
Notes to Consolidated Financial Statements.............. -- 41-59
Report of Independent Accountants....................... -- 60
Data submitted herewith:
Report of Independent Accountants....................... S-1 --
Financial Statement Schedule -- Valuation and Qualifying
Accounts.............................................. S-2 --
Schedules other than those listed above have been omitted either because
such schedules are not required or are not applicable.
(b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K
dated November 22, 2000, covering Item 5 (Other Events) and Item 7
(Financial Statements, Pro Forma Financial Information and Exhibits) of
Form 8-K and included the following: (1) unaudited pro forma condensed
combined balance sheet of the Company and Nabisco Holdings Corp. at
September 30, 2000 and unaudited pro forma condensed combined statements
of earnings of the Company and Nabisco Holdings Corp. for the nine
months ended September 30, 2000, and for the year ended December 31,
1999, all in connection with the Company's acquisition of Nabisco
Holdings Corp. The Company filed a Current Report on Form 8-K dated
December 11, 2000 covering Item 2 (Acquisition or Disposition of Assets)
and Item 7 (Financial Statements, Pro Forma Financial Information and
Exhibits) in connection with the completed acquisition of Nabisco
Holdings Corp. Subsequent to the last quarter of the period for which
this Report is filed, the Company filed (i) a Current Report on Form 8-K
on January 31, 2001, relating to its 2000 financial statements; (ii) a
Current Report on Form 8-K/A on February 22, 2001, which amends the
Current Report on Form 8-K dated December 11, 2000; and (iii) a Current
Report on Form 8-K covering Item 9 (Regulation FD disclosure) on
March 16, 2001.
(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.1-10.15 are management contracts, compensatory plans or
arrangements):
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)
27
4.2 -- First Supplemental Indenture dated as of February 1, 1991,
to Indenture dated as of August 1, 1990, between the
Company and The Chase Manhattan Bank (formerly known as
Chemical Bank) Trustee.(3)
4.3 -- Second Supplemental Indenture dated as of January 21, 1992,
to Indenture dated as of August 1, 1990, between the Company
and The Chase Manhattan Bank (formerly known as Chemical Bank)
Trustee.(4)
4.4 -- Indenture dated as of December 2, 1996, between the Company
and The Chase Manhattan Bank, Trustee.(5)
4.5 -- 5-Year Revolving Credit Agreement dated as of October 14,
1997, among the Company, and the Initial Lenders named
therein and Citibank, N.A., and The Chase Manhattan Bank as
Administrative Agents and Credit Suisse First Boston, as
Syndication Agent, and Deutsche Bank AG, New York Branch, as
Documentation Agent.(6)
10.1 -- Financial Counseling Program.(7)
10.2 -- Philip Morris Benefit Equalization Plan, as amended.(8)
10.3 -- Form of Employee Grantor Trust Enrollment Agreement.(9)
10.4 -- Automobile Policy.(7)
10.5 -- Form of Employment Agreement between the Company and its
executive officers.(10)
10.6 -- Supplemental Management Employees' Retirement Plan of the
Company, as amended.(7)
10.7 -- The Philip Morris 1992 Incentive Compensation and Stock
Option Plan.(7)
10.8 -- 1992 Compensation Plan for Non-Employee Directors, as
amended.(11)
10.9 -- Unit Plan for Incumbent Non-Employee Directors, effective
January 1, 1996.(9)
10.10 -- The Philip Morris 1987 Long Term Incentive Plan.(7)
10.11 -- Form of Executive Master Trust between the Company, The
Chase Manhattan Bank (formerly known as Chemical Bank) and
Handy Associates.(10)
10.12 -- 1997 Performance Incentive Plan.(12)
10.13 -- Philip Morris Long-Term Disability Benefit Equalization
Plan, as amended.(7)
10.14 -- Philip Morris Survivor Income Benefit Equalization Plan, as
amended.(7)
10.15 -- Post-Retirement Consulting Agreement between the Company and
Murray H. Bring.(20)
10.16 -- 2000 Performance Incentive Plan.(21)
10.17 -- 2000 Stock Compensation Plan for Non-Employee Directors.(21)
10.18 -- Comprehensive Settlement Agreement and Release dated October
17, 1997, related to settlement of Mississippi health care cost
recovery action.(7)
10.19 -- Settlement Agreement dated August 25, 1997, related to
settlement of Florida health care cost recovery action.(13)
10.20 -- Comprehensive Settlement Agreement and Release dated January
16, 1998, related to settlement of Texas health care cost recovery
action.(14)
10.21 -- Settlement Agreement and Stipulation for Entry of Judgment,
dated May 8, 1998, regarding the claims of the State of Minnesota.(15)
10.22 -- Settlement Agreement and Release, dated May 8, 1998,
regarding the claims of Blue Cross and Blue Shield of
Minnesota.(15)
10.23 -- Stipulation of Amendment to Settlement Agreement and For
Entry of Agreed Order, dated July 2, 1998, regarding the
settlement of the Mississippi health care cost recovery
action.(16)
10.24 -- Stipulation of Amendment to Settlement Agreement and For
Entry of Consent Decree, dated July 24, 1998, regarding the
settlement of the Texas health care cost recovery
action.(16)
10.25 -- Stipulation of Amendment to Settlement Agreement and For
Entry of Consent Decree, dated September 11, 1998, regarding
the settlement of the Florida health care cost recovery
action.(17)
10.26 -- Master Settlement Agreement relating to state health care
cost recovery and other claims.(18)
10.27 -- Agreement and Plan of Merger dated as of June 25, 2000,
among Nabisco Holdings Corp., Philip Morris Companies Inc.
and Strike Acquisition Corp.(22)
28
10.28 -- Voting and Indemnity Agreement dated as of June 25, 2000,
between Nabisco Group Holdings Corp. and Philip Morris
Companies Inc.(22)
12 -- Statements re computation of ratios.(19)
13 -- Pages 20-60 of the 2000 Annual Report, but only to the
extent set forth in Items 1, 3, 5-7, 7A, 8 and 14 hereof.
With the exception of the aforementioned information
incorporated by reference in this Annual Report on
Form 10-K, the 2000 Annual Report is not to be deemed
"filed" as part of this Report.
21 -- Subsidiaries of the Company.
23 -- Consent of independent accountants.
24 -- Powers of attorney.
99.1 -- Certain Pending Litigation Matters and Recent Developments.
99.2 -- Status of the Master Settlement Agreement.
99.3 -- Trial Schedule.
---------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-36450) dated August 22, 1990.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-39059) dated February 21, 1991.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-45210) dated January 22, 1992.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-3/A (No. 333-35143) dated January 29, 1998.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-8940).
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997.
(12) Incorporated by reference to the Company's proxy statement dated March 10,
1997.
(13) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 25, 1997.
(14) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 16, 1998.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1998.
29
(18) Incorporated by reference to the Company's Current Report on Form 8-K dated
November 25, 1998, as amended by Form 8/K-A dated December 24, 1998.
(19) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 26, 2000.
(20) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
(21) Incorporated by reference to the Company's proxy statement dated March 10,
2000.
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2000.
30
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PHILIP MORRIS COMPANIES INC.
By: /s/ GEOFFREY C. BIBLE
-----------------------------------
(Geoffrey C. Bible,
Chairman of the Board and
Date: March 29, 2001 Chief Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GEOFFREY C. BIBLE Director, Chairman of the Board March 29, 2001
--------------------------------------- and Chief Executive Officer
(Geoffrey C. Bible)
/s/ LOUIS C. CAMILLERI Senior Vice President and Chief March 29, 2001
--------------------------------------- Financial Officer
(Louis C. Camilleri)
/s/ JOSEPH A. TIESI Vice President and Controller March 29, 2001
---------------------------------------
(Joseph A. Tiesi)
*ELIZABETH E. BAILEY,
HAROLD BROWN,
JANE EVANS,
J. DUDLEY FISHBURN,
ROBERT E. R. HUNTLEY,
BILLIE JEAN KING,
JOHN D. NICHOLS,
LUCIO A. NOTO,
JOHN S. REED,
CARLOS SLIM HELU,
STEPHEN M. WOLF Directors
*BY: /s/ LOUIS C. CAMILLERI March 29, 2001
----------------------------
(Louis C. Camilleri
Attorney-in-fact)
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
PHILIP MORRIS COMPANIES INC.:
Our audits of the consolidated financial statements referred to in our
report dated January 29, 2001 appearing in the 2000 Annual Report to
Shareholders of Philip Morris Companies Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the financial statement schedule listed in
Item 14(a) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 29, 2001
S-1
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN MILLIONS)
COL. A COL. B COL. C COL. D COL. E
---------------------------------------- ---------- ----------------------- ---------- ----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
----------- --------- -------- -------- ---------- ---------
(a) (b)
2000:
CONSUMER PRODUCTS:
Allowance for discounts............. $ 7 $815 $ -- $813 $ 9
Allowance for doubtful accounts..... 180 3 62 35 210
Allowance for returned goods........ 8 111 -- 111 8
---- ---- ------- ---- ----
$195 $929 $ 62 $959 $227
---- ---- ------- ---- ----
---- ---- ------- ---- ----
FINANCIAL SERVICES:
Allowance for losses................ $118 $ 3 $ -- $ -- $121
---- ---- ------- ---- ----
---- ---- ------- ---- ----
1999:
CONSUMER PRODUCTS:
Allowance for discounts............. $ 9 $760 $ -- $762 $ 7
Allowance for doubtful accounts..... 192 46 1 59 180
Allowance for returned goods........ 21 100 -- 113 8
---- ---- ------- ---- ----
$222 $906 $ 1 $934 $195
---- ---- ------- ---- ----
---- ---- ------- ---- ----
FINANCIAL SERVICES:
Allowance for losses................ $116 $ 2 $ -- $ -- $118
---- ---- ------- ---- ----
---- ---- ------- ---- ----
1998:
CONSUMER PRODUCTS:
Allowance for discounts............. $ 8 $607 $ -- $606 $ 9
Allowance for doubtful accounts..... 157 36 27 28 192
Allowance for returned goods........ 6 79 -- 64 21
---- ---- ------- ---- ----
$171 $722 $ 27 $698 $222
---- ---- ------- ---- ----
---- ---- ------- ---- ----
FINANCIAL SERVICES:
Allowance for losses................ $101 $ 15 $ -- $ -- $116
---- ---- ------- ---- ----
---- ---- ------- ---- ----
---------
Notes:
(a) Primarily related to divestitures, acquisitions and currency translation.
(b) Represents charges for which allowances were created.
S-2