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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-8940
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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:
Title of each class Name of each exchange 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, 2002, was approximately $113 billion. At such date,
there were 2,147,303,822 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, 2001 (the "2001 Annual Report"), are incorporated in Part I,
Part II and Part IV hereof and made a part hereof. Portions of the registrant's
definitive proxy statement for use in connection with its annual meeting of
shareholders to be held on April 25, 2002, filed with the Securities and
Exchange Commission on March 18, 2002, are incorporated in Part III hereof and
made a part hereof.
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PART I
Item 1. Businesses.
(a) General Development of Business
General
Philip Morris Companies Inc., through its wholly-owned subsidiaries, Philip
Morris Incorporated, Philip Morris International Inc. and Miller Brewing
Company, and its majority-owned (83.9%) subsidiary, Kraft Foods Inc., is engaged
in the manufacture and sale of various consumer products, including cigarettes,
foods and beverages, and beer. Philip Morris Capital Corporation, another
wholly-owned subsidiary, is primarily engaged in leasing activities. As used
herein, unless the context indicates otherwise, the term "Company" means Philip
Morris Companies Inc., its wholly-owned subsidiaries and its majority-owned
subsidiary. The Company is the largest consumer packaged goods company in the
world.* During November 2001, the Company announced that it would ask
stockholders at its next annual meeting of stockholders in April 2002 to approve
changing the Company's name from Philip Morris Companies Inc. to Altria Group,
Inc.
Philip Morris Incorporated ("PM Inc."), which conducts business under the
trade name "Philip Morris U.S.A.," is engaged in the manufacture and sale of
cigarettes. PM Inc. is the largest cigarette company in the United States.
Philip Morris International Inc. ("Philip Morris International") is a holding
company whose subsidiaries and affiliates and their licensees are engaged
primarily in the manufacture and sale of tobacco products (mainly cigarettes)
internationally. Marlboro, the principal cigarette brand of these companies, has
been the world's largest-selling cigarette brand since 1972.
Kraft Foods Inc., together with its subsidiaries ("Kraft"), is engaged in
the manufacture and sale of branded foods and beverages in the United States,
Canada, Europe, the Middle East and Africa, Latin America and Asia Pacific.
Kraft conducts its global business through its subsidiaries: Kraft Foods North
America, Inc. ("Kraft Foods North America") and Kraft Foods International, Inc.
("Kraft Foods International"). Kraft has operations in 68 countries and sells
its products in more than 145 countries.
Prior to June 13, 2001, Kraft was a wholly-owned subsidiary of the Company.
On June 13, 2001, Kraft completed an initial public offering ("IPO") of
280,000,000 shares of its Class A common stock at a price of $31.00 per share.
The Company owns approximately 83.9% of the outstanding shares of Kraft's
capital stock through the Company's ownership of 49.5% of Kraft's Class A common
stock and 100% of Kraft's Class B common stock. Kraft's Class A common stock has
one vote per share while Kraft's Class B common stock has ten votes per share.
Therefore, the Company holds 97.7% of the combined voting power of Kraft's
outstanding common stock.
Miller Brewing Company ("Miller") is the second-largest brewing company in
the United States.
Source of Funds--Dividends
Because the Company is a holding company, its principal source of funds is
dividends from its subsidiaries. Except for minimum net worth requirements, the
Company's principal wholly-owned and majority-owned subsidiaries currently are
not limited by long-term debt or other agreements in their ability to pay cash
dividends or make other distributions with respect to their common stock.
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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.
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(b) Financial Information About Industry Segments
The Company's reportable segments are domestic tobacco, international
tobacco, North American food, international food, beer and financial services.
Operating revenues and operating companies income (together with a
reconciliation to operating income) attributable to each such segment for each
of the last three years (along with total assets for each of tobacco, food, beer
and financial services at December 31, 2001, 2000 and 1999) are set forth in
Note 12 to the Company's consolidated financial statements ("Note 12") and are
incorporated herein by reference to the 2001 Annual Report.
The relative percentages of operating companies income attributable to each
reportable segment were as follows:
2001 2000 1999
----- ----- -----
Domestic tobacco...................................... 30.1% 33.0% 32.8%
International tobacco................................. 30.9 32.1 33.5
North American food................................... 27.4 21.9 21.5
International food.................................... 7.1 7.4 7.2
Beer.................................................. 2.8 4.0 3.5
Financial services.................................... 1.7 1.6 1.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
(c) Narrative Description of Business
Tobacco Products
PM Inc. manufactures, markets and sells cigarettes in the United States and
its territories, and exports tobacco products from the United States.
Subsidiaries and affiliates of Philip Morris International and their licensees
manufacture, market and sell tobacco products outside the United States.
Domestic Tobacco Products
PM Inc. is the largest tobacco company in the United States, with total
cigarette shipments in the United States of 207.1 billion units in 2001, a
decrease of 2.3% from 2000. PM Inc. accounted for 51.0% of the domestic
cigarette industry's total shipments in 2001 (an increase of 0.5 share points
over 2000). The domestic industry's cigarette shipments decreased by 3.2% in
2001. PM Inc.'s and the industry's volume decrease during 2001 was primarily a
result of wholesalers' decisions to reduce inventory at the end of 2001 in
advance of the January 1, 2002 increase in the federal excise tax rate. In
contrast, wholesalers had decided to rebuild their inventories during 2000 after
the January 1, 2000 federal excise tax rate increase. PM Inc. estimates that
after adjusting for changes in trade inventories, domestic industry volume
declined approximately 1.0% to 2.0% in 2001. The following table sets forth the
industry's cigarette shipments in the United States, PM Inc.'s shipments and its
share of domestic industry shipments:
Years Ended PM Inc.
December 31 Industry* PM Inc. Share of Industry
----------- ----------- --------- -----------------
(in billions of units) (%)
2001..................................... 406.3 207.1 51.0
2000..................................... 419.8 211.9 50.5
1999..................................... 419.3 208.2 49.6
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* Source: Management Science Associates.
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PM Inc.'s major premium brands are Marlboro, Virginia Slims, Parliament,
Merit and Benson & Hedges. Its principal discount brands are Basic and
Cambridge. All of its brands are marketed to take into account differing
preferences of adult smokers. Marlboro is the largest-selling cigarette brand in
the United States, with shipments of 157.8 billion units in 2001 (down 0.3% from
2000), equating to 38.8% of the domestic market (up 1.1 share points over 2000).
In 2001 and 2000, the premium and discount segments accounted for
approximately 74% and 26%, respectively, of domestic cigarette industry volume.
PM Inc.'s share of the premium segment was 61.6% in 2001, an increase of 1.0
share points over 2000. Shipments of premium cigarettes accounted for 89.3% of
PM Inc.'s 2001 volume, up from 88.2% in 2000. In 2001, industry shipments within
the discount category declined 4.5% from 2000 levels; PM Inc.'s 2001 shipments
within this category decreased 11.0%, resulting in a share of 20.9% of the
discount category (down 1.6 share points from 2000).
PM Inc. cannot predict future changes or rates of change in domestic
tobacco industry volume, the relative sizes of the premium and discount segments
or in PM Inc.'s shipments, shipment market share or retail market share;
however, it believes that PM Inc.'s shipments may be materially adversely
affected by price increases, including those related to tobacco litigation
settlements and, if enacted, by increased excise taxes or other tobacco
legislation discussed below.
As set forth in Note 16 to the Company's consolidated financial statements
("Note 16"), which is incorporated herein by reference to the 2001 Annual
Report, on May 7, 2001, the trial court in the Engle class action approved a
stipulation and agreed order among PM Inc., certain other defendants and the
plaintiffs providing that the execution or enforcement of the punitive damages
component of the judgment in that case will remain stayed through the completion
of all judicial review. As a result of the stipulation, PM Inc. placed $500
million into a separate interest-bearing escrow account that, regardless of the
outcome of the appeal, will be paid to the court and the court will determine
how to allocate or distribute it consistent with the Florida Rules of Civil
Procedure. As a result, the Company has recorded a $500 million pre-tax charge
in marketing, administration and research costs in the consolidated statement of
earnings of the domestic tobacco segment for the year ended December 31, 2001.
In July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow
account, which will be returned to PM Inc. should it prevail in its appeal of
the case. The $1.2 billion escrow account is included in the December 31, 2001
consolidated balance sheet as other assets. Interest income on the $1.2 billion
escrow account is paid to PM Inc. quarterly and is being recorded as earned in
the Company's consolidated statement of earnings.
International Tobacco Products
Philip Morris International's total cigarette shipments increased 4.1% in
2001 to 698.9 billion units. Comparisons to 2000 reflect an estimated shift of
4.2 billion units into the fourth quarter of 1999 from the first quarter of 2000
as customers purchased additional product in anticipation of business
disruptions due to the century date change. Excluding the estimated impact of
this shift in volume, Philip Morris International's total cigarette shipments
increased 3.5% over 2000. Philip Morris International estimates that its share
of the international cigarette market (which is defined as worldwide cigarette
volume excluding the United States and duty-free shipments) was 14.1% in 2001,
up from 13.8% in 2000. Philip Morris International estimates that international
cigarette market shipments were approximately 4.8 trillion units in 2001, a
slight increase over 2000. Philip Morris International's leading
brands--Marlboro, L&M, Philip Morris, Bond Street, Chesterfield, Parliament,
Lark, Merit and Virginia Slims--collectively accounted for approximately 10.8%
of the international cigarette market, up from 10.6% in 2000. Shipments of
Philip Morris International's principal brand, Marlboro, decreased 0.4% in 2001,
and represented more than 6% of the international cigarette market in 2001 and
2000.
Philip Morris International has a cigarette market share of at least 15%,
and in a number of instances substantially more than 15%, in more than 60
markets, including Argentina, Australia, Austria, Belgium, the Czech Republic,
Finland, France, Germany, Greece, Hong Kong, Hungary, Israel, Italy, Japan,
Malaysia,
3
Mexico, the Netherlands, Poland, Portugal, Russia, Ukraine, Saudi Arabia,
Singapore, Spain, Switzerland and Turkey.
In 2001, Philip Morris International continued to invest in and expand its
international manufacturing base, including significant investments in
facilities located in Germany, the Netherlands, the Philippines, Poland,
Portugal, Russia and Ukraine.
Distribution, Competition and Raw Materials
PM Inc. sells its tobacco products principally to wholesalers (including
distributors), large retail organizations, including chain stores, and the armed
services. Subsidiaries and affiliates of Philip Morris International and their
licensees sell their tobacco products worldwide to distributors, wholesalers,
retailers and state-owned enterprises and other customers.
The market for tobacco products is highly competitive, characterized by
brand recognition and loyalty, with product quality, price, marketing and
packaging constituting the significant methods of competition. Promotional
activities include, in certain instances and where permitted by law, allowances,
the distribution of incentive items, price reductions and other discounts. The
tobacco products of the Company's subsidiaries, affiliates and their licensees
are advertised and promoted through various media, although television and radio
advertising of cigarettes is prohibited in the United States and is prohibited
or restricted in many other countries. In addition, as discussed below under
Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and
Smoking--State Settlement Agreements, PM Inc. and other domestic tobacco
manufacturers have agreed to other marketing restrictions in the United States
as part of the settlements of state health care cost recovery actions.
In the United States, PM Inc. purchases burley and flue-cured leaf tobaccos
of various grades and styles. In 2000, PM Inc. began a pilot partnering program
with burley tobacco growers and extended the program to flue-cured tobacco
growers in 2001. Under the terms of the program, PM Inc. agrees to purchase all
of the tobacco that participating growers may sell without penalty under the
federal tobacco program. PM Inc. continues to purchase the balance of its United
States tobacco requirements at auction and through other sources.
Tobacco production in the United States is subject to government controls,
including the tobacco-price support and production control programs administered
by the United States Department of Agriculture (the "USDA"). Oriental,
flue-cured and burley tobaccos are also purchased outside the United States.
Tobacco production outside the United States is subject to a variety of controls
and external factors, which may include tobacco subsidies and tobacco production
control programs. All of those controls and programs in the United States and
internationally may substantially affect market prices for tobacco.
PM Inc. and Philip Morris International believe there is an adequate supply
of tobacco in the world markets to satisfy their current and anticipated
production requirements.
Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and Smoking
The tobacco industry, both in the United States and abroad, has faced, and
continues to face, a number of issues that may adversely affect the business,
volume, results of operations, cash flows and financial position of PM Inc.,
Philip Morris International and the Company.
These issues, some of which are more fully discussed below, include pending
and threatened smoking and health litigation and certain jury verdicts against
PM Inc., including a $74 billion punitive damages verdict in the Engle smoking
and health class action case discussed in Note 16 and punitive damages awards in
individual smoking and health cases discussed in Note 16; the civil lawsuit
filed by the United States federal government against various cigarette
manufacturers and others discussed in Note 16; legislation or other governmental
action seeking to ascribe to the industry responsibility and liability for the
adverse health effects associated with both smoking and exposure to
environmental tobacco smoke ("ETS"); price increases in the
4
United States related to the settlement of certain tobacco litigation; actual
and proposed excise tax increases in the United States and foreign markets;
diversion into the United States market of products intended for sale outside
the United States; governmental investigations; actual and proposed requirements
regarding the use and disclosure of cigarette ingredients and other proprietary
information; governmental and private bans and restrictions on smoking; actual
and proposed price controls and restrictions on imports in certain jurisdictions
outside the United States; actual and proposed restrictions affecting tobacco
manufacturing, marketing, advertising and sales outside the United States;
actual and proposed legislation in Congress, the state of New York and other
jurisdictions inside and outside the United States to require the establishment
of fire-safety standards for cigarettes; the diminishing social acceptance of
smoking and increased pressure from tobacco control advocates and unfavorable
press reports; and other tobacco legislation that may be considered by Congress,
the states and other jurisdictions inside and outside the United States.
Excise Taxes: Cigarettes are subject to substantial federal, state and
local excise taxes in the United States and to similar taxes in most foreign
markets. In general, such taxes have been increasing. The United States federal
excise tax on cigarettes is currently $0.39 per pack of 20 cigarettes. In the
United States, state and local sales and excise taxes vary considerably and,
when combined with sales taxes, local taxes and the current federal excise tax,
may be as high as $2.00 per pack in a given locality in the United States.
Congress has considered significant increases in the federal excise tax or other
payments from tobacco manufacturers, and significant increases in excise and
other cigarette-related taxes have been proposed or enacted at the state and
local levels within the United States and in many jurisdictions outside the
United States. In the European Union (the "EU"), taxes on cigarettes vary
considerably and currently may be as high as the equivalent of $4.88 per pack on
the most popular brands. In Germany, where total tax on cigarettes is currently
equivalent to $1.96 per pack on the most popular brands, the excise tax is
scheduled to increase by approximately the equivalent of $0.17 per pack by
January 2003.
In the opinion of PM Inc. and Philip Morris International, increases in
excise and similar taxes have had an adverse impact on sales of cigarettes. Any
future increases, the extent of which cannot be predicted, could result in
volume declines for the cigarette industry, including PM Inc. and Philip Morris
International, and might cause sales to shift from the premium segment to the
discount segment.
Tar and Nicotine Test Methods and Brand Descriptors: Jurisdictions around
the world have questioned the utility of standardized test methods to measure
tar and nicotine yields of cigarettes. In September 1997, the United States
Federal Trade Commission ("FTC") issued a request for public comment on its
proposed revision of its tar and nicotine test methodology and reporting
procedures established by a 1970 voluntary agreement among domestic cigarette
manufacturers. In February 1998, PM Inc. and three other domestic cigarette
manufacturers filed comments on the proposed revisions. In November 1998, the
FTC wrote to the Department of Health and Human Services ("HHS") requesting its
assistance in developing specific recommendations on the future of the FTC's
program for testing the tar, nicotine and carbon monoxide content of cigarettes.
In November 2001, the National Cancer Institute issued a report as a part of
HHS' response to the FTC's request. The report concluded, among other things,
that because there was no meaningful difference in smoke exposure or risk to
smokers between cigarettes with different machine-measured tar and nicotine
yields, the marketing of low yield cigarettes was deceptive. Similarly, public
health officials in other countries and the EU have questioned the relevance of
the related International Standards Organisation's test method for measuring
tar, nicotine and carbon monoxide yields. The EU Commission has been directed to
establish a committee to address, among other things, alternative methods for
measuring tar, nicotine and carbon monoxide yields. In addition, public health
authorities in the United States, the EU, Brazil and other countries have called
for the prohibition of or passed legislation prohibiting the use of brand
descriptors such as "Lights" and "Ultra Lights." Brazil banned the use of
descriptors in January 2002. In the United States, as of February 15, 2002,
there were 11 putative class actions pending against PM Inc. and the Company in
which plaintiffs allege, among other things, that the use of the terms "Lights"
and/or "Ultra Lights," constitutes deceptive and unfair trade practices.
5
Food and Drug Administration ("FDA") Regulations: In August 1996, the FDA
promulgated regulations asserting jurisdiction over cigarettes as "drugs" or
"medical devices" under the provisions of the Food, Drug and Cosmetic Act
("FDCA"). The regulations, which included severe restrictions on the
distribution, marketing and advertising of cigarettes, and would have required
the industry to comply with a wide range of labeling, reporting, record keeping,
manufacturing and other requirements, were declared invalid by the United States
Supreme Court in March 2000. The Company has stated that while it continues to
oppose FDA regulation over cigarettes as "drugs" or "medical devices" under the
provisions of the FDCA, it would support new legislation that would provide for
reasonable regulation by the FDA of cigarettes as cigarettes. Currently, there
are several bills pending in Congress that, if enacted, would give the FDA
authority to regulate tobacco products. The bills take a variety of approaches
to the issue of the FDA's proposed regulation of tobacco products ranging from
codification of the original FDA regulations under the "drug" and "medical
device" provisions of the FDCA to the creation of provisions that would apply
uniquely to tobacco products. All of the pending legislation could result in
substantial federal regulation of the design, performance, manufacture and
marketing of cigarettes. The ultimate outcome of the pending bills cannot be
predicted.
Ingredient Disclosure Laws: Jurisdictions inside and outside the United
States have enacted or proposed legislation or regulations that would require
cigarette manufacturers to disclose the ingredients used in the manufacture of
cigarettes, and in certain cases, to provide toxicological information
supporting the use of ingredients. In the United States, the Commonwealth of
Massachusetts has enacted legislation to require cigarette manufacturers to
report the flavorings and other ingredients used in each brand-style of
cigarettes sold in the Commonwealth. Cigarette manufacturers sued to have the
statute declared unconstitutional, arguing that it could result in the public
disclosure of valuable proprietary information. In September 2000, the district
court granted the plaintiffs' motion for summary judgment and permanently
enjoined the defendants from requiring cigarette manufacturers to disclose
brand-specific information on ingredients in their products, and defendants
appealed. In October 2001, the United States Court of Appeals for the First
Circuit reversed the district court's decision, holding that the Massachusetts
disclosure statute does not constitute an impermissible taking of private
property. In November 2001, the First Circuit granted the cigarette
manufacturers' petition for rehearing en banc and withdrew the prior opinion.
The First Circuit, sitting en banc, heard oral argument in January 2002. The
ultimate outcome of this lawsuit cannot be predicted. Similar legislation has
been enacted or proposed in other states and in jurisdictions outside the United
States, including the EU. Under the EU product directive described below,
tobacco companies must disclose the use of, and provide toxicological
information about, all ingredients by October 2002. Philip Morris International
has voluntarily disclosed the ingredients in its brands in a number of EU member
states and in other countries. Other jurisdictions have also enacted or proposed
legislation that would require the submission of toxicological information about
ingredients and would permit governments to prohibit their use.
Health Effects of Smoking and Exposure to ETS: Reports with respect to the
health risks of cigarette smoking have been publicized for many years, and the
sale, promotion and use of cigarettes continue to be subject to increasing
governmental regulation. Since 1964, the Surgeon General of the United States
and the Secretary of Health and Human Services have released a number of reports
linking cigarette smoking with a broad range of health hazards, including
various types of cancer, coronary heart disease and chronic lung disease, and
recommending various governmental measures to reduce the incidence of smoking.
The 1988, 1990, 1992 and 1994 reports focus upon the addictive nature of
cigarettes, the effects of smoking cessation, the decrease in smoking in the
United States, the economic and regulatory aspects of smoking in the Western
Hemisphere, and cigarette smoking by adolescents, particularly the addictive
nature of cigarette smoking during adolescence.
Studies with respect to the health risks of ETS to nonsmokers (including
lung cancer, respiratory and coronary illnesses, and other conditions) have also
received significant publicity. In 1986, the Surgeon General of the United
States and the National Academy of Sciences reported that nonsmokers were at
increased risk of lung cancer and respiratory illness due to ETS. Since then, a
number of government agencies around the world have concluded that ETS causes
disease--including lung cancer and heart disease--in nonsmokers.
6
It is the policy of each of PM Inc. and Philip Morris International to
support a single, consistent public health message on the role played by
cigarette smoking in the development of diseases in smokers, and on smoking and
addiction. It is also their policy in relation to these issues and the health
effects of exposure to ETS to defer to the judgment of public health authorities
as to the text of health warning messages that will best serve the public
interest.
In 1999, PM Inc. and Philip Morris International established web sites that
include, among other things, views of public health authorities on smoking,
disease causation in smokers, addiction and ETS. In October 2000, the sites were
updated to reflect PM Inc.'s and Philip Morris International's agreement with
the overwhelming medical and scientific consensus that cigarette smoking is
addictive, and causes lung cancer, heart disease, emphysema and other serious
diseases in smokers. The web sites advise smokers, and those considering
smoking, to rely on the messages of public health authorities in making all
smoking-related decisions.
The sites also state that government agencies have concluded that ETS
causes diseases--including lung cancer and heart disease--in nonsmokers. PM Inc.
and Philip Morris International recognize and accept that many people have
health concerns regarding ETS. In addition, because of concerns relating to
conditions such as asthma and respiratory infections, PM Inc. and Philip Morris
International believe that particular care should be exercised where children
are concerned, and that smokers who have children--particularly young
ones--should seek to minimize their exposure to ETS.
The World Health Organization's Framework Convention for Tobacco
Control: The World Health Organization and its member states are negotiating a
proposed Framework Convention for Tobacco Control. The proposed treaty would
require signatory nations to enact legislation that would require, among other
things, specific actions to prevent youth smoking; restrict or prohibit tobacco
product marketing; inform the public about the health consequences of smoking
and the benefits of quitting; regulate the content of tobacco products; impose
new package warning requirements including the use of pictorial or graphic
images; eliminate cigarette smuggling and counterfeit cigarettes; restrict
smoking in public places; increase and harmonize cigarette excise taxes; abolish
duty-free tobacco sales; and permit and encourage litigation against tobacco
product manufacturers. PM Inc. and Philip Morris International have stated that
they would support a treaty that member states could consider for ratification,
based on the following four principles: (1) smoking-related decisions should be
made on the basis of a consistent public health message; (2) effective measures
should be taken to prevent minors from smoking; (3) the right of adults to
choose to smoke should be preserved; and (4) all manufacturers of tobacco
products should compete on a level playing field. The outcome of the treaty
negotiations cannot be predicted.
Other Legislative Initiatives: In recent years, various members of the
United States Congress have introduced legislation, some of which has been the
subject of hearings or floor debate, that would subject cigarettes to various
regulations under the HHS or regulation under the Consumer Products Safety Act,
establish educational campaigns relating to tobacco consumption or tobacco
control programs, or provide additional funding for governmental tobacco control
activities, further restrict the advertising of cigarettes, require additional
warnings, including graphic warnings, on packages and in advertising, eliminate
or reduce the tax deductibility of tobacco advertising, provide that the Federal
Cigarette Labeling and Advertising Act and the Smoking Education Act not be used
as a defense against liability under state statutory or common law, and allow
state and local governments to restrict the sale and distribution of cigarettes.
Legislative initiatives affecting the regulation of the tobacco industry have
also been considered in a number of jurisdictions outside the United States. In
2001, the EU issued a directive on tobacco product regulation that, among other
things, reduces maximum permitted levels of tar, nicotine and carbon monoxide
yields to 10, 1 and 10 milligrams, respectively, requires manufacturers to
disclose ingredients and toxicological data on ingredients, requires health
warnings on the front of a pack that cover at least 30% of the front panel and
14 rotational warnings that cover no less than 40% of the back panel, requires
the health warnings to be surrounded by a black border, requires the printing of
tar, nicotine and carbon monoxide numbers on the side panel of the pack at a
minimum size of 10% of the side panel, and as described above, prohibits the use
of
7
texts, names, trademarks and figurative or other signs suggesting that a
particular tobacco product is less harmful than others. The EU's member states
are in the process of drafting and adopting legislation that will implement the
provisions of the directive. The European Commission is also considering a new
directive that would further restrict tobacco marketing and advertising in the
EU. Tobacco control legislation addressing the manufacture, marketing and sale
of tobacco products has been proposed in numerous other jurisdictions.
In August 2000, New York State enacted legislation that requires the
State's Office of Fire Prevention and Control to promulgate by January 1, 2003,
fire-safety standards for cigarettes sold in New York. The legislation requires
that cigarettes sold in New York stop burning within a time period to be
specified by the standards or meet other performance standards set by the Office
of Fire Prevention and Control. All cigarettes sold in New York will be required
to meet the established standards within 180 days after the standards are
promulgated. It is not possible to predict the impact of this law on PM Inc.
until the standards are published. Similar legislation is being considered in
other states and localities and at the federal level, as well as in
jurisdictions outside the United States.
It is not possible to predict what, if any, additional foreign or domestic
governmental legislation or regulations will be adopted relating to the
manufacturing, advertising, sale or use of cigarettes, or to the tobacco
industry generally. However, if any or all of the foregoing were to be
implemented, the business, volume, results of operations, cash flows and
financial position of PM Inc., Philip Morris International and the Company could
be materially adversely affected.
Governmental Investigations: From time to time, the Company is subject to
governmental investigations on a range of matters. During 2001, the competition
authorities in Italy and Turkey initiated separate investigations into business
activities among participants in the cigarette markets of those countries. The
order initiating the Italian investigation named the Company and certain of its
affiliates as well as all other parties purportedly engaged in the sale of
cigarettes in Italy, including the Italian state tobacco monopoly. The Turkish
investigation is directed at one of the Company's Turkish affiliates and another
cigarette manufacturer. Also in 2001, authorities in Australia initiated an
investigation into the use of descriptors, alleging that their use was false and
misleading. The investigation is directed at one of the Company's Australian
affiliates and other cigarette manufacturers. While it is not possible to
predict the outcome of these governmental investigations, the Company and its
affiliates believe they have meritorious responses to the matters being
investigated. They are cooperating with the investigations and are prepared to
vigorously contest any findings of unlawful conduct that may result from the
investigations.
Tobacco-Related Litigation: There is substantial litigation pending
related to tobacco products in the United States and certain foreign
jurisdictions, including the Engle class action case in Florida, in which PM
Inc. is a defendant, and a civil health care cost recovery action filed by the
United States Department of Justice in September 1999 against domestic tobacco
manufacturers and others, including PM Inc. and the Company. (See Note 16 for a
discussion of such litigation.)
State Settlement Agreements: As discussed in Note 16, during 1997 and
1998, PM Inc. and other major domestic tobacco product manufacturers entered
into agreements with states and various United States jurisdictions settling
asserted and unasserted health care cost recovery and other claims. These
settlements provide for substantial annual payments. They also place numerous
restrictions on the tobacco industry's conduct of its business operations,
including restrictions on the advertising and marketing of cigarettes. Among
these are restrictions or prohibitions on the following: targeting youth; use of
cartoon characters; use of brand name sponsorships and brand name non-tobacco
products; outdoor and transit brand advertising; payments for product placement;
and free sampling. In addition, the settlement agreements require companies to
affirm corporate principles to reduce underage use of cigarettes; impose
requirements regarding lobbying activities; mandate public disclosure of certain
industry documents; limit the industry's ability to challenge certain tobacco
control and underage use laws; and provide for the dissolution of certain
tobacco-related organizations and place restrictions on the establishment of any
replacement organizations.
8
Food Products
Acquisitions and Divestitures
Kraft has made a number of acquisitions and divestitures during the past
three years.
On December 11, 2000, the Company, through Kraft, acquired all of the
outstanding shares of Nabisco Holdings Corp. ("Nabisco") for $55 per share in
cash. The aggregate cost to purchase Nabisco's outstanding shares, retire
employee stock options and other payments, was approximately $15.2 billion. In
addition, the acquisition of Nabisco included the assumption of approximately
$4.0 billion of existing Nabisco debt. For a discussion of the Nabisco
acquisition, see Note 4 to the Company's consolidated financial statements which
is incorporated herein by reference to the 2001 Annual Report.
The integration of Nabisco into Kraft has continued throughout 2001. The
closure of a number of Nabisco domestic and international facilities resulted in
severance and other exit costs of $379 million, which are included in the
adjustments for the allocation of purchase price. The closures will result in
the termination of approximately 7,500 employees and will require total cash
payments of $373 million, of which approximately $74 million has been spent
through December 31, 2001. Substantially all of the closures will be completed
by the end of 2002.
The integration of Nabisco into the operations of Kraft will also result in
the closure or reconfiguration of several existing Kraft facilities. The
aggregate charges to the Company's consolidated statement of earnings to close
or reconfigure its facilities and integrate Nabisco are estimated to be in the
range of $200 million to $300 million. During 2001, the Company incurred pre-tax
integration costs of $53 million for site reconfigurations and other
consolidation programs in the United States. In October 2001, Kraft announced
that it was offering a voluntary retirement program to certain salaried
employees in the United States. The program is expected to terminate
approximately 750 employees and will result in an estimated pre-tax charge of
approximately $140 million upon final employee acceptance in the first quarter
of 2002. This pre-tax charge is part of the previously discussed $200 million to
$300 million in pre-tax charges related to the integration of Nabisco.
By combining Nabisco's operations with the operations of Kraft, the Company
achieved net cost synergies of over $100 million in 2001 and expects to generate
cumulative net cost synergies of $300 million in 2002, $475 million in 2003 and
ongoing annual cost savings of $600 million thereafter.
During 2001, Kraft Foods International purchased coffee businesses in
Romania, Morocco and Bulgaria and also acquired confectionery businesses in
Russia and Poland. During 2001, Kraft Foods International sold a few small food
businesses and Kraft Foods North America sold one small food business. During
2000, Kraft Foods North America purchased the outstanding common stock of
Balance Bar Co., a maker of energy and nutrition snack products. In a separate
transaction, Kraft Foods North America also acquired Boca Burger, Inc., a
privately-held manufacturer and marketer of soy-based meat alternatives. During
2000, Kraft Foods International sold a French confectionery business and Kraft
Foods North America sold two small food businesses. During 1999, Kraft Foods
International sold three international food businesses.
The impact of these acquisitions and divestitures, excluding Nabisco, has
not had a material effect on the Company's results of operations.
North American Food
Kraft Foods North America's principal brands span five consumer sectors and
include the following:
Snacks: Oreo, Chips Ahoy!, Newtons, Nilla, Nutter Butter, Stella
D'Oro and SnackWell's cookies; Ritz, Premium, Triscuit, Wheat Thins,
Cheese Nips, Better Cheddars, Honey Maid Grahams and Teddy Grahams
crackers; Planters nuts and salty snacks; Life Savers, Creme Savers,
Altoids, Gummi Savers and Fruit Snacks sugar confectionery products;
Terry's and Toblerone
9
chocolate confectionery products; Handi-Snacks two-compartment snacks;
Balance Bar nutrition and energy snacks; and Jell-O refrigerated gelatin
and pudding snacks and Handi-Snacks shelf-stable pudding snacks.
Beverages: Maxwell House, General Foods International Coffees,
Starbucks, Yuban, Sanka, Nabob and Gevalia coffees; Capri Sun, Tang,
Kool-Aid and Crystal Light aseptic juice drinks; and Kool-Aid, Tang,
Capri Sun, Crystal Light and Country Time powdered soft drinks.
Cheese: Kraft and Cracker Barrel natural cheeses; Philadelphia
cream cheese; Kraft and Velveeta process cheeses; Kraft grated
cheeses; Cheez Whiz process cheese sauce; Easy Cheese aerosol cheese
spread; and Knudsen and Breakstone's cottage cheese and sour cream.
Grocery: Jell-O dry packaged desserts; Cool Whip frozen whipped
topping; Post ready-to-eat cereals; Cream of Wheat and Cream of Rice
hot cereals; Kraft and Miracle Whip spoonable dressings; Kraft salad
dressings; A.1. steak sauce; Kraft and Bull's-Eye barbecue sauces;
Grey Poupon premium mustards; Shake 'N Bake coatings; and Milk-Bone
pet snacks.
Convenient Meals: DiGiorno, Tombstone, Jack's, California Pizza
Kitchen and Delissio frozen pizzas; Kraft macaroni & cheese dinners;
Taco Bell, It's Pasta Anytime and Stove Top Oven Classics meal kits;
Lunchables lunch combinations; Oscar Mayer and Louis Rich cold cuts,
hot dogs and bacon; Boca soy-based meat alternatives; Stove Top
stuffing mix; and Minute rice.
International Food
Kraft Foods International's principal brands within the five consumer
sectors include the following:
Snacks: Milka, Suchard, Cote d'Or, Marabou, Toblerone, Freia,
Terry's, Daim, Figaro, Korona, Poiana, Prince Polo, Siesta, Lacta and
Gallito chocolate confectionery products; Estrella, Maarud and Lux
salty snacks; Oreo, Chips Ahoy!, Ritz, Terrabusi, Canale, Club Social,
Cerealitas, Trakinas and Lucky biscuits; and Sugus and Artic sugar
confectionery products.
Beverages: Jacobs, Gevalia, Carte Noire, Jacques Vabre, Kaffee
HAG, Grand' Mere, Kenco, Saimaza, Maxim, Maxwell House, Dadak, Onko
and Nova Brasilia coffees; Suchard Express, O'Boy, and Kaba chocolate
drinks; Tang, Clight, Kool-Aid, Royal, Verao, Fresh, Frisco,
Q-Refres-Ko and Ki-Suco powdered soft drinks; and Maguary juice
concentrate.
Cheese: Philadelphia cream cheese; Kraft Sottilette, Dairylea,
El Caserio and Invernizzi cheeses; Kraft and Eden process cheeses; and
Cheese Whiz process cheese spread.
Grocery: Kraft spoonable and pourable salad dressings; Miracel
Whip spoonable dressing; Royal dry packaged desserts; Kraft and ETA
peanut butters; and Vegemite yeast spread.
Convenient Meals: Lunchables lunch combinations; Kraft macaroni
& cheese dinners; Kraft and Miracoli pasta dinners and sauces; and
Simmenthal canned meats.
Distribution, Competition and Raw Materials
Kraft Foods North America's products are generally sold to supermarket
chains, wholesalers, supercenters, club stores, mass merchandisers,
distributors, convenience stores, gasoline stations and other retail food
outlets. In general, the retail trade for food products is consolidating. Food
products are distributed through distribution centers, satellite warehouses,
company-operated and public cold-storage facilities, depots and other
facilities. Most distribution in North America is in the form of warehouse
delivery, but snacks and frozen pizza are distributed through two
direct-store-delivery systems. Selling efforts are supported by national and
regional advertising on television and radio as well as outdoor media such as
billboards and in magazines and newspapers, as well as by sales promotions,
product displays, trade incentives, informative material offered to customers
and other promotional activities. Subsidiaries and affiliates of Kraft Foods
International sell their
10
food products primarily in the same manner and also engage the services of
independent sales offices and agents.
Kraft is subject to competitive conditions in all aspects of its business.
Competitors include large national and international companies and numerous
local and regional companies. Some of its competitors may have different profit
objectives and some international competitors may be less susceptible to
currency exchange rates. In addition, certain of its international competitors
benefit from government subsidies. Its food products also compete with generic
products and private-label products of food retailers, wholesalers and
cooperatives. Kraft competes primarily on the basis of product quality, brand
recognition, brand loyalty, service, marketing, advertising and price.
Substantial advertising and promotional expenditures are required to maintain or
improve a brand's market position or to introduce a new product.
Kraft is a major purchaser of milk, cheese, nuts, green coffee beans,
cocoa, corn products, wheat, rice, pork, poultry, beef, vegetable oil, and sugar
and other sweeteners. It also uses significant quantities of glass, plastic and
cardboard to package its products. Kraft continuously monitors worldwide supply
and cost trends of these commodities to enable Kraft to take appropriate action
to obtain ingredients and packaging needed for production.
Kraft purchases a substantial portion of its milk requirements from
independent agricultural cooperatives and individual producers, and a
substantial portion of its cheese requirements from independent sources. The
prices for milk and other dairy product purchases are substantially influenced
by government programs, as well as by market supply and demand. During 2001,
dairy commodity costs in the United States on average have been higher than the
levels seen in 2000.
The most significant cost item in coffee products is green coffee beans,
which are purchased on world markets. Green coffee bean prices are affected by
the quality and availability of supply, trade agreements among producing and
consuming nations, the unilateral policies of the producing nations, changes in
the value of the United States dollar in relation to certain other currencies
and consumer demand for coffee products. Coffee bean prices during 2001 were
lower than in 2000.
A significant cost item in chocolate confectionery products is cocoa, which
is purchased on world markets, and the price of which is affected by the quality
and availability of supply and changes in the value of the British pound
sterling and the United States dollar relative to certain other currencies.
Cocoa bean prices during 2001 were higher than in 2000.
The prices paid for raw materials and agricultural materials used in food
products generally reflect external factors such as weather conditions,
commodity market fluctuations, currency fluctuations and the effects of
governmental agricultural programs. Although the prices of the principal raw
materials can be expected to fluctuate as a result of these factors, Kraft
believes such raw materials to be in adequate supply and generally available
from numerous sources. However, Kraft uses hedging techniques to minimize the
impact of price fluctuations in its principal raw materials. Kraft does not
fully hedge against changes in commodity prices and these strategies may not
protect Kraft from increases in specific raw material costs.
Regulation
All of Kraft Foods North America's United States food products and
packaging materials are subject to regulations administered by the FDA or, with
respect to products containing meat and poultry, the USDA. Among other things,
these agencies enforce statutory prohibitions against misbranded and adulterated
foods, establish safety standards for food processing, establish ingredients and
manufacturing procedures for certain foods, establish standards of identity for
certain foods, determine the safety of food additives and establish labeling
standards and nutrition labeling requirements for food products.
In addition, various states regulate the business of Kraft Foods North
America's operating units by licensing dairy plants, enforcing federal and state
standards of identity for selected food products, grading food
11
products, inspecting plants, regulating certain trade practices in connection
with the sale of dairy products and imposing their own labeling requirements on
food products.
Many of the food commodities on which Kraft Foods North America's United
States businesses rely are subject to governmental agricultural programs. These
programs have substantial effects on prices and supplies and are subject to
Congressional and administrative review.
Almost all of the activities of the Company's food operations outside of
the United States are subject to local and national regulations similar to those
applicable to Kraft Foods North America's United States businesses and, in some
cases, international regulatory provisions, such as those of the EU relating to
labeling, packaging, food content, pricing, marketing and advertising and
related areas.
The EU and certain individual countries require that food products
containing genetically modified organisms or classes of ingredients derived from
them be labeled accordingly. Other countries may adopt similar regulations. The
FDA has concluded that there is no basis for similar mandatory labeling under
current United States law.
Beer
Products
Miller's brands include Miller Lite, Miller Genuine Draft, Miller Genuine
Draft Light, Icehouse, Foster's, the Miller High Life franchise, Leinenkugel's,
Henry Weinhard's, Olde English 800 and Mickey's in the premium/near premium
segment; Milwaukee's Best, Red Dog, Hamm's and Magnum in the below-premium
segment; and Sharp's non-alcoholic brew. In December 2000, Miller sold its
rights to Molson trademarks in the United States. During 1999, Miller purchased
four trademarks from the Pabst Brewing Company ("Pabst") and the Stroh Brewery
Company ("Stroh"). Miller began brewing and shipping the acquired brands, Henry
Weinhard's, Olde English 800, Mickey's and Hamm's during the second quarter of
1999. In connection with this acquisition, Miller entered into a
contract-brewing arrangement with Pabst whereby Miller brews a majority of
Pabst's beer and malt beverage brands for sale to Pabst.
Miller's total shipment volume (which excludes international shipments of
Miller products by other brewers under license and contract-brewing
arrangements) of 40.6 million barrels for 2001 decreased 4.6% from 2000. Export
shipments increased 3.9%. Domestic shipments of 39.6 million barrels decreased
4.8% from 2000 due to higher pricing, discontinued brands (primarily Molson) and
Miller's continuing efforts to reduce distributor inventories. Miller's
estimated market share of the United States malt beverage industry (based on
shipments, including exports) was 19.7% in 2001, down from 20.7% in 2000.
Excluding the impact of businesses divested since the beginning of 2000,
wholesalers' sales of Miller's products to retailers in 2001 decreased 2.5% from
2000. Domestic shipments of premium/near premium-priced brands in 2001 increased
1.2 percentage points to 79.8% of total domestic shipments due primarily to
higher shipments in Miller High Life franchise and Foster's brands.
The following table sets forth, based on shipments (including imports and
exports), the United States industry's sales of beer and brewed non-alcoholic
beverages, as estimated by Miller; Miller's unit sales; and Miller's estimated
share of industry sales:
Years Ended Miller's
December 31 Industry Miller Share of Industry
----------- ----------- --------- -----------------
(in thousands of barrels) (%)
2001............... 206,200 40,563 19.7
2000............... 205,628 42,532 20.7
1999............... 204,593 44,175 21.6
12
Distribution, Competition and Raw Materials
Beer is distributed primarily through independent wholesalers. The United
States malt beverage industry is highly competitive, with the principal methods
of competition being product quality, price, distribution, marketing and
advertising. Miller's business has lost market share in 2001 and 2000 and Miller
has instituted actions to increase the equity of its brands and focus on premium
brands with the highest growth potential. These actions include an emphasis on
advertising and promotion of its premium brands, streamlining contract brewing
operations, exiting certain licenses to brew brands for domestic distribution,
reducing inventory on hand at distributors and pursuing opportunities in the
growing flavored malt beverages category. Late in 2001 and early in 2002, Miller
entered agreements with Skyy Spirits LLC, Allied Domecq PLC and Brown-Forman
Corporation to launch a range of new flavored malt beverages. The flavored malt
beverage category is the fastest growing segment in the wine, beer and spirits
industry. The agreement with Skyy Spirits will introduce Skyy Blue(TM), a
flavored malt beverage with a citrus flavor. The agreement with Allied Domecq
will introduce Citrone(TM) and Diablo(TM) flavored malt beverages based on
Allied Domecq's Stolichnaya(TM) vodka and Sauza(TM) tequila brands,
respectively. The agreement with Brown-Forman will introduce a flavored malt
beverage based on Brown-Forman's Jack Daniel's(TM) brand. Barley, malt, hops,
corn syrup and water represent the principal ingredients used in manufacturing
Miller's products, and are generally available in the market. The production
process, which includes fermentation and aging periods, is conducted throughout
the year. Containers (bottles, cans and kegs) for beer are purchased from
various suppliers.
Regulation
The malt beverage industry is highly regulated at both the state and
federal levels. The Alcoholic Beverage Labeling Act of 1988 requires all
alcoholic beverages manufactured for sale in the United States to include the
following statement on containers: "GOVERNMENT WARNING: (1) According to the
Surgeon General, women should not drink alcoholic beverages during pregnancy
because of the risk of birth defects. (2) Consumption of alcoholic beverages
impairs your ability to drive a car or operate machinery, and may cause health
problems." The statute empowers the Bureau of Alcohol, Tobacco and Firearms to
regulate the size and format of the warning.
The federal excise tax is 32 cents per package of six 12-ounce containers.
Excise taxes, sales taxes and other taxes affecting beer are also levied by
various states, counties and municipalities. In the opinion of Miller, increases
in excise taxes have had, and could continue to have, an adverse effect on
shipments.
Advertising of alcoholic beverages, including beer, has come under
increased scrutiny by governmental agencies and others. In 1999, the Federal
Trade Commission issued a report to Congress entitled Self-Regulation in the
Alcohol Industry: A Review of Industry Efforts to Avoid Promoting Alcohol to
Underage Consumers. The report discusses the benefits of self-regulation in
general, describes key provisions of the alcohol industry's voluntary
advertising codes, considers those areas where self-regulation is successful and
where it falls short, and recommends steps the industry could take to strengthen
member compliance with the codes.
Financial Services
Philip Morris Capital Corporation ("PMCC") is primarily engaged in leasing
activities. Total assets of PMCC were $8.9 billion at December 31, 2001, up from
$8.4 billion at December 31, 2000, reflecting an increase in net finance assets.
PMCC's finance asset portfolio includes leases in the following investment
categories: aircraft, electrical power, real estate, manufacturing, surface
transportation and energy industries. Finance assets, net, represents lease
receivables and estimated residual values of underlying assets under lease,
reduced by non-recourse debt (which is collateralized by the assets under lease
and lease receivables) and unearned income.
13
Other Matters
Customers
None of the Company's business segments is dependent upon a single customer
or a few customers, the loss of which would have a material adverse effect on
the Company's results of operations.
Employees
At December 31, 2001, the Company employed approximately 175,000 people
worldwide.
Trademarks
Trademarks are of material importance to all three of the Company's
consumer products businesses and are protected by registration or otherwise in
the United States and most other markets where the related products are sold.
Environmental Regulation
The Company and its subsidiaries are subject to various federal, state and
local laws and regulations concerning the discharge of materials into the
environment, or otherwise related to environmental protection, including the
Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act
and the Comprehensive Environmental Response, Compensation and Liability Act
(commonly known as "Superfund"), which imposes joint and several liability on
each responsible party. In 2001, subsidiaries (or former subsidiaries) of the
Company were involved in approximately 105 active matters subjecting them to
potential remediation costs under Superfund or otherwise. The Company and its
subsidiaries expect to continue to make capital and other expenditures in
connection with environmental laws and regulations. Although it is not possible
to predict precise levels of environmental-related expenditures, compliance with
such laws and regulations, including the payment of any remediation costs and
the making of such expenditures, has not had, and is not expected to have, a
material adverse effect on the Company's results of operations, capital
expenditures, financial position, earnings and competitive position.
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the Company's
filings with the Securities and Exchange Commission and in its reports to
stockholders, including this Annual Report on Form 10-K. One can identify these
forward-looking statements by use of words such as "strategy," "expects,"
"plans," "anticipates," "believes," "will," "estimates," "intends," "projects,"
"goals," "targets" and other words of similar meaning. One can also identify
them by the fact that they do not relate strictly to historical or current
facts. In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby identifying important
factors that could cause actual results and outcomes to differ materially from
those contained in any forward-looking statement. Any such statement is
qualified by reference to the following cautionary statements.
The tobacco industry continues to be subject to health concerns relating to
the use of tobacco products and exposure to ETS; legislation, including actual
and potential excise tax increases; increasing marketing and regulatory
restrictions; governmental regulation; privately imposed smoking restrictions;
governmental and grand jury investigations; litigation, including risks
associated with adverse jury and judicial determinations, courts reaching
conclusions at variance with the Company's understanding of applicable law,
bonding requirements and the absence of adequate appellate remedies to get
timely relief from any of the foregoing; and the effects of price increases
related to concluded tobacco litigation settlements and excise tax increases on
consumption rates. The food industry continues to be subject to the possibility
that consumers could lose confidence in the safety and quality of certain food
products. Each of the Company's consumer products
14
subsidiaries is subject to intense competition, changes in consumer preferences,
and local economic conditions. Their results are dependent upon their continued
ability to promote brand equity successfully; to anticipate and respond to new
consumer trends; to develop new products and markets and to broaden brand
portfolios in order to compete effectively with lower priced products in a
consolidating environment at the retail and manufacturing levels; to improve
productivity; and to respond to changing prices for their raw materials. In
addition, Philip Morris International, Kraft Foods International and Kraft Foods
North America are subject to the effects of foreign economies and the related
shifts in consumer preferences, currency movements and fluctuations in levels of
customer inventories. Developments in any of these areas, which are more fully
described elsewhere in Part I hereof and in the Management's Discussion and
Analysis of Financial Condition and Results of Operations on pages 20 to 35 of
the 2001 Annual Report, and which descriptions are incorporated into this
section by reference, could cause the Company's results to differ materially
from results that have been or may be projected. The Company cautions that the
above list of important factors is not exclusive. The Company does not undertake
to update any forward-looking statement that may be made from time to time by it
or on its behalf.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
The amounts of operating revenues and long-lived assets attributable to
each of the Company's geographic segments and the amount of export sales from
the United States for each of the last three fiscal years are set forth in Note
12.
Subsidiaries of the Company export tobacco and tobacco-related products,
coffee products, grocery products, cheese, processed meats and beer. In 2001,
the value of all exports from the United States by these subsidiaries amounted
to approximately $4 billion.
Item 2. Properties.
Tobacco Products
PM Inc. owns and operates six tobacco manufacturing and processing
facilities--four in the Richmond, Virginia area, one in Louisville, Kentucky and
one in Cabarrus County, North Carolina. Subsidiaries and affiliates of Philip
Morris International own, lease or have an interest in 54 cigarette or component
manufacturing facilities in 31 countries outside the United States, including
cigarette manufacturing facilities in Bergen Op Zoom, the Netherlands and in
Berlin, Germany.
Food Products
Kraft has 218 manufacturing and processing facilities, 74 of which are
located in the United States. Outside the United States, Kraft has 144
manufacturing and processing facilities located in 47 countries. Kraft owns 205
and leases 13 of these facilities. In addition, Kraft has 459 distribution
centers and depots, of which 105 are located outside the United States. Kraft
owns 91 distribution centers and depots, with the remainder being leased.
The integration of Nabisco into the operations of the Company has resulted
in the closure of seven Nabisco facilities during 2001. During 2002, the Company
anticipates closing seven additional Nabisco facilities.
Beer
Miller owns and operates nine breweries, located in Milwaukee, Wisconsin
(2); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia; Irwindale,
California; Trenton, Ohio; Chippewa Falls, Wisconsin; and Tumwater, Washington.
Miller also owns the Celis Brewery in Austin, Texas, where Miller ceased
production of Celis brands as of December 31, 2000. Miller also owns a
hops-processing facility in Wisconsin and owns or leases warehouses in several
locations.
15
General
The plants and properties owned and operated by the Company's subsidiaries
are maintained in good condition and are believed to be suitable and adequate
for present needs.
Item 3. Legal Proceedings.
Legal proceedings covering a wide range of matters are pending or
threatened in various United States and foreign jurisdictions against the
Company, its subsidiaries and affiliates, including PM Inc. and Philip Morris
International, as well as their respective indemnitees. Various types of claims
are raised in these proceedings, including product liability, consumer
protection, antitrust, tax, patent infringement, employment matters, claims for
contribution and claims of competitors and distributors.
Overview of Tobacco-Related Litigation
Types and Number of Cases
Pending claims related to tobacco products generally fall within the
following categories: (i) smoking and health cases alleging personal injury
brought on behalf of individual plaintiffs, (ii) smoking and health cases
primarily alleging personal injury and purporting to be brought on behalf of a
class of individual plaintiffs, (iii) health care cost recovery cases brought by
governmental (both domestic and foreign) and non-governmental plaintiffs seeking
reimbursement for health care expenditures allegedly caused by cigarette smoking
and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other
tobacco-related litigation includes class action suits alleging that the use of
the terms "Lights" and "Ultra Lights" constitutes deceptive and unfair trade
practices, suits by foreign governments seeking to recover damages for taxes
lost as a result of the allegedly illegal importation of cigarettes into their
jurisdictions, suits by former asbestos manufacturers seeking contribution or
reimbursement for amounts expended in connection with the defense and payment of
asbestos claims that were allegedly caused in whole or in part by cigarette
smoking, and various antitrust suits. Damages claimed in some of the smoking and
health class actions, health care cost recovery cases and other tobacco-related
litigation range into the billions of dollars. In July 2000, a jury in a Florida
smoking and health class action returned a punitive damages award of
approximately $74 billion against PM Inc. (see discussion of the Engle case
below). Plaintiffs' theories of recovery and the defenses raised in the smoking
and health and health care cost recovery cases are discussed below. Exhibit 99.1
hereto lists the smoking and health class actions, health care cost recovery and
certain other actions pending as of February 15, 2002, and discusses certain
developments in such cases since November 13, 2001.
As of February 15, 2002 there were approximately 1,500 smoking and health
cases filed and served on behalf of individual plaintiffs in the United States
against PM Inc. and, in some instances, the Company, compared with approximately
1,500 such cases on December 31, 2000, and approximately 380 such cases on
December 31, 1999. In certain jurisdictions, individual smoking and health cases
have been aggregated for trial in a single proceeding; the largest such
proceeding aggregates 1,250 cases in West Virginia and is currently scheduled
for trial in September 2002. An estimated ten of the individual cases involve
allegations of various personal injuries allegedly related to exposure to ETS.
In addition, approximately 2,835 additional individual cases are pending in
Florida by current and former flight attendants claiming personal injuries
allegedly related to ETS. The flight attendants allege that they are members of
an ETS smoking and health class action, which was settled in 1997. The terms of
the court-approved settlement in that case allow class members to file
individual lawsuits seeking compensatory damages, but prohibit them from seeking
punitive damages.
As of February 15, 2002, there were an estimated 25 smoking and health
purported class actions pending in the United States against PM Inc. and, in
some cases, the Company (including four that involve allegations of various
personal injuries related to exposure to ETS), compared with approximately 36
such cases on December 31, 2000, and approximately 50 such cases on December 31,
1999. Some of these actions purport to
16
constitute statewide class actions and were filed after May 1996, when the
United States Court of Appeals for the Fifth Circuit, in the Castano case,
reversed a federal district court's certification of a purported nationwide
class action on behalf of persons who were allegedly "addicted" to tobacco
products.
As of February 15, 2002, there were an estimated 47 health care cost
recovery actions, including the suit discussed below under "Federal Government's
Lawsuit," filed by the United States government, pending in the United States
against PM Inc. and, in some instances, the Company, compared with approximately
52 such cases pending on December 31, 2000, and 60 such cases on December 31,
1999. In addition, health care cost recovery actions are pending in Israel, the
Marshall Islands, the Province of British Columbia, Canada, France (in a case
brought by a local agency of the French social security health insurance
system), and Spain.
There are also a number of other tobacco-related actions pending outside
the United States against Philip Morris International and its affiliates and
subsidiaries, including an estimated 65 smoking and health cases brought on
behalf of individuals (Argentina (40), Brazil (15), Czech Republic (1), Ireland
(1), Israel (2), Italy (1), Japan (1), the Philippines (1), Scotland (1), and
Spain (2)), compared with approximately 68 such cases on December 31, 2000, and
55 such cases on December 31, 1999. In addition, as of February 15, 2002, there
were ten smoking and health putative class actions pending outside the United
States (Brazil (2), Canada (3), Israel (1), and Spain (4)), compared with nine
such cases on December 31, 2000, and ten such cases on December 31, 1999.
Pending and Upcoming Trials
Trials are currently underway in individual smoking and health cases in
Oregon and Rhode Island in which PM Inc. is a defendant. Trial is also currently
underway in Louisiana in a smoking and health class action in which PM Inc. is a
defendant and in which plaintiffs seek the creation of funds to pay for medical
monitoring and smoking cessation programs.
Additional cases against PM Inc. and, in some instances, the Company, are
scheduled for trial through the end of 2002, including two purported smoking and
health class actions and a case in West Virginia that aggregates 1,250
individual smoking and health cases, the Retail Leaders Case (discussed below),
and an estimated 14 individual smoking and health cases, including four trials
scheduled to begin in May 2002 in California (2) and Florida (2). In addition,
17 cases involving flight attendants' claims for personal injuries from ETS are
currently scheduled for trial during 2002, including six trials scheduled to
begin in April 2002 and four scheduled to begin in May 2002. Cases against other
tobacco companies are also scheduled for trial through the end of 2002. Trial
dates, however, are subject to change.
Recent Industry Trial Results
In recent years, several jury verdicts have been returned in
tobacco-related litigation.
In February 2002, in an individual smoking and health case involving
another cigarette manufacturer, a Kansas jury awarded plaintiff $198,000 in
actual damages and also found that punitive damages should be awarded. The
amount of punitive damages has not yet been set.
In December 2001, in an individual smoking and health case involving
another cigarette manufacturer, a Florida jury awarded a smoker $165,000 in
damages, and defendant has filed post-trial motions challenging the verdict. In
November 2001, a West Virginia jury returned a verdict in favor of defendants,
including PM Inc., in a smoking and health class action in which plaintiffs
sought the creation of a fund to pay for medical monitoring of class members. In
January 2002, the court denied plaintiffs' motion for a new trial. In October
2001, an Ohio jury returned a verdict in favor of all defendants, including PM
Inc., in an individual smoking and health case, and plaintiff has filed
post-trial motions seeking a new trial. In June 2001, a California jury awarded
a smoker with lung cancer approximately $5.5 million in compensatory damages,
and $3 billion in punitive damages against PM Inc. In August 2001, the court
reduced the punitive damages award to
17
$100 million, and PM Inc. and plaintiff have appealed. In June 2001, a New York
jury awarded $6.8 million in compensatory damages against PM Inc. and a total of
$11 million against four other defendants to a Blue Cross and Blue Shield plan
seeking reimbursement of health care expenditures allegedly caused by tobacco
products. In February 2002, the court awarded plaintiff approximately $38
million for attorneys' fees. Defendants, including PM Inc., have appealed. In
May 2001, a New Jersey jury returned a verdict in favor of defendants, including
PM Inc., in an individual smoking and health case. In April 2001, a Florida jury
returned a verdict in favor of defendants, including PM Inc., in an individual
smoking and health case brought by a flight attendant claiming personal injuries
from ETS. Plaintiff's post-trial motions challenging the jury's verdict were
denied in October 2001, and plaintiff has appealed. In February and March 2001,
juries in individual smoking and health cases in South Carolina and Texas
returned verdicts in favor of other cigarette manufacturers. In January 2001, a
mistrial was declared in a case in New York in which an asbestos manufacturer's
personal injury settlement trust sought contribution or reimbursement from
cigarette manufacturers, including PM Inc., for amounts expended in connection
with the defense and payment of asbestos claims that were allegedly caused in
whole or in part by cigarette smoking, and in June 2001, the trust announced
that it would not retry the case. In January 2001, a New York jury returned a
verdict in favor of defendants, including PM Inc., in an individual smoking and
health case.
In October 2000, a Florida jury awarded plaintiff in an individual smoking
and health case $200,000 in compensatory damages against another cigarette
manufacturer. In December 2000, the trial court vacated the jury's verdict and
granted defendant's motion for a new trial; plaintiff and defendant have
appealed.
In July 2000, the jury in the Engle smoking and health class action in
Florida returned a verdict assessing punitive damages totaling approximately
$145 billion against all defendants in the case, including approximately $74
billion against PM Inc. (See "Engle Class Action," below.)
In July 2000, a Mississippi jury returned a verdict in favor of defendant
in an individual smoking and health case against another cigarette manufacturer.
Plaintiffs' post-trial motions challenging the verdict were denied, and
plaintiffs have appealed. In June 2000, a New York jury returned a verdict in
favor of all defendants, including PM Inc., in another individual smoking and
health case, and plaintiffs appealed. In September 2001, the appellate court
dismissed plaintiffs' appeal. In March 2000, a California jury awarded a former
smoker with lung cancer $1.72 million in compensatory damages against PM Inc.
and another cigarette manufacturer, and $10 million in punitive damages against
PM Inc., as well as an additional $10 million against the other defendant. PM
Inc. is appealing the verdict and damages award.
In June 1999, a Mississippi jury returned a verdict in favor of defendants,
including PM Inc., in an action brought on behalf of an individual who died
allegedly as a result of exposure to ETS. In May 1999, a Tennessee jury returned
a verdict in favor of defendants, including PM Inc., in two of three individual
smoking and health cases consolidated for trial. In the third case (not
involving PM Inc.), the jury found liability against defendants and apportioned
fault equally between plaintiff and defendants. Under Tennessee's system of
modified comparative fault, because the jury found plaintiff and defendants to
be equally at fault, recovery was not permitted.
In March 1999, an Oregon jury awarded the estate of a deceased smoker
$800,000 in actual damages, $21,500 in medical expenses and $79.5 million in
punitive damages against PM Inc. The court reduced the punitive damages award to
$32 million, and PM Inc. has appealed the verdict and damages award. In February
1999, a California jury awarded a former smoker $1.5 million in compensatory
damages and $50 million in punitive damages against PM Inc. The court reduced
the punitive damages award to $25 million, and PM Inc. appealed. In November
2001, a California district court of appeals affirmed the trial court's ruling;
PM Inc. has appealed to the California Supreme Court, which accepted the appeal
in January 2002.
In December 1999, a French court, in an action brought on behalf of a
deceased smoker, found that another cigarette manufacturer had a duty to warn
him about risks associated with smoking prior to 1976, when the French
government required warning labels on cigarette packs, and failed to do so. The
court did not
18
determine causation or liability, which were considered in subsequent
proceedings. In September 2001, a French appellate court ruled in favor of
defendant and dismissed plaintiff's claim.
Engle Class Action
Verdicts have been returned and judgment has been entered against PM Inc.
and other defendants in the first two phases of this three-phase smoking and
health class action trial in Florida. The class consists of all Florida
residents and citizens, and their survivors, "who have suffered, presently
suffer or have died from diseases and medical conditions caused by their
addiction to cigarettes that contain nicotine."
In July 1999, the jury returned a verdict against defendants in phase one
of the trial concerning certain issues determined by the trial court to be
"common" to the causes of action of the plaintiff class. Among other things, the
jury found that smoking cigarettes causes 20 diseases or medical conditions,
that cigarettes are addictive or dependence-producing, defective and
unreasonably dangerous, that defendants made materially false statements with
the intention of misleading smokers, that defendants concealed or omitted
material information concerning the health effects and/or the addictive nature
of smoking cigarettes, and that defendants were negligent and engaged in extreme
and outrageous conduct or acted with reckless disregard with the intent to
inflict emotional distress.
During phase two of the trial, the claims of three of the named plaintiffs
were adjudicated in a consolidated trial before the same jury that returned the
verdict in phase one. In April 2000, the jury determined liability against the
defendants and awarded $12.7 million in compensatory damages to the three named
plaintiffs.
In July 2000, the same jury returned a verdict assessing punitive damages
on a lump sum basis for the entire class totaling approximately $145 billion
against the various defendants in the case, including approximately $74 billion
severally against PM Inc. PM Inc. believes that the punitive damages award was
determined improperly and that it should ultimately be set aside on any one of
numerous grounds. Included among these grounds are the following: under
applicable law, (i) defendants are entitled to have liability and damages for
each plaintiff tried by the same jury, an impossibility due to the jury's
dismissal; (ii) punitive damages cannot be assessed before the jury determines
entitlement to, and the amount of, compensatory damages for all class members;
(iii) punitive damages must bear a reasonable relationship to compensatory
damages, a determination that cannot be made before compensatory damages are
assessed for all class members; and (iv) punitive damages can "punish" but
cannot "destroy" the defendant. In March 2000, at the request of the Florida
legislature, the Attorney General of Florida issued an advisory legal opinion
stating that "Florida law is clear that compensatory damages must be determined
prior to an award of punitive damages" in cases such as Engle. As noted above,
compensatory damages for all but three members of the class have not been
determined.
Following the verdict in the second phase of the trial, the jury was
dismissed, notwithstanding that liability and compensatory damages for all but
three class members have not yet been determined. According to the trial plan,
phase three of the trial will address other class members' claims, including
issues of specific causation, reliance, affirmative defenses and other
individual-specific issues regarding entitlement to damages, in individual
trials before separate juries.
It is unclear how the trial plan will be further implemented. The trial
plan provides that the punitive damages award should be standard as to each
class member and acknowledges that the actual size of the class will not be
known until the last class member's case has withstood appeal, i.e., the
punitive damages amount would be divided equally among those plaintiffs who, in
addition to the successful phase two plaintiffs, are ultimately successful in
phase three of the trial and in any appeal.
Following the jury's punitive damages verdict in July 2000, defendants
removed the case to federal district court following the intervention
application of a union health fund that raised federal issues in the case.
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In November 2000, the federal district court remanded the case to state court on
the grounds that the removal was premature.
The trial judge in the state court, without a hearing, then immediately
denied the defendants' post-trial motions and entered judgment on the
compensatory and punitive damages awarded by the jury. PM Inc. and the Company
believe that the entry of judgment by the trial court is unconstitutional and
violates Florida law. PM Inc. has filed an appeal with respect to the entry of
judgment, class certification and numerous other reversible errors that have
occurred during the trial. PM Inc. has also posted a $100 million bond to stay
execution of the judgment with respect to the $74 billion in punitive damages
that has been awarded against it. The bond was posted pursuant to legislation
that was enacted in Florida in May 2000 that limits the size of the bond that
must be posted in order to stay execution of a judgment for punitive damages in
a certified class action to no more than $100 million, regardless of the amount
of punitive damages ("bond cap legislation").
Plaintiffs had previously indicated that they believe the bond cap
legislation is unconstitutional and might seek to challenge the $100 million
bond. If the bond were found to be invalid, it would be commercially impossible
for PM Inc. to post a bond in the full amount of the judgment and, absent
appellate relief, PM Inc. would not be able to stay any attempted execution of
the judgment in Florida. PM Inc. and the Company will take all appropriate steps
to seek to prevent this worst-case scenario from occurring. In May 2001, the
trial court approved a stipulation (the "Stipulation") among PM Inc., certain
other defendants, plaintiffs and the plaintiff class that provides that
execution or enforcement of the punitive damages component of the Engle judgment
will remain stayed against PM Inc. and the other participating defendants
through the completion of all judicial review. As a result of the Stipulation
and in addition to the $100 million bond it previously posted, PM Inc. placed
$1.2 billion into an interest-bearing escrow account for the benefit of the
Engle class. Should PM Inc. prevail in its appeal of the case, both amounts are
to be returned to PM Inc. PM Inc. also placed an additional $500 million into a
separate interest-bearing escrow account for the benefit of the Engle class. If
PM Inc. prevails in its appeal, this amount will be paid to the court, and the
court will determine how to allocate or distribute it consistent with the
Florida Rules of Civil Procedure. In connection with the Stipulation, the
Company recorded a $500 million pre-tax charge in its consolidated statement of
earnings for the quarter ended March 31, 2001.
In other developments, in August 1999, the trial judge denied a motion
filed by PM Inc. and other defendants to disqualify the judge. The motion
asserted, among other things, that the trial judge was required to disqualify
himself because he is a former smoker who has a serious medical condition of a
type that the plaintiffs claim, and the jury has found, is caused by smoking,
making him financially interested in the result of the case and, under
plaintiffs' theory of the case, a member of the plaintiff class. The Third
District Court of Appeals denied defendants' petition to disqualify the trial
judge. In January 2000, defendants filed a petition for a writ of certiorari to
the United States Supreme Court requesting that it review the issue of the trial
judge's disqualification, and in May 2000 the writ of certiorari was denied.
PM Inc. and the Company remain of the view that the Engle case should not
have been certified as a class action. The certification is inconsistent with
the overwhelming majority of federal and state court decisions that have held
that mass smoking and health claims are inappropriate for class treatment. PM
Inc. has filed an appeal challenging the class certification and the
compensatory and punitive damages awards, as well as numerous other reversible
errors that it believes occurred during the trial to date.
Smoking and Health Litigation
Plaintiffs' allegations of liability in smoking and health cases are based
on various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, breach of special duty, conspiracy, concert of
action, violations of deceptive trade practice laws and consumer protection
statutes, and claims under the federal and state RICO statutes. In certain of
these cases, plaintiffs claim that cigarette smoking exacerbated the injuries
caused by their exposure to asbestos. Plaintiffs in the smoking and health
actions seek various forms of relief, including
20
compensatory and punitive damages, treble/multiple damages and other statutory
damages and penalties, creation of medical monitoring and smoking cessation
funds, disgorgement of profits, and injunctive and equitable relief. Defenses
raised in these cases include lack of proximate cause, assumption of the risk,
comparative fault and/or contributory negligence, statutes of limitations and
preemption by the Federal Cigarette Labeling and Advertising Act.
In May 1996, the United States Court of Appeals for the Fifth Circuit held
in the Castano case that a class consisting of all "addicted" smokers nationwide
did not meet the standards and requirements of the federal rules governing class
actions. Since this class decertification, lawyers for plaintiffs have filed
numerous putative smoking and health class action suits in various state and
federal courts. In general, these cases purport to be brought on behalf of
residents of a particular state or states (although a few cases purport to be
nationwide in scope) and raise "addiction" claims similar to those raised in the
Castano case and, in many cases, claims of physical injury as well. As of
February 15, 2002, smoking and health putative class actions were pending in
Alabama, California, Florida, Illinois, Indiana, Iowa, Louisiana, Michigan,
Missouri, Nevada, New Mexico, New York, North Carolina, Ohio, Oregon, Tennessee,
Texas, Utah, West Virginia and the District of Columbia, as well as in Brazil,
Canada, Israel and Spain. Class certification has been denied or reversed by
courts in 29 smoking and health class actions involving PM Inc. in Arkansas, the
District of Columbia, Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan,
Minnesota, Nevada (4), New Jersey (6), New York (2), Ohio, Oklahoma,
Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin, while classes
remain certified in the Engle case in Florida (discussed above), two cases in
California and in a case in Louisiana in which plaintiffs seek the creation of
funds to pay for medical monitoring and smoking cessation programs for class
members. Some of the decisions denying or granting plaintiffs' motions for class
certification are on appeal. In May 1999, the United States Supreme Court
declined to review the decision of the United States Court of Appeals for the
Third Circuit affirming a lower court's decertification of a class. In November
2001, in the first medical monitoring class action case to go to trial, a West
Virginia jury returned a verdict in favor of all defendants, including PM Inc.;
in January 2002, the trial court denied plaintiffs' motion for a new trial.
Health Care Cost Recovery Litigation
Overview
In certain pending proceedings, domestic and foreign governmental entities
and non-governmental plaintiffs, including union health and welfare funds
("unions"), Native American tribes, insurers and self-insurers such as Blue
Cross and Blue Shield plans, hospitals, taxpayers and others, are seeking
reimbursement of health care cost expenditures allegedly caused by tobacco
products and, in some cases, of future expenditures and damages as well. Relief
sought by some but not all plaintiffs includes punitive damages, multiple
damages and other statutory damages and penalties, injunctions prohibiting
alleged marketing and sales to minors, disclosure of research, disgorgement of
profits, funding of anti-smoking programs, additional disclosure of nicotine
yields, and payment of attorney and expert witness fees. Certain of the health
care cost recovery cases purport to be brought on behalf of a class of
plaintiffs.
The claims asserted in the health care cost recovery actions include the
equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs'
payment of health care costs allegedly attributable to smoking, the equitable
claim of indemnity, common law claims of negligence, strict liability, breach of
express and implied warranty, violation of a voluntary undertaking or special
duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims
under federal and state statutes governing consumer fraud, antitrust, deceptive
trade practices and false advertising, and claims under federal and state RICO
statutes.
Defenses raised include lack of proximate cause, remoteness of injury,
failure to state a valid claim, lack of benefit, adequate remedy at law,
"unclean hands" (namely, that plaintiffs cannot obtain equitable relief because
they participated in, and benefited from, the sale of cigarettes), lack of
antitrust standing and injury,
21
federal preemption, lack of statutory authority to bring suit, and statute of
limitations. In addition, defendants argue that they should be entitled to "set
off" any alleged damages to the extent the plaintiff benefits economically from
the sale of cigarettes through the receipt of excise taxes or otherwise.
Defendants also argue that these cases are improper because plaintiffs must
proceed under principles of subrogation and assignment. Under traditional
theories of recovery, a payor of medical costs (such as an insurer) can seek
recovery of health care costs from a third party solely by "standing in the
shoes" of the injured party. Defendants argue that plaintiffs should be required
to bring any actions as subrogees of individual health care recipients and
should be subject to all defenses available against the injured party.
Although there have been some decisions to the contrary, most courts that
have decided motions in these cases have dismissed all or most of the claims
against the industry. In addition, eight federal circuit courts of appeals, the
Second, Third, Fifth, Seventh, Eighth, Ninth, Eleventh and District of Columbia
circuits, as well as California and Tennessee intermediate appellate courts,
relying primarily on grounds that plaintiffs' claims were too remote, have
affirmed dismissals of, or reversed trial courts that had refused to dismiss,
health care cost recovery actions. The United States Supreme Court has refused
to consider plaintiffs' appeals from the cases decided by the courts of appeals
for the Second, Third, Ninth and District of Columbia circuits.
As of February 15, 2002, there were an estimated 47 health care cost
recovery cases pending in the United States against PM Inc., and in some
instances, the Company, including the case filed by the United States
government, which is discussed below under "Federal Government's Lawsuit."
The cases brought in the United States include actions brought by Belize,
Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario,
Canada, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 11
Brazilian states, 11 Brazilian cities and a group of Argentine unions. The
actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the
Province of Ontario, Panama, the Russian Federation, Tajikistan, Ukraine,
Venezuela, 10 Brazilian states and 11 Brazilian cities were consolidated for
pre-trial purposes and transferred to the United States District Court for the
District of Columbia. The court has remanded the cases of Venezuela, Ecuador and
two Brazilian states to state court in Florida, and defendants appealed to the
United States Court of Appeals for the District of Columbia Circuit. Subsequent
to remand, the Ecuador case was voluntarily dismissed. In November 2001, the
cases brought by Venezuela and the Brazilian state of Espirito Santo were
dismissed, and Venezuela has appealed. The district court dismissed the cases
brought by Guatemala, Nicaragua, Ukraine, and the Province of Ontario, and
plaintiffs appealed. In May 2001, the United States Court of Appeals for the
District of Columbia Circuit affirmed the district court's dismissals of the
cases brought by Guatemala, Nicaragua and Ukraine, and in October 2001, the
United States Supreme Court refused to consider plaintiffs' appeal. In November
2001, the Province of Ontario voluntarily dismissed its appeal. In January 2001,
the Superior Court of the District of Columbia dismissed the suit brought by the
Argentine unions. In addition to cases brought in the United States, health care
cost recovery actions have also been brought in Israel, the Marshall Islands,
the Province of British Columbia, Canada and France, and other entities have
stated that they are considering filing such actions.
In March 1999, in the first health care cost recovery case to go to trial,
an Ohio jury returned a verdict in favor of defendants on all counts. In June
2001, a New York jury returned a verdict awarding $6.83 million in compensatory
damages against PM Inc. and a total of $11 million against four other defendants
in a health care cost recovery action brought by a Blue Cross and Blue Shield
plan. In February 2002, the court awarded plaintiff approximately $38 million
for attorneys' fees. Defendants, including PM Inc., have appealed.
Settlements of Health Care Cost Recovery Litigation
In November 1998, PM Inc. and certain other United States tobacco product
manufacturers entered into the Master Settlement Agreement (the "MSA") with 46
states, the District of Columbia, Puerto Rico, Guam, the United States Virgin
Islands, American Samoa and the Northern Marianas to settle asserted and
unasserted health care cost recovery and other claims. PM Inc. and certain other
United States tobacco product manufacturers had previously settled similar
claims brought by Mississippi, Florida, Texas and
22
Minnesota (together with the MSA, the "State Settlement Agreements"). The MSA
has received final judicial approval in all 52 settling jurisdictions.
The State Settlement Agreements require that the domestic tobacco industry
make substantial annual payments in the following amounts (excluding future
annual payments contemplated by the agreement with tobacco growers discussed
below), subject to adjustment for several factors, including inflation, market
share and industry volume: 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9
billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4
billion each year. In addition, the domestic tobacco industry is required to pay
settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million,
as well as additional annual payments of $250 million through 2003. These
payment obligations are the several and not joint obligations of each settling
defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is
based on its relative share of the settling manufacturers' domestic cigarette
shipments, including roll-your-own cigarettes, in the year preceding that in
which the payment is due. PM Inc. records its portions of ongoing settlement
payments as part of cost of sales as product is shipped.
The State Settlement Agreements also include provisions relating to
advertising and marketing restrictions, public disclosure of certain industry
documents, limitations on challenges to certain tobacco control and underage use
laws, restrictions on lobbying activities and other provisions. See Item 1(c)
Tobacco Products -- Taxes, Legislation, Regulation and Other Matters Regarding
Tobacco and Smoking.
As part of the MSA, the settling defendants committed to work cooperatively
with the tobacco-growing states to address concerns about the potential adverse
economic impact of the MSA on tobacco growers and quota-holders. To that end,
four of the major domestic tobacco product manufacturers, including PM Inc., and
the grower states, have established a trust fund to provide aid to tobacco
growers and quota-holders. The trust will be funded by these four manufacturers
over 12 years with payments, prior to application of various adjustments,
scheduled to total $5.15 billion. Future industry payments (2002 through 2008,
$500 million each year; 2009 and 2010, $295 million each year) are subject to
adjustment for several factors, including inflation, United States cigarette
volume and certain other contingent events, and, in general, are to be allocated
based on each manufacturer's relative market share. PM Inc. records its portion
of these payments as part of cost of sales as product is shipped.
The State Settlement Agreements have materially adversely affected the
volumes of PM Inc. and the Company; the Company believes that they may
materially adversely affect the business, volumes, results of operations, cash
flows or financial position of PM Inc. and the Company in future periods. The
degree of the adverse impact will depend, among other things, on the rates of
decline in United States cigarette sales in the premium and discount segments,
PM Inc.'s share of the domestic premium and discount cigarette segments, and the
effect of any resulting cost advantage of manufacturers not subject to the MSA
and the other State Settlement Agreements.
Certain litigation, described in Exhibit 99.1, has arisen challenging the
validity of the MSA and alleging violations of antitrust laws.
Federal Government's Lawsuit
In 1999, the United States government filed a lawsuit in the United States
District Court for the District of Columbia against various cigarette
manufacturers and others, including PM Inc. and the Company, asserting claims
under three federal statutes, the Medical Care Recovery Act ("MCRA"), the
Medicare Secondary Payer ("MSP") provisions of the Social Security Act and the
Racketeer Influenced and Corrupt Organizations Act ("RICO"). The lawsuit seeks
to recover an unspecified amount of health care costs for tobacco-related
illnesses allegedly caused by defendants' fraudulent and tortious conduct and
paid for by the government under various federal health care programs, including
Medicare, military and veterans' health benefits programs, and the Federal
Employees Health Benefits Program. The complaint alleges that such costs total
more than $20 billion annually. It also seeks various types of what it alleges
to be equitable and declaratory relief, including disgorgement, an injunction
prohibiting certain actions by the defendants, and a
23
declaration that the defendants are liable for the federal government's future
costs of providing health care resulting from defendants' alleged past tortious
and wrongful conduct. PM Inc. and the Company moved to dismiss this lawsuit on
numerous grounds, including that the statutes invoked by the government do not
provide a basis for the relief sought. In September 2000, the trial court
dismissed the government's MCRA and MSP claims, but permitted discovery to
proceed on the government's claims for relief under RICO. In October 2000, the
government moved for reconsideration of the trial court's order to the extent
that it dismissed the MCRA claims for health care costs paid pursuant to
government health benefit programs other than Medicare and the Federal Employees
Health Benefits Act. In February 2001, the government filed an amended complaint
attempting to replead the MSP claims. In July 2001, the court denied the
government's motion for reconsideration of the dismissal of the MCRA claims and
dismissed the government's amended MSP claims. Trial of the case is currently
scheduled for July 2003.
In June 2001, representatives of the Department of Justice invited the
defendants, including PM Inc. and the Company, to participate in settlement
discussions. A meeting with representatives of the Department of Justice was
held in July 2001. PM Inc. and the Company cannot predict whether discussions
will continue or the outcome of any such discussions. The Company and PM Inc.
believe that they have a number of valid defenses to the lawsuit and will
continue to vigorously defend it.
Certain Other Tobacco-Related Litigation
Lights/Ultra Lights Cases: As of February 15, 2002, there were 11 putative
class actions pending against PM Inc. and the Company in California, Florida,
Illinois, Massachusetts, Minnesota, Missouri, New Jersey, Ohio (2), Tennessee
and West Virginia on behalf of individuals who purchased and consumed various
brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia
Slims Lights and Superslims, Merit Lights and Cambridge Lights. Plaintiffs in
these cases allege, among other things, that the use of the terms "Lights"
and/or "Ultra Lights" constitutes deceptive and unfair trade practices, and seek
injunctive and equitable relief, including restitution. In February 2002, a
Florida court certified a class. In November 2001, plaintiffs voluntarily
dismissed a case in Pennsylvania, and in October 2001, a Massachusetts court
certified a statewide class. In February 2001, an Illinois court also certified
a class, and trial in this case is scheduled for January 2003. During the first
quarter of 2001, plaintiffs voluntarily dismissed cases in Florida and New York.
In July 2001, an Arizona court refused to certify a class, and that case has
been voluntarily dismissed.
Cigarette Importation Cases: As of February 15, 2002, the European
Community and ten member states, various Departments of Colombia, Ecuador,
Belize and Honduras had filed suits in the United States against the Company and
certain of its subsidiaries, including PM Inc. and Philip Morris International,
and other cigarette manufacturers and their affiliates, alleging that defendants
sold to distributors cigarettes that would be illegally imported into the
plaintiff jurisdictions in an effort to evade taxes. The claims asserted in
these cases include negligence, negligent misrepresentation, fraud, unjust
enrichment, violations of RICO and its state-law equivalents and conspiracy.
Plaintiffs in these cases seek actual damages, treble damages and undisclosed
injunctive relief. In February 2002, the courts granted defendants' motions to
dismiss all of the actions. In the Colombia and European Community actions,
however, the RICO and fraud claims predicated on money laundering claims were
dismissed without prejudice. In October 2001, the United States Court of Appeals
for the Second Circuit affirmed the dismissal of a cigarette importation case
filed against another cigarette manufacturer and in March 2002, plaintiff in
that case petitioned the United States Supreme Court for further review.
Asbestos Contribution Cases: As of February 15, 2002, an estimated 13
suits were pending on behalf of former asbestos manufacturers and affiliated
entities against domestic tobacco manufacturers, including PM Inc. These cases
seek, among other things, contribution or reimbursement for amounts expended in
connection with the defense and payment of asbestos claims that were allegedly
caused in whole or in part by cigarette smoking. Plaintiffs in most of these
cases also seek punitive damages. The aggregate amounts claimed in these cases
range into the billions of dollars.
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Retail Leaders Case: Three domestic tobacco manufacturers have filed suit
against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that
became available to retailers in October 1998. The complaint alleges that this
retail merchandising program is exclusionary, creates an unreasonable restraint
of trade and constitutes unlawful monopolization. In addition to an injunction,
plaintiffs seek unspecified treble damages, attorneys' fees, costs and interest.
In June 1999, the court issued a preliminary injunction enjoining PM Inc. from
prohibiting retail outlets that participate in the program at one of the levels
from installing competitive permanent signage in any section of the "industry
fixture" that displays or holds packages of cigarettes manufactured by a firm
other than PM Inc., or requiring those outlets to allocate a percentage of
cigarette-related permanent signage to PM Inc. greater than PM Inc.'s market
share. The court also enjoined PM Inc. from prohibiting retailers participating
in the program from advertising or conducting promotional programs of cigarette
manufacturers other than PM Inc. The preliminary injunction does not affect any
other aspect of the Retail Leaders program. In May 2001, the court denied
plaintiffs' motion alleging that PM Inc. had violated the preliminary
injunction. In July 2001, one plaintiff filed a motion to modify and expand the
preliminary injunction. The motion was denied in December 2001. In October 2001,
PM Inc. moved for summary judgment dismissing all of plaintiffs' claims. Trial
is scheduled for May 2002.
Vending Machine Case: Plaintiffs, who began their case as a purported
nationwide class of cigarette vending machine operators, allege that PM Inc. has
violated the Robinson-Patman Act in connection with its promotional and
merchandising programs available to retail stores and not available to cigarette
vending machine operators. Plaintiffs request actual damages, treble damages,
injunctive relief, attorneys' fees and costs, and other unspecified relief. In
June 1999, the court denied plaintiffs' motion for a preliminary injunction.
Plaintiffs have withdrawn their request for class action status. In August 2001,
the court granted PM Inc.'s motion for summary judgment and dismissed, with
prejudice, the claims of ten plaintiffs. In October 2001, the court certified
its decision for appeal to the United States Court of Appeals for the Sixth
Circuit following the stipulation of all plaintiffs that the district court's
dismissal would, if affirmed, be binding on all plaintiffs.
Tobacco Price Cases: As of February 15, 2002, there were 36 putative class
actions pending against PM Inc. and other domestic tobacco manufacturers, as
well as, in certain instances, the Company and Philip Morris International,
alleging that defendants conspired to fix cigarette prices in violation of
antitrust laws. Seven of the putative class actions were filed in various
federal district courts by direct purchasers of tobacco products, and the
remaining 29 were filed in 14 states and the District of Columbia by retail
purchasers of tobacco products. In November 2001, the court granted plaintiffs'
motion for class certification and denied defendant's motion to dismiss in a
case pending in state court in Kansas. In November 2001, the court denied
plaintiffs' motion for class certification in a case pending in state court in
Minnesota. In the State of Michigan, plaintiffs' motion for class certification
is pending. The seven federal class actions have been consolidated. In November
2000, the court hearing the consolidated cases granted in part and denied in
part defendants' motion to dismiss portions of the consolidated complaint. The
court has certified a class of plaintiffs who made direct purchases between
February 1996 and February 2000. In June 2001, the court granted defendants'
motion to dismiss the fraudulent concealment allegations in the complaint. In
February 2002, defendants moved for summary judgment dismissing plaintiffs'
claims. The cases are listed in Exhibit 99.1.
Tobacco Growers' Case: In February 2000, a suit was filed on behalf of a
purported class of tobacco growers and quota-holders, and amended complaints
were filed in May 2000 and in August 2000. The second amended complaint alleges
that defendants, including PM Inc., violated antitrust laws by bid-rigging and
allocating purchases at tobacco auctions and by conspiring to undermine the
tobacco quota and price-support program administered by the federal government.
In October 2000, defendants filed motions to dismiss the amended complaint and
to transfer the case, and plaintiffs filed a motion for class certification. In
November 2000, the court granted defendants' motion to transfer the case to the
United States District Court for the Middle District of North Carolina. In
December 2000, plaintiffs served a motion for leave to file a third amended
complaint to add tobacco leaf buyers as defendants. This motion was granted, and
the additional parties were served in February 2001. In March 2001, the leaf
buyer defendants filed a motion to dismiss the
25
case. In June 2001, the manufacturing and leaf buyer defendants filed a joint
memorandum in opposition to plaintiffs' motion for class certification. In July
2001, the court denied the manufacturer and leaf buyer defendants' motions to
dismiss the case.
Consolidated Putative Punitive Damages Cases: In September 2000, a
putative class action was filed in the federal district court in the Eastern
District of New York that purports to consolidate punitive damages claims in ten
tobacco-related actions currently pending in the federal district court in the
Eastern Districts of New York and Pennsylvania. In November 2000, the court
hearing this case indicated that, in its view, it appears likely that plaintiffs
will be able to demonstrate a basis for certification of an opt-out compensatory
damages class and a non-opt-out punitive damages class. In December 2000,
plaintiffs served a motion for leave to file an amended complaint and a motion
for class certification. A hearing on plaintiffs' motion for class certification
was held in March 2001.
Certain Other Actions
National Cheese Exchange Cases: Since 1996, seven putative class actions
have been filed by various dairy farmers alleging that Kraft and others engaged
in a conspiracy to fix and depress the prices of bulk cheese and milk through
their trading activity on the National Cheese Exchange. Plaintiffs seek
injunctive and equitable relief and unspecified treble damages. Two of the
actions were voluntarily dismissed by plaintiffs after class certification was
denied. Three cases were consolidated in state court in Wisconsin, and in
November 1999, the court granted Kraft's motion for summary judgment. In June
2001, the Wisconsin Court of Appeals affirmed the trial court's ruling. In
October 2001, the Wisconsin Supreme Court granted plaintiffs' petition for
further review. Kraft's motion to dismiss was granted in a case pending in the
United States District Court for the Central District of California. The United
States Court of Appeals for the Ninth Circuit reversed and remanded the case for
further proceedings. A case in Illinois state court has been settled and
dismissed. No classes have been certified in any of the cases.
Italian Tax Matters: One hundred ninety-four tax assessments alleging the
nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1996 and
income taxes for the years 1987 to 1996) have been served upon certain
affiliates of the Company, including six new assessments (for the year 1996),
which were served in October and December 2001. The aggregate amount of alleged
unpaid taxes assessed to date is the euro equivalent of $2.1 billion. In
addition, the euro equivalent of $3.1 billion in interest and penalties has been
assessed. The Company anticipates that value-added and income tax assessments
may also be received with respect to subsequent years. All of the assessments
are being vigorously contested. To date, the Italian administrative tax court in
Milan has overturned 188 of the assessments. The decisions to overturn 185
assessments have been appealed by the tax authorities to the regional appellate
court in Milan. To date, the regional appellate court has rejected 72 of the
appeals filed by the tax authorities. The tax authorities have appealed 45 of
the 72 decisions of the regional appellate court to the Italian Supreme Court,
and a hearing on these cases was held in December 2001. Six of the 51 decisions
were not appealed and are now final. In March 2002, the Italian Supreme Court
rejected 12 of the 45 appeals and these 12 cases are now final. Also in March
2002, the Italian Supreme Court vacated the decisions of the regional appellate
court in 16 of the cases and remanded these cases back to the regional appellate
court for further hearings on the merits. In a separate proceeding in October
1997, a Naples court dismissed charges of criminal association against certain
present and former officers and directors of affiliates of the Company, but
permitted tax evasion and related charges to remain pending. In February 1998,
the criminal court in Naples determined that jurisdiction was not proper, and
the case file was transmitted to the public prosecutor in Milan. In December
2000, the Milan prosecutor took certain procedural steps that may indicate his
intention to recommend that charges be pursued against certain of these present
and former officers and directors. The Company, its affiliates and the officers
and directors who are subject to the proceedings believe they have complied with
applicable Italian tax laws and are vigorously contesting the pending
assessments and proceedings.
------------------------
26
It is not possible to predict the outcome of the litigation pending against
the Company and its subsidiaries. Litigation is subject to many uncertainties.
Unfavorable verdicts awarding compensatory and punitive damages against PM Inc.
have been returned in the Engle smoking and health class action, several
individual smoking and health cases and a health care cost recovery case and are
being appealed. It is possible that there could be further adverse developments
in these cases and that additional cases could be decided unfavorably. An
unfavorable outcome or settlement of a pending smoking and health or health care
cost recovery case could encourage the commencement of additional similar
litigation. There have also been a number of adverse legislative, regulatory,
political and other developments concerning cigarette smoking and the tobacco
industry that have received widespread media attention. These developments may
negatively affect the perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending litigation, and
may prompt the commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of pending tobacco-related
litigation, and the Company has not provided any amounts in the consolidated
financial statements for unfavorable outcomes, if any. The present legislative
and litigation environment is substantially uncertain, and it is possible that
the Company's business, volume, results of operations, cash flows or financial
position could be materially affected by an unfavorable outcome or settlement of
certain pending litigation or by the enactment of federal or state tobacco
legislation. The Company and each of its subsidiaries named as a defendant
believe, and each has been so advised by counsel handling the respective cases,
that it has a number of valid defenses to all litigation pending against it, as
well as valid bases for appeal of adverse verdicts against it. All such cases
are, and will continue to be, vigorously defended. However, the Company and its
subsidiaries may enter into discussions in an attempt to settle particular cases
if they believe it is in the best interests of the Company's stockholders to do
so.
Reference is made to Note 16 for a description of certain pending legal
proceedings. Reference is also made to Exhibit 99.1 to this Form 10-K for a list
of pending smoking and health class actions, health care cost recovery actions,
and certain other actions, and for a description of certain developments in such
proceedings; and Exhibit 99.2 for a schedule of the smoking and health class
actions, consolidated individual smoking and health case and Retail Leaders
Case, which are currently scheduled for trial through 2002. Copies of Note 16
and Exhibits 99.1 and 99.2 are available upon written request to the Corporate
Secretary, Philip Morris Companies Inc., 120 Park Avenue, New York, NY 10017.
27
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Executive Officers of the Company
The following are the executive officers of the Company as of February 28,
2002:
Name Office Age
---- ------ ---
Geoffrey C. Bible.................... Chairman of the Board and Chief Executive Officer 64
John D. Bowlin....................... President and Chief Executive Officer of Miller Brewing 51
Company
Bruce S. Brown....................... Vice President, Corporate Taxes 62
Louis C. Camilleri................... Senior Vice President and Chief Financial Officer(1) 47
Nancy J. De Lisi..................... Vice President, Finance and Treasurer 51
Roger K. Deromedi.................... Co-Chief Executive Officer of Kraft Foods Inc.; and 48
President and Chief Executive Officer of Kraft Foods
International, Inc.
David I. Greenberg................... Senior Vice President and Chief Compliance Officer 47
Betsy D. Holden...................... Co-Chief Executive Officer of Kraft Foods Inc.; and 46
President and Chief Executive Officer of Kraft Foods
North America, Inc.
G. Penn Holsenbeck................... Vice President, Associate General Counsel and Corporate 55
Secretary
John R. Nelson....................... President and Chief Executive Officer of Philip Morris 49
International Inc.
Steven C. Parrish.................... Senior Vice President, Corporate Affairs 51
Timothy A. Sompolski................. Senior Vice President, Human Resources and 49
Administration
Michael E. Szymanczyk................ President and Chief Executive Officer of Philip Morris 53
Incorporated
Joseph A. Tiesi...................... Vice President and Controller 43
Charles R. Wall...................... Senior Vice President and General Counsel 56
William H. Webb...................... Vice Chairman and Chief Operating Officer 62
All of the above-mentioned officers have been employed by the Company in
various capacities during the past five years.
(1) In January 2002, the Board of Directors announced its intention to elect
Louis C. Camilleri as President and Chief Executive Officer of the Company,
following the Annual Stockholders' Meeting.
28
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information called for by this Item is hereby incorporated by reference
to the paragraph captioned "Quarterly Financial Data (Unaudited)" on page 59 of
the 2001 Annual Report and made a part hereof.
Item 6. Selected Financial Data.
The information called for by this Item is hereby incorporated by reference
to the information with respect to 1997-2001 appearing under the caption
"Selected Financial Data" on page 36 of the 2001 Annual Report and made a part
hereof.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information called for by this Item is hereby incorporated by reference
to the paragraphs captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" ("MD&A") on pages 20 to 35 of the 2001
Annual Report and made a part hereof.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information called for by this Item is hereby incorporated by reference
to the paragraphs in the MD&A captioned "Market Risk" and "Value at Risk" on
pages 33 to 34 of the 2001 Annual Report and made a part hereof.
Item 8. Financial Statements and Supplementary Data.
The information called for by this Item is hereby incorporated by reference
to the 2001 Annual Report as set forth under the caption "Quarterly Financial
Data (Unaudited)" on page 59 and in the Index to Consolidated Financial
Statements and Schedules (see Item 14) and made a part hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions.
Except for the information relating to the executive officers of the
Company set forth in Part I of this Report, the information called for by Items
10-13 is hereby incorporated by reference to the Company's definitive proxy
statement for use in connection with its annual meeting of stockholders to be
held on April 25, 2002, filed with the Securities and Exchange Commission on
March 18, 2002, and, except as indicated therein, made a part hereof.
29
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 2001
Annual Report Annual Report
Page Page
------------- -------------
Data incorporated by reference to the Company's
2001 Annual Report:
Consolidated Balance Sheets at December 31, 2001
and 2000..................................... -- 37
Consolidated Statements of Earnings for the
years ended December 31, 2001, 2000 and
1999......................................... -- 38
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2001, 2000
and 1999..................................... -- 40
Consolidated Statements of Cash Flows for the
years ended December 31, 2001, 2000 and
1999......................................... -- 38-39
Notes to Consolidated Financial Statements...... -- 41-59
Report of Independent Accountants............... -- 60
Data submitted herewith:
Report of Independent Accountants............... S-1 --
Financial Statement Schedule--Valuation and
Qualifying Accounts.......................... S-2 --
Schedules other than those listed above have been omitted either because
such schedules are not required or are not applicable.
(b) Reports on Form 8-K: The Registrant filed a Current Report on Form 8-K
on January 30, 2002 containing the Registrant's consolidated financial
statements for the year ended December 31, 2001.
(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.1-10.18 are management contracts, compensatory plans or
arrangements):
3.1 -- Restated Articles of Incorporation of the Company.(1)
3.2 -- By-Laws, as amended, of the Company.
4.1 -- Indenture dated as of August 1, 1990, between the Company
and The Chase Manhattan Bank (formerly known as Chemical
Bank), Trustee.(2)
4.2 -- First Supplemental Indenture dated as of February 1, 1991,
to Indenture dated as of August 1, 1990, between the Company
and The Chase Manhattan Bank (formerly known as Chemical
Bank) Trustee.(3)
4.3 -- Second Supplemental Indenture dated as of January 21, 1992,
to Indenture dated as of August 1, 1990, between the Company
and The Chase Manhattan Bank (formerly known as Chemical
Bank) Trustee.(4)
4.4 -- Indenture dated as of December 2, 1996, between the Company
and The Chase Manhattan Bank, Trustee.(5)
4.5 -- Indenture dated as of October 17, 2001, between Kraft Foods
Inc. and The Chase Manhattan Bank, Trustee.(29)
4.6 -- The Registrant agrees to furnish copies of any instruments
defining the rights of holders of long-term debt of the
Registrant and its consolidated subsidiaries that does not
exceed 10 percent of the total assets of the Registrant and
its consolidated subsidiaries to the Commission upon
request.
30
10.1 -- Financial Counseling Program.(7)
10.2 -- Philip Morris Benefit Equalization Plan, as amended.(8)
10.3 -- Form of Employee Grantor Trust Enrollment Agreement.(9)
10.4 -- Automobile Policy.(7)
10.5 -- Form of Employment Agreement between the Company and its
executive officers.(10)
10.6 -- Supplemental Management Employees' Retirement Plan of the
Company, as amended.(7)
10.7 -- The Philip Morris 1992 Incentive Compensation and Stock
Option Plan.(7)
10.8 -- 1992 Compensation Plan for Non-Employee Directors, as
amended.(11)
10.9 -- Unit Plan for Incumbent Non-Employee Directors, effective
January 1, 1996.(9)
10.10 -- The Philip Morris 1987 Long Term Incentive Plan.(7)
10.11 -- Form of Executive Master Trust between the Company, The
Chase Manhattan Bank (formerly known as Chemical Bank) and
Handy Associates.(10)
10.12 -- 1997 Performance Incentive Plan.(12)
10.13 -- Philip Morris Long-Term Disability Benefit Equalization
Plan, as amended.(7)
10.14 -- Philip Morris Survivor Income Benefit Equalization Plan, as
amended.(7)
10.15 -- Post-Retirement Consulting Agreement between the Company and
Murray H. Bring.(20)
10.16 -- 2000 Performance Incentive Plan.(21)
10.17 -- 2000 Stock Compensation Plan for Non-Employee Directors.(21)
10.18 -- Post-Retirement Consulting Agreement between the Company and
Geoffrey C. Bible.
10.19 -- Comprehensive Settlement Agreement and Release dated October
17, 1997, related to settlement of Mississippi health care
cost recovery action.(7)
10.20 -- Settlement Agreement dated August 25, 1997, related to
settlement of Florida health care cost recovery action.(13)
10.21 -- Comprehensive Settlement Agreement and Release dated January
16, 1998, related to settlement of Texas health care cost
recovery action.(14)
10.22 -- Settlement Agreement and Stipulation for Entry of Judgment,
dated May 8, 1998, regarding the claims of the State of
Minnesota.(15)
10.23 -- Settlement Agreement and Release, dated May 8, 1998,
regarding the claims of Blue Cross and Blue Shield of
Minnesota.(15)
10.24 -- Stipulation of Amendment to Settlement Agreement and For
Entry of Agreed Order, dated July 2, 1998, regarding the
settlement of the Mississippi health care cost recovery
action.(16)
10.25 -- Stipulation of Amendment to Settlement Agreement and For
Entry of Consent Decree, dated July 24, 1998, regarding the
settlement of the Texas health care cost recovery
action.(16)
10.26 -- Stipulation of Amendment to Settlement Agreement and For
Entry of Consent Decree, dated September 11, 1998, regarding
the settlement of the Florida health care cost recovery
action.(17)
10.27 -- Master Settlement Agreement relating to state health care
cost recovery and other claims.(18)
10.28 -- Stipulation and Agreed Order Regarding Stay of Execution
Pending Review and Related Matters.(28)
12 -- Statements re: computation of ratios.(19)
13 -- Pages 19 to 60 of the 2001 Annual Report, but only to the
extent set forth in Items 1, 3, 5-7, 7A, 8 and 14 hereof.
With the exception of the aforementioned information
incorporated by reference in this Annual Report on Form
10-K, the 2001 Annual Report is not to be deemed "filed" as
part of this Report.
31
21 -- Subsidiaries of the Company.
23 -- Consent of independent accountants.
24 -- Powers of attorney.
99.1 -- Certain Pending Litigation Matters and Recent Developments.
99.2 -- Trial Schedule.
------------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-36450) dated August 22, 1990.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-39059) dated February 21, 1991.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-45210) dated January 22, 1992.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-3/A (No. 333-35143) dated January 29, 1998.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1997.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (File No. 1-08940).
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No. 1-08940).
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-08940).
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1997.
(12) Incorporated by reference to the Company's proxy statement dated March 10,
1997.
(13) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 25, 1997.
(14) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 16, 1998.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998.
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1998.
(18) Incorporated by reference to the Company's Current Report on Form 8-K dated
November 25, 1998, as amended by Form 8/K-A dated December 24, 1998.
(19) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 30, 2002.
(20) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
(21) Incorporated by reference to the Company's proxy statement dated March 10,
2000.
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2000.
32
(23) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2000.
(24) Incorporated by reference to the Company's Quarterly Report on Form 10-K
for the year ended December 31, 2000.
(25) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 2001.
(26) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2001.
(27) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2001.
(28) Incorporated by reference to the Company's Current Report on Form 8-K dated
May 8, 2001.
(29) Incorporated by reference to Kraft Foods Inc.'s Registration Statement on
Form S-3 (No. 333-67770) dated August 16, 2001.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
By: /s/ GEOFFREY C. BIBLE
------------------------------------
(Geoffrey C. Bible,
Chairman of the Board and
Chief Executive Officer)
Date: March 19, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ GEOFFREY C. BIBLE Director, Chairman of the March 19, 2002
-------------------------------------------------------- Board and Chief Executive
(Geoffrey C. Bible) Officer
/s/ LOUIS C. CAMILLERI Senior Vice President and March 19, 2002
-------------------------------------------------------- Chief Financial Officer
(Louis C. Camilleri)
/s/ JOSEPH A. TIESI Vice President and March 19, 2002
-------------------------------------------------------- Controller
(Joseph A. Tiesi)
*ELIZABETH E. BAILEY,
HAROLD BROWN,
JANE EVANS,
J. DUDLEY FISHBURN,
ROBERT E. R. HUNTLEY,
BILLIE JEAN KING,
RUPERT MURDOCH,
JOHN D. NICHOLS,
LUCIO A. NOTO,
CARLOS SLIM HELU,
WILLIAM H. WEBB,
STEPHEN M. WOLF Directors
*BY: /s/ LOUIS C. CAMILLERI March 19, 2002
---------------------------------------------------
(Louis C. Camilleri,
Attorney-in-fact)
34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
PHILIP MORRIS COMPANIES INC.:
Our audits of the consolidated financial statements referred to in our
report dated January 28, 2002 appearing in the 2001 Annual Report to
Shareholders of Philip Morris Companies Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedule listed in Item
14(a) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 28, 2002
S-1
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2001, 2000 and 1999
(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)
2001:
CONSUMER PRODUCTS:
Allowance for discounts........ $ 9 $709 $ 4 $709 $ 13
Allowance for doubtful
accounts.................... 210 27 5 35 207
Allowance for returned goods... 8 145 -- 146 7
---- ---- --- ---- ----
$227 $881 $ 9 $890 $227
==== ==== === ==== ====
FINANCIAL SERVICES:
Allowance for losses........... $121 $ 11 $-- $ -- $132
==== ==== === ==== ====
2000:
CONSUMER PRODUCTS:
Allowance for discounts........ $ 7 $815 $-- $813 $ 9
Allowance for doubtful
accounts.................... 180 3 62 35 210
Allowance for returned goods... 8 111 -- 111 8
---- ---- --- ---- ----
$195 $929 $62 $959 $227
==== ==== === ==== ====
FINANCIAL SERVICES:
Allowance for losses........... $118 $ 3 $-- $ -- $121
==== ==== === ==== ====
1999:
CONSUMER PRODUCTS:
Allowance for discounts........ $ 9 $760 $-- $762 $ 7
Allowance for doubtful
accounts.................... 192 46 1 59 180
Allowance for returned goods... 21 100 -- 113 8
---- ---- --- ---- ----
$222 $906 $ 1 $934 $195
==== ==== === ==== ====
FINANCIAL SERVICES:
Allowance for losses........... $116 $ 2 $-- $ -- $118
==== ==== === ==== ====
---------------
Notes:
(a) Primarily related to divestitures, acquisitions and currency translation.
(b) Represents charges for which allowances were created.
S-2