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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December---------------------
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
Commission file number1998
COMMISSION FILE NUMBER 1-8940
Philip Morris Companies Inc.------------------------
PHILIP MORRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
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VirginiaVIRGINIA 13-3260245
(State or other jurisdiction of (I.R.S. Employer
Identification No.)
incorporation or organization) Identification No.)
120 Park Avenue, New York,PARK AVENUE,
NEW YORK, N.Y. 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-880-5000
Securities registered pursuant to Section------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 917-663-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act:OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Name of each exchange on
Title of each class which registered
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Common Stock, $1$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/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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At February 29, 1996, the/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 26, 1999, was approximately $82.0$95 billion. At such date,
there were 829,752,4272,425,864,366 shares of the registrant's Common Stock outstanding.
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Documents Incorporated by Reference------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to stockholders for the year
ended December 31, 1995,1998, are incorporated in Part I, Part II and Part IV hereof
and made a part hereof. The registrant's definitive proxy statement for use in
connection with its annual meeting of stockholders to be held on April 25, 1996,29, 1999,
is incorporated in Part III hereof and made a part hereof.
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PART I
ItemITEM 1. Description of Business.
(a) General Development of Business
GeneralDESCRIPTION OF BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS
GENERAL
Philip Morris Companies Inc. is a holding company whose principal
wholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris
International Inc., Kraft Foods, Inc., and Miller Brewing Company, are engaged
primarily
in the manufacture and sale of various consumer products. A wholly-owned
subsidiary of the Company, Philip Morris Capital Corporation, engages in various
financing and investment activities. As used herein, unless the context
indicates otherwise, the term "Company" means Philip Morris Companies Inc. and
its subsidiaries. The Company is the largest consumer packaged goods company in
the world.*
Philip Morris Incorporated ("PM Inc."), which conducts business under the
trade name "Philip Morris U.S.A.,", and its subsidiaries and affiliates are
engaged primarily in the manufacture and sale of cigarettes. PM Inc. is the largest
cigarette company in the United States. Philip Morris International Inc.
("Philip Morris International" or "PMI") is a holding company whose subsidiaries
and affiliates and their licensees are engaged primarily in the manufacture and
sale of tobacco products (mainly cigarettes); certain Latin American subsidiaries and
affiliates manufacture and sell a wide variety of food products. internationally. A subsidiary of
Philip Morris International is the leading United States exporter of cigarettes.
Marlboro,MARLBORO, the principal cigarette brand of these companies, has been the world's
largest sellinglargest-selling cigarette brand since 1972. The Company'sCertain subsidiaries and affiliates
of Philip Morris International manufacture and sell a wide variety of food
subsidiary,products in Latin America.
Kraft Foods, Inc. ("Kraft"), is the largest processor and marketer of retail
packaged foods in the United States. A wide variety of grocery,cheese, processed meat
products, coffee cheese, confectionery and processed meatgrocery products are manufactured and marketed in the
United States and Canada by KraftKraft. Subsidiaries and by
its subsidiary,affiliates of Kraft Foods
International, Inc. ("Kraft Foods International"), a subsidiary of Kraft,
manufacture and market coffee, confectionery, cheese, grocery and processed meat
products primarily in Europe and the Asia/Pacific region.
Miller Brewing Company ("Miller") is the second largestsecond-largest brewing company in
the United States.
Source of Funds--DividendsSOURCE OF FUNDS--DIVIDENDS
Because the Company is a holding company, its principal source of funds is
dividends from its subsidiaries. The Company's principal wholly-owned
subsidiaries currently are not limited by long-term debt or other agreements in
their ability to pay cash dividends or make other distributions with respect to
their common stock.
(b) Financial Information About Industry Segments(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
In 1995,1998, the Company's significant industry segments were domestic tobacco,
products
(principally cigarettes),international tobacco, North American food, products,international food, beer and
financial services and
real estate.services. Operating revenues and operating profitcompanies income (together
with a reconciliation to operating income) and identifiable assets 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, 1998, 1997 and 1996) are set forth
in Note 1112 to the Company's consolidated financial statements and are
incorporated herein by reference to the Company's annual report to stockholders
for the year ended December 31, 19951998 (the "1995"1998 Annual Report").
In 1995,1998, operating profit fromcompanies income for domestic tobacco products was approximately
65%13.1% of consolidated operating companies income, down from 25.7% in 1997 and
32.7% in 1996. Both the Company's total operating profit (updecrease from 62%1996 to 1997 and the decrease from 1997 to
1998 were due primarily to charges recorded in 1994), with PM Inc.1998 and Philip Morris International contributing 34% and 31%, respectively (compared
with 33% and 29%, respectively,1997 in
1994). Food products, beer, and financial
services and real estate accounted for approximately 29%, 4% and 2%,
respectively, of the Company's total operating profit in 1995 (32%, 4% and
2%, respectively, in 1994).
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* References to the Company's competitive ranking in its various businesses
are based on sales data or, in the case of cigarettes and beer, shipments,
unless otherwise indicated.
1
(c) Narrative Descriptionconnection with tobacco litigation settlements discussed below in Item 3. LEGAL
PROCEEDINGS. International tobacco contributed 44.4% of Business
Tobacco Productsconsolidated operating
companies income in 1998, compared with 35.7% and 31.7%, respectively, in 1997
and 1996. North American food and international food contributed 27.0% and 9.9%,
respectively, to consolidated operating companies income in 1998, compared with
22.4% and 10.3%, respectively, in 1997 and 20.5% and 10.1%, respectively, in
1996. Beer and financial services contributed 4.0% and 1.6%, respectively, to
consolidated operating companies income in 1998, compared with 3.6% and 2.3%,
respectively, in 1997, and 3.4% and 1.6%, respectively, in 1996. The higher
contribution attributable to financial services in 1997 reflects a $103 million
pre-tax gain on the sale of its real estate operations.
(C) NARRATIVE DESCRIPTION OF BUSINESS
TOBACCO PRODUCTS
PM Inc. is responsible for the manufacture, marketingmanufactures, markets and sale ofsells cigarettes in the United States (including military sales); subsidiariesStates.
Subsidiaries and affiliates of Philip Morris International and their licensees
are responsible
for the manufacture, marketingmarket and sale ofsell tobacco products outside the United States;States and
a subsidiary of Philip Morris International is responsible
forexport tobacco product exportsproducts from the United States.
The industry continues to be subject to health concerns relating to the
use of tobacco products and exposure to environmental tobacco smoke,
legislation, including tax increases, governmental regulation, privately
imposed smoking restrictions, governmental and grand jury investigations and
litigation, any or all of which could have an adverse impact on the Company.
Domestic Tobacco ProductsDOMESTIC TOBACCO PRODUCTS
PM Inc. is the largest tobacco company in the United States, with total
cigarette shipments in the United States of 221.8227.6 billion units in 1995 (an increase1998, a
decrease of 1.1%3.2% from 1994), accounting1997. PM Inc. accounted for 46.1%49.4% of the cigarette
industry's total estimated
shipments in the United States in 1998 (an increase of 1.30.7
share points from 1994)1997). The industry's estimated cigarette shipments in the United States
decreased by 1.7%4.6% in 1995, compared with 1994, in line with the United States
industry's historical long-term average rate of decline of 1% to 2% per
annum.1998. The following tabletable(+) sets forth the industry's estimated
cigarette shipments in the United States, PM Inc.'s shipments and its share of
United States industry shipments:
Years EndedYEARS ENDED PM Inc.
DecemberINC.
DECEMBER 31 Industry*INDUSTRY* PM Inc. Share of Industry*INC. SHARE OF INDUSTRY
- ------------ -------- ------- ------------------
(in billions of units) (%)---------------------------------------------------------- ----------- ----------- -------------------
1995..................... 481.1 221.8 46.1
1994** .................. 489.6 219.4 44.8
1993 .................... 461.2 194.7 42.2(IN BILLIONS OF UNITS) (%)
1998...................................................... 460.8 227.6 49.4
1997...................................................... 482.9 235.2 48.7
1996...................................................... 483.2 230.8 47.8
PM Inc.'s major premium brands are Marlboro, BensonMARLBORO, VIRGINIA SLIMS, BENSON &
Hedges, Merit,
Virginia SlimsHEDGES, MERIT and Parliament.PARLIAMENT. Its principal discount brands are BasicBASIC and
Cambridge.CAMBRIDGE. All of its brands are marketed to satisfytake into account differing
preferences of adult smokers. PM Inc. has been the leading cigarette company in the United
States market since 1983.* MarlboroMARLBORO is the largest sellinglargest-selling cigarette brand in
the United States, with shipments of 144.9162.5 billion units in 1995 (up 5.2%1998 (down 0.9% from
1994, despite a limited product recall)1997), equating to 30.1%35.3% of the United States market (up from 28.1%34.0% in 1994)1997).
During 1995,In December 1998, PM Inc. paid $150 million for options to purchase the
United States rights to manufacture and market three cigarette trademarks, L&M,
Lark and Chesterfield, the international rights to which are already owned by
Philip Morris International. The exercise of the options is subject to certain
conditions. Including the $150 million paid in December, the total acquisition
price for these trademarks will be $300 million. L&M, Lark and Chesterfield
accounted for less than 0.2% of domestic cigarette industry volume continued to shift from
the discount segment, which consists of "generic" and lower-priced cigarettes
that have a lower profit margin than premium brands, to the full-price
(premium) segment (70% of industry shipments in 1995, compared with 67.5% in
1994). The shift from the discount segment began in the second half of 1993,
reflecting a pricing strategy implemented by1998. In
February 1999, PM Inc. announced that it plans to phase out cigarette production
at its Louisville, Kentucky manufacturing plant by December 2000.
In 1998, the premium and discount segments accounted for approximately 73%
and 27%, respectively, of domestic cigarette industry volume, versus 72.3% and
27.7%, respectively, in response to the
domestic tobacco market, which was becoming increasingly price-sensitive.
Previously, the discount segment of the industry had been growing markedly
and constituted as much as 40.7% of United States industry shipments in the
second quarter of 1993, up from 30.2% in 1992.1997. PM Inc.'s 1995 share of the premium segment was 54.5%,58.4%
in 1998, an increase of 0.90.8 share points over 1994.1997. Shipments of premium
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+ Data presented in this table differ in some cases from data discussed above
due to rounding differences.
* Source: Management Science Associates.
2
cigarettes accounted for 82.7%86.4% of PM Inc.'s 19951998 volume, up from 80.7%85.7% in 1994.1997.
In 1995,1998, United States industry shipments within the discount segment declined
9.2%6.9% from 19941997 levels; PM Inc.'s 19951998 shipments within this category declined
9.1%8.1%, resulting in a share of 26.6%25.0% of the discount segment (up 0.1(down 0.3 share
points from 1994)1997). These developments and
their impact on the Company's financial statements are more fully discussed
in Management's Discussion and Analysis of Financial Condition and Results of
Operations (the "MD&A"), incorporated herein by reference to the Company's
1995 Annual Report.
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* Source: The Maxwell Consumer Report (issued by Wheat, First Securities,
Inc.).
** The increase in industry shipments in 1994 from 1993 was due in part to
increased distributor buying in 1992 (made in anticipation of higher
cigarette prices and the January 1, 1993, increase in the federal excise
tax), which reduced 1993 shipments.
2
PM Inc. cannot predict future change or rates of change in domestic tobacco
industry volume, the relative sizes of the premium and discount segments or in
PM Inc.'s shipments, shipment market share
(based on shipments) or retail market share.
International Tobacco Productsshare; however, it
believes that PM Inc.'s shipments may be materially adversely affected by price
increases related to the tobacco litigation settlements and, if enacted, by
increased excise taxes or other tobacco legislation discussed below.
INTERNATIONAL TOBACCO PRODUCTS
Philip Morris International's total cigarette shipments grew 10.7%1.0% in 1995,1998,
to approximately 593.2716.9 billion units. Philip Morris International'sInternational estimates that its share of
the worldinternational cigarette market (excluding the United States) was approximately 12%13.9% in
1995,1998, up from approximately 11%13.6% in 1994.1997. Philip Morris International estimates that
worldinternational cigarette industry unit shipments (excluding the United States) were
approximately 5.05.2 trillion units in 1995,
which represents1998, down slightly from 1997, due to the
impact of regional economic crises. Philip Morris International unit shipments
(including brands acquired through acquisitions) have grown at a compounded
annual increasegrowth rate of approximately 1% per year9.3% over the last five years.years, versus compounded annual
industry growth of approximately 1.3% over the same period. Philip Morris
International estimates that the
American-style segmentInternational's leading international brands--MARLBORO, L&M, PHILIP MORRIS, BOND
STREET, CHESTERFIELD, PARLIAMENT, LARK, MERIT and VIRGINIA SLIMS--collectively
accounted for approximately 10.8% of the world market (excluding the United States) has
increased at a compounded annual rate of more than 3% per year over the last
five years. It also estimates that the American-style segment constituted
approximately 32% of the worldinternational cigarette market
(excluding the United States) in 1995,1998, up from approximately 31%10.7% in 1994; shipments by Philip Morris
International accounted for approximately 36% of this segment in 1995, versus
approximately 34% in 1994.1997. Unit sales of
Philip Morris International's principal brand, Marlboro,MARLBORO, increased 6.4%3.8% in 1995 over 1994,1998,
to 276.7330 billion units, representing more than 5%6% of the worldinternational cigarette
market (excluding the United States).
Philip Morris International has a cigarette market share of at least 15%--and,
and in a number of instances substantially more than 15%--in, in more than 3040
markets, including Argentina, Australia, Belgium, the Canary Islands, the Czech Republic, Finland,
France, Germany, Hong Kong, Hungary, Italy, Japan, Kuwait,Mexico, the Netherlands,
the Philippines,Poland, Portugal, Saudi Arabia, Singapore, Spain, Switzerland and Switzerland. Philip
Morris International's leading international brands are Marlboro, L&M, Bond
Street, Philip Morris, Lark, Chesterfield, Parliament, Merit and Virginia
Slims.
A subsidiary ofTurkey.
In 1998, Philip Morris International is the leading United States
exportertook a number of cigarettes. It exported 164.1 billion unitsmeasures to invest in
1995, an increase
of 22.8% from 1994. These exports constituted 28% of Philip Morris
International's total unit volume in 1995.
In 1995, Philip Morris International increased capacity and improved
productivity through various capital projects. Philip Morris International
modernized and expanded aexpand its international manufacturing plant in the Czech Republic, began
construction of a new plant in Lithuania, and undertook plant renovations in
Krasnodar, Russia, and in Kharkov, Ukraine. It also began a program to
increase capacity in Holland, announced plans to upgrade its tobacco-
processing facility in Switzerland and to build a new factory in Kazakhstan,
completed construction of a leaf-processing facility in Malaysia, and concluded
an agreement under which a third party will contract-manufacture Marlboro
cigarettes in China for the Chinese market. In February 1996,base. Philip Morris International
acquired an initial 33% sharethe assets of Poland's largest tobacco
company, Zaklady Przemyslu Tytoniowego w Krakowie S.A. ("ZPTK"). Within the
next three years, Philip Morris International will receive an additional 32%its former licensee in Indonesia, produced L&M and BOND
STREET at a new manufacturing facility in Romania, and began construction of the company, provided it has completed certain investmentsnew
manufacturing plants in ZPTK's
manufacturing facilities and at such time is in compliance with other
contractual commitments.
Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and
Smoking
Cigarettes are subject to substantial excise taxes in the United States
and to similar taxes in most foreign markets. The United States federal
excise tax on cigarettes, last increased in 1993, is $12 per 1,000 ($.24 per
pack). During 1995, several measures were proposed to increase the federal
excise tax on cigarettes. However, no hearings were held on any of these
measures, and none was passed by Congress. In general, excise taxes, sales
taxes and other cigarette-related taxes levied by various states, counties
and municipalities have been increasing. These taxes vary considerably and,
when combined with the current federal excise tax, may be as high as $1.26
per pack.
In the opinion of PM Inc. and Philip Morris International, past increases in
the federal excise tax and the other taxes discussed above 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 shifts from
the premium segment to the discount segment.
3
Reports with respect to the alleged harmful physical effects 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.
As a result, the tobacco industry, both in the United States and abroad, is
subject to increased governmental restrictions, decreasing social acceptance
of smoking, increased pressure from anti-smoking groups, unfavorable press
reports, governmental investigations and substantial increases in excise
taxes. In the opinion of PM Inc. and Philip Morris International, these
developments have had, and continue to have, an adverse effect upon tobacco
industry sales. Since 1964, the Surgeon General of the United States and the
Secretary of Health and Human Services have released a number of reports
purporting to link 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
purported "addictive" nature of cigarettes, the purported effects of smoking
cessation, the decrease in smoking in the United States and the economic and
regulatory aspects of smoking in the Western Hemisphere, and cigarette
smoking by adolescents, particularly the purported "addictive" nature of
cigarette smoking in adolescence.
The Comprehensive Smoking Education Act (the "Smoking Education Act"),
enacted in 1984, requires cigarette manufacturers and importers to include
the following warning statements in rotating sequence on cigarette packagesSt. Petersburg, Russia and in advertisements: "SURGEON GENERAL'S WARNING: Smoking Causes Lung
Cancer, Heart Disease, Emphysema, And May Complicate Pregnancy"; "SURGEON
GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious Risks to Your
Health"; "SURGEON GENERAL'S WARNING: Smoking By Pregnant Women May Result in
Fetal Injury, Premature Birth, And Low Birth Weight"; and "SURGEON GENERAL'S
WARNING: Cigarette Smoke Contains Carbon Monoxide." The Smoking Education Act
also covers the size and format of warnings on cigarette packages and in
cigarette advertising, and prescribes a modified version of the warnings for
outdoor billboard advertisements. In addition to the warning statements,
pursuant to an agreement sanctioned by the Federal Trade Commission (the
"FTC"), cigarette advertising in the United States must disclose the average
"tar" and nicotine yields of the advertised brand or variety. It has been
reported that the FTC is considering changes to the test method used to rate
the "tar" and nicotine yields of cigarettes sold in the United States. It is
also possible that the FTC will promulgate new regulations governing or
restricting advertising or marketing claims based on "tar" and nicotine
ratings.
Cigarette manufacturers and importers are also required to provide
annually to the Secretary of Health and Human Services a list of ingredients
added to tobacco in the manufacture of cigarettes, and the Secretary is
directed to report to Congress concerning the health effects, if any, of such
ingredients.
Most of the cigarettes sold by the Company's subsidiaries, affiliates and
their licensees are sold in countries where warning statement requirements
for cigarette packages have been adopted. In markets where such statements
are not legally required, the Company's policy is to place the United States
Surgeon General's warnings on all cigarette packages.
Studies with respect to the alleged health risk to nonsmokers of diluted
and modified cigarette smoke, often referred to as environmental tobacco
smoke ("ETS"), have received significant publicity. In 1986, the Surgeon
General of the United States and the National Academy of Sciences reported
that nonsmokers were at increased risk of lung cancer and respiratory illness
due to ETS. In January 1993, the United States Environmental Protection
Agency (the "EPA") issued a report concluding, among other things, that ETS
is a human lung carcinogen and that ETS increases certain health risks for
young children. In June 1993, PM Inc. joined five other representatives of
the tobacco manufacturing and related industries in a lawsuit against the
EPA, seeking a declaration that the EPA does not have the authority to
regulate ETS, and that, in view of the available scientific evidence and the
EPA's failure to follow its own guidelines in making the determination, the
EPA's final risk assessment be declared arbitrary and capricious and ordered
withdrawn. The EPA report, as well as adverse publicity on ETS, have resulted
in the enactment of legislation and privately imposed limitations that
restrict or ban cigarette smoking in certain public places and some places of
employment. It has been reported that the International Agency for Research
on Cancer of the World Health Organization is conducting research on ETS that
may be published sometime during 1996.
4
Enactments by regulatory agencies and other governmental authorities,
together with private initiatives, have restricted or prohibited smoking areas
aboard certain common carriers, including domestic and certain international
commercial airline flights, in certain public places and in some places of
employment.
In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban
smoking in the workplace. Hearings on this proposed rule were held from
September 1994 through March 1995. The period for post-hearing submissions on
the proposed rule ended on February 9, 1996. OSHA has not yet issued either a
final rule or a proposed revised rule.
For several years, Congress has provided funds for the development of test
methodologies and standards aimed at measuring the propensity of cigarettes
to ignite upholstered furniture or mattresses. The Company cannot predict
whether these efforts will result in legislation or regulation.
Television and radio advertising of cigarettes is prohibited in the United
States and prohibited or restricted in many other countries. In June 1995, PM
Inc. entered into a consent decree with the Department of Justice, pursuant
to which it agreed to reposition its brand advertising at professional
football, baseball, basketball and hockey arenas so as not to be
inadvertently exposed to prominent television coverage.
In June 1992, the Alcohol, Drug Abuse and Mental Health Act was enacted.
This act requires states to adopt a minimum age of at least 18 for purchases
of tobacco products and to establish a system to monitor, report and reduce
the illegal sale of tobacco products to minors in order to continue receiving
federal funding for mental health and drug abuse programs. In January 1996,
regulations implementing this legislation were announced by the Department of
Health and Human Services.
In June 1995, PM Inc. announced that it has voluntarily undertaken a
program to limit minors' access to cigarettes. Elements of the program
include discontinuing free cigarette sampling to consumers in the United
States, discontinuing the distribution of cigarettes by mail to consumers in
the United States, placing a notice on cigarette cartons and packs for sale
in the United States stating "Underage Sale Prohibited," working with others
in support of state legislation to prevent youth access to tobacco products,
taking measures to encourage retailer compliance with minimum-age laws, and
independent auditing of the program.
In August 1995, President Clinton announced, and the United States Food and
Drug Administration (the "FDA") initiated, a rulemaking proceeding purportedly
designed to prevent minors from smoking. In the proposed regulations, the FDA
asserted that it has jurisdiction over nicotine as a "drug" and over cigarettes
as a medical "device" (a nicotine delivery system) under the provisions of the
Food, Drug and Cosmetic Act. The proposed regulations include severe
restrictions on the distribution, marketing and advertising of cigarettes, and
require cigarette manufacturers to fund a $150 million-a-year campaign to
discourage minors from using tobacco products. The period for public comment on
the FDA's plan initially ended on January 2, 1996. The FDA's assertion of
jurisdiction, if not reversed by judicial or legislative action, could lead to
more expansive FDA-imposed restrictions on cigarette operations than those set
forth in the current proposed regulations. PM Inc., four other domestic
cigarette manufacturers and an advertising firm have sued the FDA, seeking a
judicial declaration that the FDA has no authority to regulate cigarettes and
asking the court to issue an injunction requiring the FDA to withdraw its
proposed regulations. Similar suits have been filed against the FDA by
manufacturers of smokeless tobacco products, by a trade association of cigarette
retailers and by advertising agency associations.
On March 18, 1996, the FDA placed in its rulemaking docket statements from
three former employees of PM Inc. concerning, according to the FDA Commissioner,
"the role of nicotine in the design and manufacture of cigarettes." As a result
of this and unrelated developments, the FDA has reopened for limited purposes
for thirty days the period during which the public may comment on the statements
and two specific aspects of its proposed regulations.
Legislation and other governmental action potentially affecting the
tobacco industry is proposed periodically at the federal, state and local
levels. During 1995, members of Congress, the Clinton Administration and
state officials proposed measures that would ban or severely restrict smoking
in workplaces and in buildings with public access and on international
flights that have a nexus with the United States, require additional health
warning and product content information on packaging and in advertising,
eliminate the tax deductibility of a portion of the cost
5
of tobacco advertising, significantly increase the excise and similar taxes on
cigarettes, and authorize the FDA to regulate tobacco products (see above). In
November 1995, Congress passed a measure that bans or severely restricts
vending machines and the provision of free tobacco products in federal
buildings and on federal property. In recent years various members of Congress
have introduced legislation--some of which has been the subject of hearings or
floor debate--that would subject cigarettes to various regulations under the
Department of Health and Human Services or regulation under the Consumer
Products Safety Act, establish anti-smoking educational campaigns or
anti-smoking programs or provide additional funding for governmental
anti-smoking activities, further restrict the advertising of cigarettes,
including requiring additional warnings on packages and in advertising,
provide that the Federal Cigarette Labeling and Advertising Act and the
Smoking Education Act could 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 and further restrict certain
advertising of cigarettes.
A number of foreign countries have also taken steps to restrict or
prohibit cigarette advertising and promotion, to increase taxes on
cigarettes, to control prices, to restrict imports and to discourage
cigarette smoking.
It is not possible to determine the outcome of the FDA regulatory
initiative announced by President Clinton or the related litigation, or to
predict what, if any, other foreign or domestic governmental legislation or
regulations will be adopted relating to the 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 volume, operating revenues and
operating income of PM Inc., Philip Morris International and the Company
could be adversely impacted, in amounts that cannot be determined.
PM Inc. has received requests for information in connection with various
governmental investigations of the tobacco industry.
In June 1995, The New York Times published an article that made
allegations about PM Inc. documents and supposedly secret research relating
to nicotine. Following publication of that article, PM Inc. has received
grand jury subpoenas from the United States Attorney for the Southern
District of New York.
PM Inc. has received Civil Investigative Demands ("CIDs") from the United
States Department of Justice requiring PM Inc. to produce documents and
respond to interrogatories relating to the possibility of "joint activity to
restrain competition in the manufacture and sale of cigarettes, including
joint activity to limit or restrict research and development or product
innovations." Certain present and former employees of PM Inc. have been
deposed or have received CIDs noticing their depositions in connection with
the investigation.
The United States Attorney for the Eastern District of New York is
reviewing the status of a grand jury investigation, begun in 1992, of
possible violations of criminal law in connection with activities relating to
The Council for Tobacco Research -- U.S.A., Inc., a research organization of
which PM Inc. is a sponsor.
PM Inc. has received grand jury subpoenas from the United States Department
of Justice requesting documents relating to an investigation of testimony
provided by tobacco industry executives before Congress.
PM Inc. has received a grand jury subpoena from the United States Attorney
for the Eastern District of Virginia requesting documents relating to an
investigation of Healthy Buildings International, Inc.
While the outcomes of these investigations cannot be predicted, PM Inc.
believes it has acted lawfully.
Smoking and Health Litigation
There is litigation pending in various jurisdictions against the leading
United States cigarette manufacturers and others seeking compensatory and, in
some cases, punitive damages for cancer and other health effects alleged to
have resulted from cigarette smoking, "addiction" to cigarette smoking or
exposure to ETS. As of December 31, 1995, there were 125 such smoking and
health cases pending in the United States against PM Inc. and, in some cases,
the Company. Of these cases, 88 were filed in the state of Florida and served
between April 28, 1995, and
6
December 31, 1995. One hundred and nine of the smoking and health cases, four of
which purport to be class actions, involve allegations of various injuries
allegedly related to cigarette smoking. Eleven of the smoking and health cases,
including one that purports to be a class action, involve allegations of various
personal injuries allegedly related to exposure to ETS. Five of the cases
pending as of December 31, 1995, involve states that have commenced actions
seeking reimbursement for Medicaid and other expenditures claimed to have been
made to treat diseases allegedly caused by cigarette smoking. In addition, a
purported class action involving allegations of various personal injuries
allegedly related to cigarette smoking is pending in Canada against, among
others, an entity in which the Company has a 40% indirect ownership interest,
and another such action is pending in Brazil against a subsidiary of the
Company, among others.
Note 15 to the Company's consolidated financial statements, incorporated
herein by reference to the Company's 1995 Annual Report, describes certain
litigation pending against the Company and its subsidiaries and related
entities, including smoking and health cases. Item 3 herein describes certain
subsequent developments in such litigation. Further reference is made to such
Note 15 and Item 3.
In March 1996, Liggett Group, Inc., a United States manufacturer and
seller of cigarettes ("Liggett"), announced an agreement to settle the Castano
case described in such Note 15 and Item 3. The agreement is subject to court
approval. Liggett also announced an agreement to settle the Medicaid
reimbursement actions brought by the states of Florida, Louisiana,
Massachusetts, Mississippi and West Virginia as described in such Note 15 and
Item 3. As part of each settlement, Liggett agreed to comply with certain
aspects of the regulations proposed by the FDA, to make certain payments and
to cooperate in limited ways with otherwise adverse parties in certain
investigations and lawsuits. The terms of the settlements would be available
to any other defendant that has a share of the Untied States domestic
cigarette market of less than 30% if it acquires or is acquired by Liggett,
and each settlement can be terminated by Liggett upon the occurrence of
specified events. Liggett's sales account for approximately 2% of the Untied
States domestic cigarette market. The major cigarette manufacturers in the
United States, including PM Inc., have stated that they do not intend to
settle any smoking and health litigation and that they will continue to defend
all such actions vigorously.
The Attorneys General of other states have announced they are considering
filing Medicaid reimbursement actions.
Distribution, Competition and Raw MaterialsAlmaty, Kazakhstan.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
PM Inc. sells its tobacco products principally to wholesalers (including
distributors), large retail organizations, including chain stores, vending
machine operators and the armed
services. Subsidiaries and affiliates of Philip Morris International and their
licensees market cigarettes and other tobacco products worldwide, directly or
through export sales organizations and other entities with which they have
contractual arrangements.
The market for tobacco products is highly competitive, characterized by
brand recognition and loyalty, with product quality, price, marketing and
packaging constituting the significant methods of competition. Promotional
activities include, in certain instances and where permitted by law, allowances,
the usedistribution 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 in Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") on pages 21-35 of the Company's 1998 Annual Report, incorporated herein
by reference, 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.
3
PM Inc. and Philip Morris International's subsidiaries and affiliates and
their licensees purchase domestic burley and flue-cured leaf tobaccos of various
grades and types each year, primarily at domestic auction. In addition, oriental
tobacco and certain other tobaccos are purchased outside the United States. The
tobacco is then graded, cleaned, stemmed and redried prior to its storage for
aging up to three years. Large quantities of leaf tobacco inventory are
maintained to support cigarette manufacturing requirements. Tobacco is an
agricultural commodity subject to United States government controls, including
the tobacco price support (subject to Congressional review) and production
adjustment programs administered by the United States Department of Agriculture
(the "USDA"), either of which can substantially affect market prices. PM Inc.
and Philip Morris International believe there is an adequate supply of tobacco
in the world markets to satisfy their current production requirements.
7
AsTAXES, 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 January 1, 1994,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
legislation became effective requiring,or other governmental action seeking to ascribe to the industry
responsibility and liability for the purported adverse health effects associated
with both smoking and exposure to environmental tobacco smoke ("ETS"); increased
smoking and health litigation; price increases in the United States related to
the settlement of certain tobacco litigation; actual and proposed excise tax
increases; the issuance of final regulations by the United States Food and Drug
Administration (the "FDA") that, if upheld by the courts, would regulate
cigarettes as "drugs" or "medical devices"; governmental and grand jury
investigations; actual and proposed requirements regarding disclosure of
cigarette ingredients and other proprietary information, as well as the testing
and reporting of the yields of "tar," nicotine and other constituents found in
cigarette smoke; 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 on
tobacco manufacturing, marketing, advertising and sales (including two European
Union directives that, if implemented, will (i) ban virtually all forms of
tobacco advertising and sponsorship in the European Union other than at the
retail point of sale, and (ii) abolish duty-free tobacco sales among member
states of the European Union); proposed legislation to eliminate the U.S. tax
deductibility of tobacco advertising and promotional costs; proposed legislation
in the United States to require the establishment of ignition propensity
performance standards for cigarettes; the diminishing social acceptance of
smoking and increased pressure from anti-smoking groups and unfavorable press
reports; and other tobacco legislation that may be considered by the Congress,
the states and other countries.
EXCISE TAXES--Cigarettes are subject to financial penalties,substantial federal and state excise
taxes in the useUnited States and to similar taxes in most foreign markets. The
United States federal excise tax on cigarettes is currently $0.24 per pack of at least 75% American-grown tobacco, which20
cigarettes and is more expensive than imported tobacco,scheduled to increase to $0.34 per pack in the year 2000 and
then to $0.39 per pack in 2002. In general, excise taxes and other taxes on
cigarettes manufacturedhave been increasing. These taxes vary considerably and, when
combined with sales taxes and the current federal excise tax, may be as high as
$1.50 per pack in a given locality in the United States. A provisionCongress has been
considering significant increases in the federal excise tax or other payments
from tobacco manufacturers, and the Clinton Administration's fiscal year 2000
budget proposal includes an additional increase of $0.55 per pack in the Uruguay Round Amendments Act, enactedfederal
excise tax. Increases in December 1994, replaced this requirement with a tariff-rate quota system that
allows a specified quantityother cigarette-related taxes have been proposed at the
state and local level and in many jurisdictions outside the United States.
In the opinion of tobacco to be imported at current tariff
levels, with additional quantities subject to a significantly higher duty.
Due to the high content of American-grown tobacco used in PM Inc.'s products and those exported by subsidiaries of 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.
FEDERAL TRADE COMMISSION ("FTC")--In September 1997, the FTC issued a
request for public comments on its proposed revision of its "tar" and nicotine
test methodology and reporting procedures
4
established by a 1970 voluntary agreement among domestic purchase requirement has not had,cigarette
manufacturers. In February 1998, PM Inc. and the new tariff-rate quota
system is not expected to have, a material adverse effectthree other domestic cigarette
manufacturers filed comments on the proposed revisions. In November 1998, the
FTC wrote to the Department of Health and Human Services requesting its
assistance in developing specific recommendations on the future of the FTC's
program for testing the "tar," nicotine and carbon monoxide content of
cigarettes.
FDA REGULATIONS--The FDA has promulgated regulations asserting jurisdiction
over cigarettes as "drugs" or "medical devices" under the provisions of the
Food, Drug and Cosmetic Act. These regulations include severe restrictions on
the distribution, marketing and advertising of cigarettes, and would require the
industry to comply with a wide range of labeling, reporting, recordkeeping,
manufacturing and other requirements. The FDA's exercise of jurisdiction, if not
reversed by judicial or legislative action, could lead to more expansive
FDA-imposed restrictions on cigarette operations than those set forth in the
regulations, and could materially adversely affect the business, volume, results
of operations, cash flows and financial position of PM Inc. and the Company. In
August 1998, the Fourth Circuit Court of Appeals ruled that the FDA does not
have the authority to regulate tobacco products, and declared the FDA's
regulations invalid and, in November 1998, that court denied the FDA's petition
for rehearing. The FDA is now petitioning the U.S. Supreme Court to review the
judgment of the Fourth Circuit Court of Appeals in this case. The ultimate
outcome of this litigation cannot be predicted.
INGREDIENT DISCLOSURE LAWS--The Commonwealth of Massachusetts has enacted
legislation to require cigarette manufacturers to report yearly the flavorings
and other ingredients used in each brand style of cigarettes sold in the
Commonwealth, and on a qualified, by-brand basis to provide "nicotine-yield
ratings" for their products based on standards to be established by the
Commonwealth. Enforcement of the ingredient disclosure provisions of the statute
could result in the public disclosure of valuable proprietary information. In
December 1997, a federal district court in Boston granted the tobacco company
plaintiffs a preliminary injunction and enjoined the Commonwealth from enforcing
the ingredient disclosure provisions of the legislation. In November 1998, the
First Circuit Court of Appeals affirmed this ruling. In addition, both parties'
cross-motions for summary judgment are pending before the district court. The
ultimate outcome of this lawsuit cannot be predicted. Similar legislation has
been enacted or proposed in other states. Some jurisdictions outside the United
States have also enacted or proposed some form of ingredient disclosure
legislation or regulation.
HEALTH EFFECTS OF SMOKING AND EXPOSURE TO ETS--Reports with respect to the
alleged harmful physical effects 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, and the economic and regulatory aspects of
smoking in the Western Hemisphere, and cigarette smoking by adolescents,
particularly the "addictive" nature of cigarette smoking in adolescence.
Studies with respect to the alleged health risks of ETS to nonsmokers
(including lung cancer, respiratory and coronary illnesses, and other
conditions) have also received significant publicity. In 1986, the Surgeon
General of the United States and the National Academy of Sciences reported that
nonsmokers were at increased risk of lung cancer and respiratory illness due to
ETS. In 1993, the U.S. Environmental Protection Agency (the "EPA") issued a
report relating to certain alleged health effects of ETS. The report included a
risk assessment relating to the alleged association between ETS and lung cancer
in nonsmokers, and a determination by the EPA to classify ETS as a "Group A"
carcinogen. In July 1998, a federal district court vacated those sections of the
report relating to lung cancer, finding that
5
the EPA may have reached different conclusions had it complied with certain
relevant statutory requirements. The federal government has appealed the court's
ruling. The ultimate outcome of this litigation cannot be predicted.
In October 1997, at the request of the United States Senate Judiciary
Committee, the Company provided the Committee with a document setting forth the
Company's position on a number of issues. On the issues of the role played by
cigarette smoking in the development of lung cancer and other diseases in
smokers, and whether nicotine, as found in cigarette smoke, is "addictive," the
Company stated that despite the differences that may exist between its views and
those of the public health community, it would, in order to ensure that there
will be a single, consistent public health message on these issues, refrain from
debating the issues other than as necessary to defend itself and its opinions in
the courts and other forums in which it is required to do so. The Company also
stated that in relation to these issues, and the alleged health effects of
exposure to ETS, the Company is prepared to defer to the judgment of public
health authorities as to what health warning messages will best serve the public
interest.
OTHER LEGISLATIVE INITIATIVES--In recent years, various members of Congress
have introduced legislation, some of which has been the subject of hearings or
floor debate, that would subject cigarettes to various regulations under the
Department of Health and Human Services or regulation under the Consumer
Products Safety Act, establish anti-smoking educational campaigns or
anti-smoking programs, or provide additional funding for governmental
anti-smoking activities, further restrict the advertising of cigarettes,
including requiring additional warnings on packages and in advertising, provide
that the Federal Cigarette Labeling and Advertising Act and the Smoking
Education Act could not be used as a defense against liability under state
statutory or common law, allow state and local governments to restrict the sale
and distribution of cigarettes, and further restrict certain advertising of
cigarettes and eliminate or reduce the tax deductibility of tobacco advertising.
It is not possible to determine the outcome of the FDA regulatory initiative
or the related litigation discussed above, or to predict what, if any, other
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.
Food Products
Kraft's reportingInternational and management structure currently consiststhe Company could
be materially adversely affected.
GOVERNMENTAL AND GRAND JURY INVESTIGATIONS--PM Inc. has received requests
for information (including grand jury subpoenas) in connection with governmental
investigations of Kraft
Foods North America,the tobacco industry, and is cooperating with respect to such
requests. Present and former employees of PM Inc. have testified or have been
asked to testify in connection with certain of these matters. The investigations
include four grand jury investigations being conducted by: the United States
Attorney for the Eastern District of New York relating to The Council for
Tobacco Research-U.S.A., Inc., a research organization of which comprises eleven business divisions (includingPM Inc. was a
sponsor; the United States Department of Justice in Washington, D.C., relating
to issues raised in testimony provided by tobacco industry executives before
Congress and other related matters; the United States Department of Justice
Antitrust Division in the Eastern District of Pennsylvania relating to tobacco
leaf purchases; and the United States Attorney for the Northern District of New
York relating to alleged contraband transactions primarily in Canadian-brand
tobacco products. Philip Morris International and its subsidiary, Philip Morris
Duty Free Inc., have also received subpoenas in the last referenced
investigation. While the outcomes of these investigations cannot be predicted,
PM Inc., Philip Morris International and Philip Morris Duty Free Inc. believe
they have acted lawfully.
TOBACCO-RELATED LITIGATION AND SETTLEMENTS--See Item 3. LEGAL PROCEEDINGS.
below for a discussion of the tobacco-related litigation pending against PM
Inc., Philip Morris International and, in some cases, the Company and its other
subsidiaries and related entities. As noted in the MD&A on pages 21-35 of the
Company's 1998 Annual Report, PM Inc. and other major domestic tobacco product
manufacturers have entered into agreements with states and various U.S.
jurisdictions settling asserted and unasserted health care cost recovery and
other claims. These settlement agreements, among other things, provide for
6
substantial annual payments, restrict advertising and marketing of tobacco
products, require public disclosure of certain industry documents, impose
requirements applicable to lobbying activities, and limit the industry's ability
to challenge certain tobacco control and underage use laws.
FOOD PRODUCTS
Kraft Canada), and Kraft Foods International. Effective January 1995, the
North American foodInternational have taken a number of actions to
improve their business was reorganized to fully integrate the
operations of the former Kraft U.S.A.portfolios and General Foods U.S.A. The combined
organization, named Kraft Foods, Inc., has begun to streamline operations and
improve effectiveness and customer response. In December 1995,operating efficiencies. During 1998, Kraft
Foods International was realigned to capitalize on growth opportunities,sold four international food businesses. During 1997, Philip
Morris International sold its Brazilian ice cream businesses, Kraft sold North
American maple-flavored syrup businesses and reorganized into four separate regional business divisions: Western Europe;
Northern Europe; Central and Eastern Europe, Middle East and Africa; and
Asia/Pacific.Kraft Foods International sold a
Scandinavian sugar confectionery business. During 1995,1996, Kraft sold its bakery businesses and its North American
margarine, specialty oils, marshmallows, caramelsbagel
business, and Kraft Foodservice
distributionFoods International sold margarine businesses in the U.K.
and several small international food businesses. In
1994, Kraft sold The All American Gourmet Company, which produced frozen
meals and side dishes.Italy. The sales of these and other smaller businesses arehave not expected to havehad a
material effect on the Company's future results of operationsoperations. In the fourth quarter of
1997, the international food businesses recorded pre-tax realignment charges of
$630 million, related primarily to the downsizing or closure of manufacturing
and are
expectedother facilities, as well as the discontinuance of certain low-margin
product lines. Included in the charges were provisions for incremental
postemployment benefits, primarily related to improveseverance. During 1998, certain
actions contemplated by the profit margincharges were undertaken, including the divestiture
or closure of North American food operations.
North Americafour businesses, the commencement of two manufacturing facilities
closures and consolidation of certain sales force and headquarters functions,
and began to make periodic postemployment payments to severed employees, the
duration of such payments being dictated by the severed employees' salary
grades, years of service and the customs of the respective countries in which
actions were taken. Kraft Foods International anticipates that the majority of
the remaining postemployment payments will be made by the end of the year 2000.
NORTH AMERICA
Kraft is the largest retail packaged food company in North America. Kraft's
principal products include ready-to-eat cereals, coffee and other beverages,
desserts, cheese and cheese products, frozen toppings, stuffing mix, syrup,
vegetable oil-based products, such as salad dressings, barbecue sauce,
cultured dairy products, frozen pizza, processed meat and
poultry products, coffee, ready-to-eat cereals, salad and other dressings,
powdered and ready-to-drink beverages, frozen bagelspizza, packaged and ready-to-eat
desserts and snacks, packaged pasta dinners.dinners, lunch combinations, barbecue
sauces, frozen toppings, confections and other cultured dairy and grocery
products. Its principal brands include Kraft,
VelveetaKRAFT, VELVEETA, CRACKER BARREL and
Cracker BarrelPOLLY-O cheese and cheese products, Miracle Whip salad
dressing, Philadelphia Brandproducts; PHILADELPHIA cream cheese; CHEEZ WHIZ cheese
Cheez Whiz cheese sauce, Kraft and
Seven Seas pourable dressings, Kraft and Bull's-Eye barbecue sauces, DiGiorno
pastas, sauces and cheeses, Light n' Lively, Knudsen and Breakstone's cultured
dairy products, Tombstone, Jack's and DiGiorno frozen pizzas, Oscar Mayersauce; OSCAR MAYER luncheon meats, hot dogs, bacon, ham and other meat products, Louis Richproducts;
LOUIS RICH luncheon meats, poultry franks, turkey bacon and other poultry
products; LUNCHABLES lunch combinations; CLAUSSEN pickles; MAXWELL HOUSE, YUBAN,
GEVALIA and NABOB coffees; GENERAL FOODS INTERNATIONAL COFFEES flavored coffees;
POST ready-to-eat cereals; MIRACLE WHIP salad dressing; KRAFT spoonable and
pourable salad dressings; KOOL-AID, TANG, CAPRI SUN, CRYSTAL LIGHT and COUNTRY
TIME powdered and ready-to-drink beverages; TOMBSTONE and JACK'S frozen pizzas
and DI GIORNO pastas, sauces, cheeses and frozen pizzas; JELL-O desserts;
HANDI-SNACKS snack combinations and desserts; ALTOIDS confections; KRAFT
Macaroni & Cheese dinners; KRAFT and BULL'S-EYE barbecue sauces; COOL WHIP
whipped toppings; STOVE TOP stuffing mix; MINUTE rice; SHAKE 'N BAKE coatings;
LIGHT N' LIVELY, BREYERS, KNUDSEN and BREAKSTONE'S cultured dairy products; and
TACO BELL grocery products Lunchables lunch combinations, Claussen pickles, Maxwell House, Yuban, Nabob,
Sanka(acquired in 1996). During 1998, Kraft entered into a
licensing agreement to manufacture, market and Maximsell CALIFORNIA PIZZA KITCHEN
frozen pizzas and a licensing agreement to market, sell and distribute STARBUCKS
coffees General Foods International Coffees, Jell-O desserts,
Postto grocery customers.
INTERNATIONAL
Subsidiaries and Nabisco ready-to-eat cereals, Log Cabin syrups, Kool-Aid, Tang,
Crystal Light, Country Time and Capri Sun beverages, Minute rice, Stove Top
stuffing mix, Shake 'N Bake coatings, Good Seasons salad dressing mixes,
Lender's bagels and Cool Whip toppings.
Internationalaffiliates of Kraft Foods International is responsible for manufacturingmanufacture and
marketingmarket a wide variety of coffee, confectionery, cheese, packaged grocery and processed
meat products in Europe, with distribution to the Middle East Africaand Africa. In the
Asia/Pacific region, select grocery products are produced locally, and other
Company branded products are sourced from Europe and the Asia/Pacific
region. Approximately 93% of Kraft Foods International's sales are made in
Europe. International brands include a wide variety of the products sold by
Kraft in North America, as well as Milka, Tobler, Toblerone, Suchard, Sugus,
Freia, Marabou, Daim, Estrella, Callard & Bowser, Terry's and Cote d'Or
confections, Carte Noire, Gevalia, Grand'Mere, Kenco, HAG, Jacobs Cafe,
Jacobs Kronung, Jacques Vabre, Night & Day, Saimaza and Splendid coffees,
Miracoli pasta dinners, Dairylea processed cheese, Vegemite spread and
Hollywood chewing gum.United States. In Latin
America, certain subsidiaries and affiliates of Philip Morris International manufacture
and market a wide variety of food products, including Kibon ice cream,confectionery products,
various powdered soft drinks, and a number of the
other grocery products sold by Kraft. 8In 1998,
approximately 83% of operating revenues for the international food businesses
were derived from
7
Distribution, Competitionsales made in Europe. International brands include JACOBS, GEVALIA, CARTE NOIRE,
JACQUES VABRE, KAFFEE HAG, GRAND' MERE, KENCO, SAIMAZA and Raw MaterialsSPLENDID coffees;
MILKA, SUCHARD, COTE D'OR, MARABOU, TOBLERONE, FREIA, TERRY'S, DAIM and CALLARD
& BOWSER confectionery products; HOLLYWOOD chewing gum; DAIRYLEA, EL CASERIO and
INVERNIZZI cheeses; MIRACOLI pasta dinners and sauces; VEGEMITE spread; ESTRELLA
and MAARUD snacks; and SIMMENTHAL meats, as well as a variety of products sold
by Kraft in the United States, including PHILADELPHIA cream cheese. In 1996,
Philip Morris International acquired nearly all of the remaining voting shares
of Industrias de Chocolate Lacta S.A., a Brazilian confectionery company.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
Kraft's products in North America are generally sold to supermarket chains,
wholesalers, club stores, mass merchandisers, distributors, convenience stores,
individual stores and other retail food outlets. ProductsIn general, the retail trade
for food products is consolidating. Food products are distributed through
distribution centers, satellite warehouses, company-operated and public
cold storagecold-storage facilities, depots and other facilities. Selling efforts are
assistedsupported by national and regional advertising on television and radio and in
magazines and newspapers, as well as by sales promotions, product displays,
trade incentives, informative material offered to customers and other
promotional activities. ProductsSubsidiaries and affiliates of Kraft Foods International
are soldand Philip Morris International sell their food products primarily throughin the same
manner and also engage the services of independent sales offices and agents abroad. European distribution is coordinated from offices
located in Zurich, Switzerland; Vienna, Austria; and Cheltenham, England. The
Asia/Pacific area operations are headquartered in Hong Kong. Kraft Foods
International's operations outside of the United States and Canada are
directed from its headquarters in Rye Brook, New York.agents.
Advertising is tailored by product and country to reach targeted audiences.
Kraft is subject to highly competitive conditions in all aspects of its
business. Competitors include large national and international companies and
numerous local and regional companies. Its food products also compete with
generic products and private labelprivate-label products of food retailers, wholesalers and
cooperatives. Kraft competes primarily on the basis of product quality, service,
marketing, advertising and price.
Kraft is a major purchaser of milk, cheese, green coffee beans, cocoa, corn,
wheat, poultry, meat cuts, wheat, cocoa, hazelnuts,pork, beef, vegetable oil, fruits and berries, and sugar and other sweeteners. Kraft
continuously monitors worldwide supply and cost trends of these commodities to
enable it to take appropriate action to obtain ingredients needed for
production.
Kraft purchases all of its milk requirements and a substantial portion of
its cheddar cheese requirements from independent sources, principally from cooperatives
and individual producers. The prices for United States milk and other dairy product purchases
are substantially influenced by government programs, as well as market supply
and demand. During 1998, the cost of certain United States dairy commodities
reached record high levels. These costs began to moderate early in 1999.
The most significant cost item in coffee products is green coffee beans,
which are purchased on world markets. Green coffee bean prices are affected by
the quality and availability of supply, trade agreements among producing and
consuming nations, the unilateral policies of the producing nations, changes in
the value of the United States dollar in relation to certain other currencies
and consumer demand for coffee products. Coffee bean prices declined during the
last three quarters of 1998 after reaching a 20-year high in May 1997.
A significant cost item in 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 relative to certain other currencies.
The purchase price of poultry and meat cuts is the major factor in the cost
of Kraft's processed meat products. Poultry and meat prices are cyclical and are
affected by market supply and demand.
Meats for Oscar Mayer processed
products are provided primarily by full-lot quantity purchases.
Kraft is also a major user of packaging materials purchased from many
suppliers.
The prices paid for raw materials used in food products generally reflect
external factors such as weather conditions, commodity market activities,
currency fluctuations, and the effects of governmental agricultural programs.
Although the prices of the principal raw materials required by Kraft can be expected to fluctuate
as a result of government actions and/or market forces (which would directly
affect the cost of products and
8
value of inventories), Kraft believesand Philip Morris International believe such raw
materials to be in adequate supply and generally available from numerous
sources and in adequate
supply.
Regulationsources.
REGULATION
Almost all of Kraft's United States food products (and packaging materials
therefor) 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 ingredients and/or manufacturing procedures for certain
standard foods, establish standards of identity for food, determine the safety
of food substances, and establish labeling standards and nutrition labeling
requirements for food products.
FDA regulations may, in certain
instances, affect the ability of Kraft's United States operating units to
develop and market new products and to utilize technological innovations in
the processing of existing products.
In addition, various states regulate the business of Kraft's United States
operating units by licensing dairy plants, enforcing federal and state standards
of identity for food, grading food products, inspecting plants, regulating
9
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'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
review.
Almost all of the activities of the Company's food operations outside of the
United States are subject to the same kinds of regulation aslocal and national regulations similar to those
applicable to Kraft's United States businesses. Each of the operations and locations of these units
is subject to local and nationalbusinesses and, in some cases, international
regulatory provisions (such as those of the European Union) regulatory provisions. The rules and regulations relaterelating to
labeling, packaging, food content, pricing, marketing and advertising, and
related areas.
Beer
ProductsBEER
PRODUCTS
Miller's brands include Miller Beer, Miller Lite, Miller Lite Ice, Miller
Genuine Draft, MGD Light, Red DogMILLER LITE, MILLER LITE ICE, MILLER GENUINE DRAFT,
MILLER GENUINE DRAFT LIGHT, MILLER BEER and IcehouseICEHOUSE in the premium segment; the
Miller High LifeMILLER HIGH LIFE family, including MILLER HIGH LIFE, MILLER HIGH LIFE LIGHT and
MILLER HIGH LIFE ICE, and RED DOG in the near-premium segment; LOWENBRAU, in the
above-premium segment, including Miller High
Life, Miller High Life Light and Miller High Life Ice; Lowenbrau,which is brewed and sold in the United States underpursuant to
a license from Lowenbrau Munchen AG in the
above-premium segment; Meister Brau, Milwaukee's Bestagreement that is scheduled to expire on September 30, 1999; MEISTER
BRAU, MILWAUKEE'S BEST and Magnum Malt LiquorMAGNUM MALT LIQUOR in the below-premium segment; and
Sharp'sSHARP'S non-alcohol brew. CompetingMiller's brands in the specialty segment are
the Leinenkugel, CelisLEINENKUGEL, CELIS and Shipyard brands. New products
introduced in 1995 include Miller Genuine Red, Leinenkugel's Honey Weiss and
Autumn Gold, Southpaw Light and Big Sky, a near-premium beer sold primarily in
Wisconsin.SHIPYARD. Miller also owns and operatesa majority interest in Molson
Breweries U.S.A. Inc.,USA, LLC, one of the
second largest beer importerimporters in the United States, with more than 20whose brands
from six countries, includinginclude MOLSON and FOSTER'S. Other brands in the Molson brands from Canada, Asahiimport segment include
PRESIDENTE and Foster's Lager. New Molson Breweries U.S.A. products introduced in 1995 were
Foster's Special Bitter and Molson Red Jack Ale. ShipmentSHANGHAI (available February 1999).
Miller's total shipment volume for Miller,
including imports, exports and non-alcohol brew, decreased 0.5% in 1995,
compared with 1994, in line with the industry. The decrease resulted primarily
from reduced(which excludes international shipments of
below-premium brands, as well as Lite Ice, Molson
IceMiller products by other brewers under license and Miller Genuine Draft, partially offset by volume increases due tocontract brewing
arrangements) of 42.7 million barrels for 1998 decreased 2.3% from 1997. Export
shipments decreased 18.6%, with a planned, corresponding increase in licensee
volume. Domestic shipments of 41.7 million barrels decreased 1.8% from 1997.
Miller's estimated market share of the U.S. malt beverage industry (based on
shipments) was 21% in 1998, down from 21.7% in 1997. Wholesalers' sales of
Red Dog during its first full yearMiller's products to retailers in the marketplace and improved
sales1998 decreased 1.3% from 1997. Domestic
shipments of Miller Lite. Miller's premium and above-premium beer shipmentspremium-priced brands in 1998 increased by 1.3% in 1995. Premium and above-premium brands accounted for
81.8%slightly to 81.6% of Miller's shipment volume in 1995, up from 80.4% in 1994.total
domestic shipments.
9
The following table sets forth, based on shipments (including imports and
exports), the U.S. industry's sales of beer and brewed non-alcohol beverages, as
estimated by Miller,Miller; Miller's unit salessales; and itsMiller's estimated share of
industry sales:
Years Ended Miller's
DecemberYEARS ENDED MILLER'S
DECEMBER 31 Industry Miller Share of IndustryINDUSTRY MILLER SHARE OF INDUSTRY
- ------------ -------- ------ -----------------
(in thousands of barrels) (%)----------------------------------------------------------- --------- --------- -------------------
1995 ................ 198,554 45,006 22.7
1994 ................ 199,572 45,243 22.7
1993 ................ 198,019 44,024 22.2(IN THOUSANDS OF
BARRELS) (%)
1998....................................................... 203,646 42,674 21.0
1997....................................................... 201,246 43,675 21.7
1996....................................................... 200,627 43,799 21.8
Internationally,During 1997, Miller has formedsold its 20% interest in Molson Breweries of Canada, and
a minority ownership interest in Molson USA, LLC. During 1996, Miller initiated
a number of new alliances with brewersactions intended to restore growth, streamline its organization and
beveragereduce costs, including a workforce reduction.
In February 1999, Miller announced an agreement to acquire four trademarks
from the Pabst Brewing Company and the Stroh Brewery Company, subject to
regulatory review. Miller also agreed to increase its contract manufacturing of
Pabst products, including brands that Pabst has agreed to acquire from Stroh in
a separate agreement. Miller estimates that the acquisition and increased
contract manufacturing could result in incremental 1999 operating companies
in Japan, Brazil, Chinaincome, depending upon the timing of regulatory review and Great Britain.
Distribution, Competition and Raw Materialsthe subsequent
beginning of production.
DISTRIBUTION, COMPETITION AND RAW MATERIALS
Beer products areis distributed primarily through independent beer
wholesalers. During 1998,
the agreement by which Miller and its independent wholesalers conduct business
was changed to better define wholesalers' responsibilities and to promote
increased focus on Miller's brands.
The United States malt beverage industry is highly competitive, with the
principal methods of competition being product quality, price, distribution,
marketing and advertising. Miller engages in a wide variety of advertising and
sales promotion activities. Barley malt, hops, corn grits and water represent
the principal ingredients used in manufacturing Miller's beer products, and are
generally available in the market. The production process, which includes
fermentation and aging periods, is conducted throughout the year, and at any one time Miller has on hand only a small quantity of
finished products.year. Containers
10
(bottles, cans and kegs) for beer products are purchased from various suppliers.
Miller expects cost increases for aluminumREGULATION
The malt beverage industry is highly regulated at both the state and other packaging and
brewing materials as supply agreements expire during 1996.
Regulationfederal
levels. The Alcoholic Beverage Labeling Act of 1988 requires all alcoholic
beverages manufactured for sale in the United States to include the following
warning
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;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.
Financial ServicesAdvertising of alcoholic beverages, including beer, has come under increased
scrutiny by governmental agencies and Real Estateothers. Pursuant to a Congressional
request in 1998, the FTC ordered Miller, along with seven other alcohol beverage
manufacturers, to file a Special Report regarding the industry's self-regulating
efforts related to alcohol advertising and underage consumption. Miller expects
the FTC to report its findings to Congress during the first quarter of 1999.
10
In 1997, key changes were made to the Beer Institute's Advertising and
Marketing Code, including the following: a revised introduction clarifying that
the Code applies to advertising and marketing in cyberspace, including the
Internet; an undertaking that the Beer Institute will make a list of brewer web
sites available to all major Internet service providers so that the sites can be
included in parental control software; and an obligation for brewers to include
additional notices on their web sites reminding users of the legal purchase age.
Consistent with the brewers' commitment to marketing their products only to
persons of legal purchase age, the revised Code requires that television survey
data purchased by brewers reflect the proportion of viewers in the sample survey
who are over legal purchase age. The revised code also obligates brewers to
review their advertising placements at least every six months to ensure that the
majority of viewers of brewer-sponsored television programs are above the legal
purchase age.
FINANCIAL SERVICES
Philip Morris Capital Corporation ("PMCC") invests in leveraged and direct
finance leases, other tax-oriented financing transactions and third-party
financial instruments, and also engages in various financing activities for
customers and suppliers of the Company's other subsidiaries. Total assets
increased to $5.6 billion at year-end 1995, compared with $5.2 billion at
year-end 1994, reflecting the net investment of an additional $490 million in
finance assets.instruments. During 1997, PMCC sold its wholly-owned subsidiary,
Mission Viejo Company, a wholly-owned subsidiary of PMCC, iswhich was engaged
principally in land planning, development and sales
activities in Southern California and in the Denver, Colorado area. Other Matters
CustomersTotal assets
of PMCC were $6.5 billion at December 31, 1998, up from $5.9 billion at December
31, 1997, reflecting an increase in net finance assets.
OTHER MATTERS
CUSTOMERS
None of the Company's business segments is dependent upon a single customer
or a few customers, the loss of which would have a material adverse effect on
the Company's results of operations.
EmployeesEMPLOYEES
At December 31, 1995,1998, the Company employed approximately 151,000144,000 people
worldwide.
TrademarksIn February 1998, the Company announced voluntary early retirement and
separation programs for salaried and hourly employees, primarily at PM Inc.'s
manufacturing facilities in Richmond, Virginia and Louisville, Kentucky.
Approximately 2,100 employees were affected by the programs, which were
completed during 1998 at a cost of $337 million, of which $319 million was
charged against domestic tobacco operating results and $18 million, reflecting
actions concerning corporate headquarters' employees, was charged to general
corporate expense. During January 1999, Kraft announced that it will take a
pre-tax charge of approximately $150 million during 1999, primarily for
voluntary retirement and separation programs for employees in the United States.
As previously discussed, in February 1999, PM Inc. announced that it plans to
phase out cigarette production at its Louisville, Kentucky manufacturing plant
by December 2000. PM Inc. estimates that this will result in a pre-tax charge of
approximately $200 million, principally for severance, in the first half of
1999, and will affect approximately 1,400 employees.
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 RegulationENVIRONMENTAL 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
11
Act and the Comprehensive Environmental Response, Compensation and Liability
Act, which imposes joint and several liability on each responsible party
(commonly known as "Superfund"). In 1995,1998, subsidiaries (or former subsidiaries)
of the Company were involved in approximately 185160 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 relatedenvironmental-related expenditures, compliance with
such laws and regulations, including the payment of any remediation costs and
the making of such expenditures, havehas not had, and areis not expected to have, a
material adverse effect on the Company's results of operations, capital
expenditures, or financial position, earnings and competitive position.
11
Share Repurchase Program
In October 1994, the Company commenced a program to spend up to $6 billion
to repurchase shares of its Common Stock in open market transactions over
three years. The Company is currently repurchasing shares at an annualized
rate of $2.6 billion.
Forward-Looking and Cautionary StatementsFORWARD-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. 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 to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company; any such statement is qualified by reference to the following
cautionary statements.
The tobacco industry continues to be subject worldwide to health concerns relating to
the use of tobacco products and exposure to ETS, legislation, including tax
increases, governmental regulation, privately imposed smoking restrictions,
governmental and grand jury investigations, litigation, and litigation.the effects of price
increases related to concluded tobacco litigation settlements. Each of the
Company's operating subsidiaries is subject to intense competition, changes in
consumer preferences, the effects of changing prices for its raw materials,
and local economic conditions. The performanceconditions and the potential impact of each ofthe century date change
(or "Year 2000") issue. In addition, Philip Morris International, and Kraft Foods
International is affected byand Kraft are subject to the effects of foreign economies,
currency movements and currency movements.the conversion to the Euro. Developments in any of these
areas, which are more fully described elsewhere in Part I hereof and in Management's Discussion and Analysis
of Financial Condition and Results of Operationsthe MD&A
on pages 19-2521-35 of the Company's 19951998 Annual Report, each of which is
incorporated into this section by reference, could cause the Company's results
to differ materially from results that have been or may be projected by or on
behalf of the Company. The Company cautions that the foregoing list of important
factors is not exclusive. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The amounts of operating revenues operating profit and identifiablelong-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 1112
to the Company's consolidated financial statements, incorporated herein by
reference to the Company's 19951998 Annual Report.
Kraft, MillerSubsidiaries of the Company export tobacco and subsidiaries of Philip Morris International exporttobacco-related products,
coffee products, grocery products, cheese, processed meats beer, tobacco and tobacco-related products.beer. In 1995,1998,
the value of all exports from the United States by these subsidiaries amounted
to approximately $5.9$6 billion.
ItemITEM 2. Description of Property.
Tobacco ProductsDESCRIPTION OF PROPERTY.
TOBACCO PRODUCTS
PM Inc. owns 9seven tobacco manufacturing and processing facilities--6facilities--four in
the Richmond, Virginia area, 2two in Louisville, Kentucky and 1one in Cabarrus
County, North Carolina. As noted above, cigarette production at one of PM Inc. owns or leases other premises and facilities,
including an operations center, a research and development facility and
various administrative facilities in Richmond and an engineering center in
Newport News, Virginia.'s
Louisville, Kentucky plants is scheduled to be phased out. Subsidiaries and
affiliates of Philip Morris International own, lease or have an interest in 55
cigarette or component
12
manufacturing facilities in 2830 countries outside the United States.
Food ProductsStates, including
cigarette manufacturing facilities in Bergen Op Zoom, the Netherlands and in
Berlin, Germany.
FOOD PRODUCTS
The Company's subsidiaries have 6054 manufacturing and processing facilities
217and 261 distribution centers and depots and 178 various other
facilities inthroughout the United States, as well as
11792 foreign manufacturing and processing facilities in 34 countries, and various
distribution and other facilities outside the United States. All significant
plants and properties used for production of food products are owned, although
the majority of the domestic distribution centers and depots are leased.
12
BeerBEER
Miller currently owns and operates 8eight breweries, located in Milwaukee, Wisconsin
(2)(two); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia; Irwindale,
California; Trenton, Ohio; and Chippewa Falls, Wisconsin. Miller owns a majority
interest in the Celis Brewery in Austin, Texas and the Shipyard Brewery in
Portland, Maine. Miller also owns a beer distributorship in
Oklahoma, a hops processinghops-processing facility in Wisconsin and
owns or leases warehouses in several locations. GeneralAs part of the Pabst/Stroh
transaction described above, Miller agreed to purchase a brewery in Tumwater,
Washington.
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.
InDuring 1997, the fourth quarterCompany's international food businesses recorded a pre-tax
charge of 1993, the Company provided for
the costs of restructuring its worldwide operations. The charge$342 million, related primarily to the downsizing or closure of
approximately 40 manufacturing and other facilities, as well as the discontinuance of which 26 were downsized or closed during 1994 and 1995.
Writedowns of such facilitiescertain
low-margin product lines. Facility write-downs included in the restructuring charge were $429
million,totaled
$209 million.
ITEM 3. LEGAL PROCEEDINGS.
Legal proceedings covering a wide range of which $141 million, $211 millionmatters are pending or threatened
in various United States and $77 millionforeign jurisdictions against the Company, its
subsidiaries and affiliates, including PM Inc. and Philip Morris International,
and their respective indemnitees. Various types of claims are raised in these
proceedings, including product liability, consumer protection, antitrust, tax,
patent infringement, employment matters, claims for contribution and claims of
competitors and distributors.
OVERVIEW OF TOBACCO-RELATED LITIGATION
TYPES AND NUMBER OF CASES
Pending claims related to tobacco foodproducts generally fall within three
categories: (i) smoking and beer facilities, respectively.health cases alleging personal injury brought on
behalf of individual plaintiffs, (ii) smoking and health cases alleging personal
injury and purporting to be brought on behalf of a class of individual
plaintiffs, and (iii) health care cost recovery cases brought by governmental
and non-governmental plaintiffs seeking reimbursement for health care
expenditures allegedly caused by cigarette smoking. Governmental plaintiffs have
included local, state and certain foreign governmental entities.
Non-governmental plaintiffs in these cases include union health and welfare
trust funds ("unions"), Blue Cross/Blue Shield groups, health maintenance
organizations ("HMOs"), hospitals, native American tribes, taxpayers and others.
Damages claimed in some of the smoking and health class actions and health care
cost recovery cases range into the billions of dollars. Plaintiffs' theories of
recovery and the defenses raised in those cases are discussed below.
13
In recent years, there has been a substantial increase in the number of
tobacco-related cases being filed.
As of March 1, 1999, there were approximately 500 smoking and health cases
filed and served on behalf of individual plaintiffs in the United States against
PM Inc. and, in some cases, the Company, compared with approximately 375 such
cases on December 31, 1997, and approximately 185 such cases on December 31,
1996. Many of these cases are pending in Florida, West Virginia and New York.
Eighteen of the individual cases involve allegations of various personal
injuries allegedly related to exposure to ETS.
In addition, as of March 1, 1999, there were approximately 65 smoking and
health putative class actions pending in the United States against PM Inc. and,
in some cases, the Company (including eight that involve allegations of various
personal injuries related to exposure to ETS), compared with approximately 50
such cases on December 31, 1997, and approximately 20 such cases on December 31,
1996. Most of these actions purport to constitute statewide class actions and
were filed after May 1996 when the Fifth Circuit Court of Appeals, 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.
During 1997 and 1998, PM Inc. and certain other United States tobacco
product manufacturers entered into agreements settling the asserted and
unasserted health care cost recovery and other claims of all 50 states and
several commonwealths and territories of the United States. The 1993 restructuringsettlements are
in the process of being approved by the courts, and some of the settlements are
being challenged by various third parties. As of March 1, 1999, there were
approximately 95 health care cost recovery actions pending in the United States
(excluding the cases covered by the settlements), compared with approximately
105 health care cost recovery cases pending on December 31, 1997, and 25 such
cases on December 31, 1996.
There are also a number of tobacco-related actions pending outside the
United States against Philip Morris International and its impact onaffiliates and
subsidiaries, including approximately 31 smoking and health cases initiated by
one or more individuals (Argentina (21), Brazil (1), Canada (1), Ireland (1),
Italy (1), Japan (1), the Company's financial statements are more fully describedPhilippines (1), Scotland (1), Spain (1) and Turkey
(2)), and six smoking and health putative class actions (Brazil (2), Canada (3)
and Nigeria (1)). In addition, health care cost recovery actions have been
brought in Israel, the Marshall Islands and British Columbia, Canada, and, in
the MD&A, incorporated hereinUnited States, by referenceBolivia, Guatemala, Panama, Nicaragua, Thailand and
Venezuela.
VERDICTS IN INDIVIDUAL CASES
There have been a number of jury verdicts in individual smoking and health
cases over the past three years. In February 1999, a California jury awarded
$1.5 million in compensatory damages and $50.0 million in punitive damages
against PM Inc. PM Inc. is appealing the verdict and the damage award. Prior to
the Company's 1995 Annual
Report.
Item 3. Legal Proceedings.
Reference is made to "Tobacco Products--Smokingthat, juries had returned verdicts for defendants in three individual smoking
and Health Litigation"
under Item 1health cases and to Note 15 to the Company's consolidated financial
statements, incorporated herein by reference to the Company's 1995 Annual
Report ("Note 15"), forin one individual ETS smoking and health case. In January
1999, a description of certain pending legal proceedings.
Certain litigation developments since the date of Note 15 are summarized
below.
In October 1994, theFlorida court set aside a $1.0 million jury award in a smoking and
health case against another United States cigarette manufacturer and ordered a
new trial court in the Engle case describedcase. In June 1998, a Florida appeals court reversed a $750,000
jury verdict awarded in Note 15
granted plaintiffs' motion for class certification. Defendants appealed the
class certification decision and order to the Florida Third District Court of
Appeal. On January 31,August 1996 the Court of Appeal affirmed the trial court's
order, with the modification that the subject class be restricted to Florida
citizens and residents rather thanagainst another United States citizens and residents. On
February 15, 1996, defendants filed with the Florida Third District Courtcigarette
manufacturer. Plaintiff is seeking an appeal of Appeal a motion for rehearing and a motion for rehearing en banc. In both
motions, defendants sought, in the alternative, an order remanding the case to
the trial court for a determination of whether certification of such a class
meets the manageability and superiority requirements of the Florida Rules of
Civil Procedure. Defendants also filed a motion for certification of the casethis ruling to the Florida
Supreme Court. OnIn Brazil, a court in 1997 awarded plaintiffs in a smoking and
health case the Brazilian currency equivalent of $81,000, attorneys' fees and a
monthly annuity for 35 years equal to two-thirds of the deceased smoker's last
monthly salary. Neither the Company nor its affiliates were parties to that
action.
PENDING AND UPCOMING TRIALS
As of March 4, 1996, plaintiffs notified1, 1999, trials against PM Inc. and, in one case, the Company
were underway in the ENGLE smoking and health class action in Florida (discussed
below), in a union health care cost recovery action in Ohio (discussed below)
and in individual smoking and health cases in Oregon and Tennessee.
14
Additional cases are scheduled for trial court that they believeduring 1999, including one union
health care cost recovery action in Washington (September), one smoking and
health class action in Illinois (August), a "Proposition 65" case (discussed
below) in California (June), and an "asbestos contribution" case (discussed
below) in New York (November). Also, six individual smoking and health cases
against PM Inc. and, in one case, the Company, are currently scheduled for trial
during 1999. Trial dates, however, are subject to change.
LITIGATION SETTLEMENTS
In November 1998, PM Inc. and certain other United States tobacco product
manufacturers entered into a Master Settlement Agreement (the "MSA") with 46
states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the
United States Virgin Islands, American Samoa and the Northern Marianas to settle
asserted and unasserted health care cost recovery and other claims. PM Inc. and
certain other United States tobacco product manufacturers had previously settled
similar claims brought by Mississippi, Florida, Texas and Minnesota (together
with the MSA, the "State Settlement Agreements") and an ETS smoking and health
class action brought on behalf of airline flight attendants. The State
Settlement Agreements and certain ancillary agreements are filed as exhibits to
various of the Company's reports filed with the Securities and Exchange
Commission, and such agreements and the ETS settlement are discussed in detail
therein.
PM Inc. recorded pre-tax charges of $3.1 billion and $1.5 billion during
1998 and 1997, respectively, to accrue for its share of all fixed and
determinable portions of its obligations under the tobacco settlements, as well
as $300 million during 1998 for its unconditional obligation under an agreement
in principle to contribute to a tobacco growers trust fund, discussed below. As
of December 31, 1998, PM Inc. had accrued costs of its obligations under the
settlements and to tobacco growers aggregating $1.4 billion, payable principally
before the end of the year 2000. The settlement agreements require that the
casedomestic tobacco industry make substantial annual payments in the following
amounts (excluding future annual payments contemplated by the agreement in
principle with tobacco growers discussed below), subject to adjustment for
several factors, including inflation, market share and industry volume: 1999,
$4.2 billion (of which $2.7 billion related to the MSA and has already been paid
by the industry); 2000, $9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion;
2003, $10.9 billion; 2004 through 2007, $8.4 billion; and thereafter, $9.4
billion. In addition, the domestic tobacco industry is readyrequired to pay settling
plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well
as additional amounts as follows: 1999, $450 million; 2000, $416 million; and
2001 through 2002, $250 million. These payment obligations are the several and
not joint obligations of each settling defendant. PM Inc.'s portion of the
future adjusted payments and legal fees, which is not currently estimable, will
be based on its share of domestic cigarette shipments in the year preceding that
in which the payment is made.
The State Settlement Agreements also include provisions, more fully
discussed in the MD&A, relating to advertising and marketing restrictions,
public disclosure of certain industry documents, limitations on challenges to
certain tobacco control and underage use laws, lobbying activities and other
provisions.
As set forth in Exhibit 99.2, the MSA has been initially approved by trial
courts in all settling jurisdictions. If a jurisdiction does not obtain "final
judicial approval" (as defined in Exhibit 99.2) of the MSA by December 31, 2001,
the agreement will be terminated with respect to such jurisdiction.
As part of the MSA, the settling defendants committed to work cooperatively
with the tobacco growers to address concerns about the potential adverse
economic impact of the MSA on that community. To that end, in January 1999, the
four major domestic tobacco product manufacturers, including PM Inc., agreed in
principle to participate in the establishment of a $5.15 billion trust fund to
be setadministered by the tobacco-growing states. It is currently contemplated that
the trust will be funded by industry participants over 12 years, beginning in
1999. PM Inc. has agreed to pay $300 million into the trust in 1999, which
amount has been charged to 1998 operating companies income. Subsequent annual
industry payments are
15
to be adjusted for trial. On March
13, 1996, defendants filed a joint oppositionseveral factors, including inflation and United States
cigarette consumption, and are to be allocated based on each manufacturer's
market share.
The Company believes that the State Settlement Agreements may materially
adversely affect the business, volume, results of operations, cash flows or
financial position of PM Inc. and the Company in future years. 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 noticeMSA and the
other State Settlement Agreements. As of trial.
On March 1, 1996,1999, manufacturers
representing almost all domestic shipments in 1998 had agreed to become subject
to the trial courtterms of the MSA.
Certain litigation has arisen out of the MSA. In December 1998, a putative
class action was filed against PM Inc. and certain other domestic tobacco
manufacturers on behalf of a class consisting of citizens of the United States
who consume tobacco products manufactured by defendants. One count of the
complaint alleges that defendants conspired to raise the prices of their tobacco
products in order to pay the costs of the MSA in violation of the federal
antitrust laws. The other two counts allege that the actions of defendants
amount to an unconstitutional deprivation of property without due process of law
and an unlawful burdening of interstate trade. The complaint seeks unspecified
damages (to be trebled under the antitrust count), injunctive and declaratory
relief, costs and attorneys' fees.
In February 1999, a putative class action was filed on behalf of tobacco
consumers in the United States against the States of California and Utah, other
public entity defendants, certain domestic tobacco manufacturers, including PM
Inc., and others, challenging the MSA. Plaintiffs are seeking, among other
things, an order (i) prohibiting the states from collecting any monies under the
MSA; (ii) restraining the domestic tobacco manufacturers from further collection
of price increases related to the MSA and compelling them to reimburse to
plaintiffs all monies paid by plaintiffs in the form of price increases related
to the MSA; and (iii) declaring the MSA "unfair, discriminatory,
unconstitutional and unenforceable."
Also in February 1999, a putative class action was filed on behalf of
Wisconsin Medicaid recipients against the State of Florida case described in
Note 15 partially lifted the stay for the limited purpose of permitting motions
to dismiss to be filed. Oral argument of the motions to dismiss is scheduled
for May 28, 1996.
In February 1995, the court in the Castano case described in Note 15
conditionally certified the class forWisconsin and certain
issues,domestic tobacco manufacturers, including fraud, breach
of warranty, intentional tort, negligence, strict liability, consumer
protection and punitive damages. However, the court declined to certify a
class on the issues of injury in fact, causation, reliance, compensatory
damages, the availability of certain affirmative defenses and on plaintiffs'
claim for medical monitoring. Defendants, including the Company and PM Inc., appealedchallenging the decisionState of
Wisconsin's authority to enter into the United States Court of Appeals for the Fifth
Circuit. Oral argument has been scheduled for April 2, 1996.
On March 18, 1996, in the Lacey case described in Note 15, the court denied
plaintiff's motion to remand the case to the Alabama state court. Also on March
18, 1996, the court denied defendants' motion to dismiss, which had been filed
in May 1994.
On February 16, 1996, in the Moore case described in Note 15, the Governor
of Mississippi filed a Petition for Writ of MandamusMSA and Prohibition and for
Declaratory Judgment with the Mississippi Supreme Court requesting,asking, among other things, that
"any funds to be paid the state by the tobacco defendants pursuant to the master
settlement agreement which exceed the amount of assistance granted to plaintiff
and to similarly situated Medicaid recipients during the applicable statute of
limitations period by the state prior to execution of the master settlement
agreement must be paid to plaintiff and similarly situated Medicaid recipients
and their estates."
A description of the smoking and health litigation, health care cost
recovery litigation and certain other proceedings pending against the Company
and/or its subsidiaries and affiliates follows.
SMOKING AND HEALTH LITIGATION
Plaintiffs' allegations of liability in smoking and health cases are based
on various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design 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 Racketeer Influenced and Corrupt
Organization Act ("RICO") and state RICO statutes. In certain of these cases,
plaintiffs claim that cigarette smoking exacerbated the injuries caused by their
exposure to asbestos. Plaintiffs in the smoking and health actions seek various
forms of relief, including compensatory and punitive damages, treble/multiple
damages and other statutory damages and penalties, creation of medical
monitoring and smoking cessation funds, disgorgement of profits, and injunctive
and equitable relief. Defenses raised in these cases include lack of proximate
cause, assumption of the risk, comparative fault and/or contributory negligence,
statutes of limitations and preemption by the Federal Cigarette Labeling and
Advertising Act.
16
In May 1996, the Fifth Circuit Court of Appeals held that a putative class
consisting of all "addicted" smokers nationwide did not meet the standards and
requirements of the federal rules governing class actions (CASTANO, ET AL. V.
THE AMERICAN TOBACCO COMPANY, ET AL.). Since this class decertification, lawyers
for plaintiffs have filed numerous 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 and raise "addiction"
claims similar to those raised in the CASTANO case and, in many cases, claims of
physical injury as well. As of March 1, 1999, smoking and health class actions
were pending in Alabama, Arkansas, California, the District of Columbia,
Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey,
New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Puerto Rico,
South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia and Wisconsin,
as well as in Canada, Brazil and Nigeria. Class certification has been denied or
reversed by courts in 13 smoking and health class actions involving PM Inc. in
Louisiana, the District of Columbia, New York (2), Pennsylvania, Puerto Rico,
New Jersey (5), Wisconsin and Kansas, while classes remain certified in three
cases in Florida, Louisiana and Maryland. A number of these class certification
decisions are on appeal. Class certification motions are pending in a number of
the other putative smoking and health class actions. As mentioned above, one ETS
smoking and health class action was settled in 1997.
ENGLE TRIAL
Trial in this Florida class action case began in July 1998. The presentation
of the defense case began on March 1, 1999. Plaintiffs seek compensatory and
punitive damages ranging into the billions of dollars, as well as equitable
relief including, but not limited to, a medical fund for future health care
costs, attorneys' fees and court issuecosts. The class consists of all Florida
residents and citizens, and their survivors, who claim to have suffered,
presently suffer or have died from diseases and medical conditions caused by
their addiction to cigarettes that contain nicotine.
The current trial plan calls for the case to be tried in three "Phases." The
court has stated, however, that the trial plan may be modified further. Phase
One, which is currently underway, involves evidence concerning certain "common"
class issues relating to the plaintiff class's causes of action. Entitlement to
punitive damages will be decided at the end of Phase One, but no amount will be
set at that time.
If plaintiffs prevail in Phase One, the first two stages of Phase Two will
involve individual determination of specific causation and other individual
issues regarding entitlement to compensatory damages for the class
representatives. Stage three of Phase Two will involve an assessment of the
amount of punitive damages, if any, that individual class representatives will
be awarded. Stage four of Phase Two will involve the setting of a Writpercentage or
ratio of Mandamuspunitive damages for absent class members, assuming entitlement was
found at the end of Phase One.
Phase Three of the trial will be held before separate juries to address
absent class members' claims, including issues of specific causation and Prohibition
requiringother
individual issues regarding entitlement to compensatory damages.
17
HEALTH CARE COST RECOVERY LITIGATION
In certain of the Attorney Generalpending proceedings, domestic and foreign governmental
entities and non-governmental plaintiffs, including unions, Blue Cross/Blue
Shield groups, HMOs, hospitals, native American tribes, taxpayers and others are
seeking reimbursement of health care cost expenditures allegedly caused by
tobacco products and, in some cases, for future expenditures and damages as
well. Certain of these cases purport to ceasebe brought on behalf of a class of
plaintiffs and, desist from actions forin some cases, the class has been certified by the court. In one
health care cost recovery case, private citizens seek recovery of Medicaid funds until employed and/or directed to do soalleged
tobacco-related health care expenditures incurred by the 13federal Medicare
program. In others, Blue Cross subscribers seek reimbursement of allegedly
increased medical insurance premiums caused by tobacco products. In the native
American cases, claims are also asserted for alleged lost productivity of tribal
government employees. Other relief sought by some but not all plaintiffs
includes punitive damages, treble/multiple damages and other statutory damages
and penalties, injunctions prohibiting alleged marketing and sales to minors,
disclosure of research, disgorgement of profits, funding of anti-smoking
programs, disclosure of nicotine yields, and payment of attorney and expert
witness fees.
The claims asserted in these health care cost recovery actions include the
equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs'
payment of health care costs allegedly 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 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 injury, federal preemption, lack of proximate
cause, remoteness of injury, lack of statutory authority to bring suit and
statute of limitations. In addition, defendants argue that they should be
entitled to "set-off" any alleged damages to the extent the plaintiff benefits
economically from the sale of cigarettes through the receipt of excise taxes or
otherwise. Defendants also argue that these cases are improper because
plaintiffs must proceed under principles of subrogation and assignment. Under
traditional theories of recovery, a payor of medical costs (such as an insurer)
can seek recovery of health care costs from a third party solely by "standing in
the shoes" of the injured party. Defendants argue that plaintiffs should be
required to bring any actions as subrogees of individual health care recipients
and should be subject to all defenses available against the injured party.
Excluding the cases covered by the State Settlement Agreements described
above, as of March 1, 1999, there were approximately 95 health care cost
recovery cases pending against PM Inc. and, in some cases, the Company, of which
approximately 75 were filed by unions. Health care cost recovery actions have
also been brought in Israel, the Marshall Islands and British Columbia, Canada,
and, in the United States, by Bolivia, Guatemala, Panama, Nicaragua, Thailand
and Venezuela. Other foreign entities, including a local agency of the French
social security health insurance system, and others have stated that they are
considering filing health care cost recovery actions. In January 1999, President
Clinton announced that the United States Department of Justice is preparing a
litigation plan to take tobacco companies to court and to use recovered funds to
strengthen Medicare.
Courts have ruled on preliminary motions to dismiss various claims in
approximately 50 health care cost recovery actions. Although many of the rulings
in cases not settled by the State Settlement Agreements have been favorable to
the industry, a number have been adverse, including rulings in the union cases
scheduled for trial in 1999. In late January and in February of 1999, the Third
and Second Circuit Courts of Appeal heard oral argument on appeals from lower
court rulings on motions to dismiss various claims in health care cost recovery
actions filed by unions. The Company cannot predict the ultimate outcome of such
appeals.
18
Governor. OnOHIO IRON WORKERS
Trial in this union health care cost recovery action began in February 20, 1996,1999,
and on March 16 the case went to the jury for a verdict on "Phase I" of the
trial (see discussion of trial Phases below). This case is being brought on
behalf of a class consisting of approximately 114 employer-employee trust funds
in Ohio. Plaintiffs seek compensatory damages in excess of $600 million,
statutory treble damages under RICO, and declaratory and injunctive relief
(including disgorgement of profits) as well as equitable relief, attorneys' fees
and court costs. Most of plaintiffs' original causes of action have either been
dismissed or voluntarily withdrawn. At present, plaintiffs have two remaining
claims, one under the Ohio RICO law and the other under general conspiracy law.
The current trial plan calls for the case to be tried in three Phases. Phase
I will determine liability for the named plaintiffs and all other class members.
Phase II will determine damages for the six class representatives. Phase III
will set damages for all absent class members.
CERTAIN OTHER TOBACCO-RELATED LITIGATION
ASBESTOS CONTRIBUTION CASES--Since September 1997, a number of suits have
been filed by former asbestos manufacturers, asbestos manufacturers' personal
injury settlement trusts and an insurance company against domestic tobacco
manufacturers, including PM Inc. and others. 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 trial of an asbestos contribution case in the Southern
District of New York is scheduled to begin in November 1999.
MARLBORO LIGHT/ULTRA LIGHT CASES--Since June 1998, six class actions have
been filed against PM Inc. and the other defendantsCompany, in the
Moore case filed a Petition for Writ of Prohibition and/or Mandamus with the
Mississippi Supreme Court requesting that the court instruct the trial judge to
dismiss those portions of the Attorney General's lawsuit that seek recovery of
the Medicaid funds.
In October 1995, the court in the McGraw case described in Note 15 granted
defendants' motion to prohibit prosecution of this case pursuant to a
contingent fee arrangement with private counsel, ruling that the Attorney
General lacked the authority to enter into such an agreement. On January 23,
1996, plaintiff filed a motion for leave to file an amended complaint to join
the Public Employees Insurance Agency Financial Board as a party plaintiff.
In May 1995, the trial court dismissed eight of the ten counts of the
complaint for lack of standing. In October 1995, the court issued a final
order entering judgmentFlorida, New Jersey,
Pennsylvania, Massachusetts and Tennessee (2), on behalf of defendants. On February 15, 1996,
the Attorney General filed a Petition for Appealindividuals who
purchased and consumed MARLBORO LIGHTS and, in one case, MARLBORO ULTRA LIGHTS,
as well. These cases allege, in connection with the Supreme Court of
Appeals of West Virginia from the October 1995 order, requesting that the
court reverse the trial court's ruling that the Attorney General does not
have the authority to pursue the common-law and declaratory judgment countsuse of the complaint. Oral argument hasterm "Lights"
and/or "Ultra Lights," among other things, deceptive and unfair trade practices,
unjust enrichment, and seek injunctive and equitable relief.
RETAIL LEADERS CASE--In March 1999, R.J. Reynolds Tobacco Company 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 incentive program is exclusionary and creates unreasonable restraint of
trade and unlawful monopolization. In addition to an injunction, plaintiff seeks
unspecified treble damages, attorneys' fees, costs, and interest.
PROPOSITION 65 CASES--Since July 1998, two suits have been scheduled for May 30, 1996.
On February 6, 1996,filed in
the Morales case described in Note 15, plaintiffs,California courts alleging that domestic cigarette manufacturers, including PM
Inc., amended their complaint to include and others, have violated a request for a
declaration thatCalifornia statute known as "Proposition 65" by
not informing the Attorney General has no authority to enter into contingent
fee agreements with private attorneys. On February 23, 1996, plaintiffs,
including PM Inc., filed a motion for partial summary judgment on counts I and
II of their amended complaint (which request, respectively, a declaration that
the Attorney General has no authority under Texas law to seek reimbursement of
Medicaid expenditures from plaintiffs outsidepublic of the assignment/subrogation
remedy provided by statute,alleged risks of ETS to non-smokers. Plaintiffs
also allege violations of California's Business and a declaration that the assignment/subrogation
remedy is the exclusive remedy for recovery of Medicaid expenditures from third
parties).
On February 1, 1996, plaintiff in the Commonwealth of Massachusetts
case described in Note 15 served a motion to remand the action to the state
court in which it was originally filed. The motion to remand was orally
argued on February 26, 1996.
On February 16, 1996, in the action against the Governor of the State of
Maryland described in Note 15, the plaintiffs, including PM Inc., filed a
motion for summary judgment on the grounds that any contingent fee contract
between the Attorney General of MarylandProfessions Code regarding
unfair and private attorneys to be appointed
assistant counsel for the State and compensated in such a manner is invalid
under Maryland law. On February 23, 1996, defendants filed a motion to dismiss
or, in the alternative, for summary judgment, arguing that plaintiffs have no
standing to assert the challenges they make in the complaint and that the
Attorney General has the power under Maryland law to retain contingency fee
counsel.
On March 13, 1996, an action was filed in Louisiana state court against the
leading United States cigarette manufacturers and others, including the
Company, by the Attorney General of Louisiana seeking reimbursement of Medicaid
and other expenditures claimed to have been made to treat eligible citizens of
the State of Louisiana for diseases allegedly caused by cigarette smoking.
Ieyoub, et al. v. The American Tobacco Company, et al., 14th Judicial District
Court, Parish of Calcasieu, Louisiana, Case No. 96-1209. Plaintiff asserts
various claims under Louisiana law and seeks an injunction prohibitingfraudulent business practices. Plaintiffs seek statutory penalties,
injunctions barring the sale of cigarettes, restitution, disgorgement of profits
and other relief. The courts have denied defendants' motions to minors, an unspecifieddismiss in both
of these cases. One of these cases is scheduled to begin trial in June 1999.
------------------------
One hundred eighty-eight tax assessments alleging the nonpayment of taxes in
Italy (value-added taxes for the years 1988 to 1995 and income taxes for the
years 1987 to 1995) have been served upon certain affiliates of the Company. The
aggregate amount of compensatory damages for pastunpaid taxes assessed to date is alleged to be the Italian
lira equivalent of $2.6 billion. In addition, the Italian lira equivalent of
$3.5 billion in interest and future health care expenditurespenalties 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
105 of the assessments. The
19
decisions to overturn 66 assessments have been appealed by the State, an unspecified amounttax authorities.
In a separate proceeding in Naples, in October 1997, a court dismissed charges
of punitive damages, attorneys' fees,criminal association against certain present and prejudgmentformer officers and
legal interest.directors of affiliates of the Company, but permitted charges of tax evasion to
remain pending. In February 1998, the tax evasion charges were dismissed by the
criminal court in Naples following a determination that jurisdiction was not
proper, and the case file was transmitted to the public prosecutor in Milan, who
will determine whether to bring charges, in which case a preliminary
investigations judge will make a new finding as to whether there should be a
trial on these charges. The Company, has not yet received service ofits affiliates and the complaint.
On March 18, 1996, plaintiff in the Netherland case described in Note 15
filed a motion to amend the complaint. The proposed amendment would add a
manufacturer of packaging materials as a defendantofficers and
would seek to expand the
proposed class from individuals in the State of Louisiana to all persons in the
United Statesdirectors who were allegedly injured by cigarettesare subject to the product
recall announced by PM Inc. in May 1995. PM Inc. has filedproceedings believe they have complied with
applicable Italian tax laws and are vigorously contesting the pending
assessments and proceedings.
------------------------
It is not possible to predict the outcome of the litigation pending against
the Company and its subsidiaries. Litigation is subject to many uncertainties,
and it is possible that some of these actions could be decided unfavorably. An
unfavorable outcome or settlement of a motion to strike
all class allegations.
On March 5, 1996, plaintiffs inpending smoking and health or health care
cost recovery case could encourage the Tijerina case described in Note 15
filed an amendmentcommencement 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
complaint which limits the proposed class to all
people who have purchased and smoked within the State of Texas certain filtered
products manufactured by PM Inc.
In August 1995, the trial court in the Lawrence case described in Note 15
granted plaintiffs' motion for class certification and, in December 1995, the
court denied defendants' motion to amend the court's class certification
14
order to permit the Company to take an interlocutory appeal from that ordertobacco industry, possibly to the United States Courtdetriment of Appeals forcertain pending litigation, and
may prompt the Second Circuit. On February 8,
1996,commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the Company filed a Petition for Writamount or range of
Mandamus withloss that could result from an unfavorable outcome of pending litigation. The
present legislative and litigation environment is substantially uncertain, and
it is possible that the United States
CourtCompany's business, volume, results of Appeals foroperations, cash
flows or financial position could be materially affected by an unfavorable
outcome or settlement of certain pending litigation or by the Second Circuit requesting the Courtenactment of
Appeals to
direct the trial court to withdraw its order granting class certification.federal or state tobacco legislation. The Company and each of its subsidiaries
named as a defendant believes,believe, and each has been so advised by counsel handling
the respective cases, that it has a number of valid defenses to all litigation
pending against it. All such cases are, and will continue to be, vigorously
defended. It is not
possibleHowever, the Company and its subsidiaries may enter into discussions
in an attempt to predict the outcome of this litigation. Litigation is subject to
many uncertainties, andsettle particular cases if they believe it is possible that somein the best
interests of these actions could be
decided unfavorably. An unfavorable outcomethe Company's stockholders to do so.
Reference is made to Note 16, incorporated herein by reference to the
Company's 1998 Annual Report, for a description of certain pending legal
proceedings. Reference is also made to Exhibit 99.1 to this Form 10-K for a list
of pending smoking and health case could encourageclass actions, health care cost recovery actions,
and certain other actions, and for a description of certain developments in such
proceedings; Exhibit 99.2 for the commencementstatus of additional similar litigation. There
have also beenthe MSA in each of the settling
jurisdictions; and Exhibit 99.3 for a numberschedule of adverse legislative, regulatory, political and
other developments concerning cigarette smoking and health class
actions, health care cost recovery and certain other actions that are currently
scheduled for trial through 2000. Copies of Note 16 and Exhibits 99.1, 99.2 and
99.3 are available upon written request to the tobacco industry.
These developments generally receive widespread media attention. The Company
is not able to evaluate the effect of these developing matters on pending
litigation and the possible commencement of additional litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of all pending
litigation. It is possible that the Company's results of operations or cash
flows in a particular quarterly or annual period or its financial position
could be materially affected by an ultimate unfavorable outcome of certain
pending litigation. Management believes, however, that the ultimate outcome of
all pending litigation should not have a material adverse effect on the
Company's financial position.
ItemCorporate Secretary, Philip
Morris Companies Inc., 120 Park Avenue, New York, NY 10017.
ITEM 4. Submission of Matters to a Vote of Security Holders.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-------------
Executive Officers of the Company20
EXECUTIVE OFFICERS OF THE COMPANY
The following are the executive officers of the Company as of March 1, 1996:1999:
Name Office Age
---- ------ ----NAME OFFICE AGE
- ----------------------------------------------------- ----------------------------------------------------- ---
Geoffrey C. Bible..........Bible.................................... Chairman of the Board and Chief Executive Officer 58
Murray H. Bring............ Executive Vice President, External Affairs and General Counsel 61
Bruce S. Brown............. Vice President, Taxes 56
Louis C. Camilleri.........John D. Bowlin....................................... President and Chief Executive Officer of Kraft Foods 48
International, 41
Katherine P. Clark.........Inc.
Murray H. Bring...................................... Vice Chairman, External Affairs, and General Counsel 64
Bruce S. Brown....................................... Vice President, Taxes 59
Louis C. Camilleri................................... Senior Vice President and Controller 47
Dinyar S. Devitre.......... SeniorChief Financial Officer 44
Siw de Gysser........................................ Vice President, Corporate Planning 48
Lawrence A. Gates.......... Senior55
Nancy J. De Lisi..................................... Vice President Human Resources and Administration 58
Marc S. Goldberg........... Senior ViceTreasurer 48
Robert A. Eckert..................................... President Worldwide Operations and Technology 52Chief Executive Officer of Kraft Foods, 44
Inc.
Paul W. Hendrys...................................... President and Chief Executive Officer of Philip 51
Morris International Inc.
G. Penn Holsenbeck.........Holsenbeck................................... Vice President, Associate General Counsel and 52
Corporate Secretary 49
James M. Kilts............. Executive Vice President, Worldwide Food 48
George R. Lewis............ Vice President and Treasurer 54
John N. MacDonough.........MacDonough................................... Chairman and Chief Executive Officer of Miller 52
James J. Morgan............ President and Chief Executive Officer of PM Inc. 53
Robert S. Morrison......... Chairman and Chief Executive Officer of Kraft 5355
Brewing Company
Steven C. Parrish..........Parrish.................................... Senior Vice President, Corporate Affairs 45
Hans G. Storr.............. Executive48
Timothy A. Sompolski................................. Senior Vice President, Human Resources and Chief Financial Officer; Chairman 64
and Chief Executive Officer of PMCC
William H. Webb............46
Administration
Michael E. Szymanczyk................................ President and Chief Executive Officer of Philip 50
Morris International 56Incorporated
Frank T. Toscano..................................... Vice President and Controller 47
William H. Webb...................................... Chief Operating Officer 59
All of the above-mentioned officers, with the exception of Messrs.Mr. Holsenbeck, and MacDonough,
have been employed by the Company in various capacities during the past five
years. Mr. Holsenbeck was elected to his current
15
position with the Company in
January 1995. Previously, Mr. Holsenbeck held various positions with Bethlehem
Steel Corporation, including Secretary and Deputy General Counsel from 1992 to
January 1995, Assistant General Counsel
from 1985 to 1992, and Assistant Secretary from 1983 to 1992. Mr. MacDonough
was Executive Vice President, Marketing, of Anheuser-Busch International, Inc.,
from 1991 until September 1992, when he became President and Chief Operating
Officer of Miller. He assumed his current position in August 1993.1995.
PART II
ItemITEM 5. Market for Registrants' Common Equity and Related Stockholder Matters.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 4659 of
the Company's 19951998 Annual Report and made a part hereof.
ItemITEM 6. Selected Financial Data.SELECTED FINANCIAL DATA.
The information called for by this Item is hereby incorporated by reference
to the information with respect to 1994-1998 appearing under the caption
"Selected Financial Data" on page 26pages 36 and 37 of the Company's 19951998 Annual Report
and made a part hereof.
Item21
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this Item is hereby incorporated by reference
to the paragraphs captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 19-2521 to 35 of the Company's 19951998
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 35 of the Company's 1998 Annual Report and made a part hereof.
ITEM 8. Financial Statements and Supplementary Data.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information called for by this Item is hereby incorporated by reference
to the Company's 19951998 Annual Report as set forth under the caption "Quarterly
Financial Data (Unaudited)" on page 4659 and in the Index to Consolidated
Financial Statements and Schedules (see Item 14) and made a part hereof.
ItemITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ItemITEM 10. Directors and Executive Officers of the Registrant.
ItemDIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. Executive Compensation.
ItemEXECUTIVE COMPENSATION.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
ItemSECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. Certain Relationships and Related Transactions.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, 11, 12 and 1310-13 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, 1996,29, 1999, and made a part hereof.
1622
PART IV
ItemITEM 14. Exhibits, Financial Statement Schedules, and Reports on FormEXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Index to Consolidated Financial Statements and Schedules
ReferenceREFERENCE
----------------------------
Form 10-K 1995 Annual
Annual Report Report
Page Page
------------ ------------
FORM 10-K 1998
ANNUAL REPORT ANNUAL REPORT
PAGE PAGE
------------- -------------
Data incorporated by reference to the Company's 19951998 Annual Report:
Consolidated Balance Sheets at December 31, 19951998 and 1994 ................................................1997 -- 28-2938 - 39
Consolidated Statements of Earnings for the years ended December 31,
1995, 19941998, 1997 and 1993 ....................1996................................................ -- 3040
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 19941998, 1997 and 1993 ........1996................................... -- 3242
Consolidated Statements of Cash Flows for the years ended December
31, 1995, 19941998, 1997 and 1993 ..............1996............................................ -- 30-3140 - 41
Notes to Consolidated Financial Statements .............Statements........................... -- 33-4643 - 59
Report of Independent Accountants.......................Accountants.................................... -- 4760
Data submitted herewith:
Report of Independent Accountants.......................Accountants.................................... S-1 --
Financial Statement Schedule--Valuation and Qualifying Accounts .................................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: No Current Reports on Form 8-K were filed duringDuring the last quarter of the period for which
this Report is filed.filed, the Company filed a Current Report on Form 8-K
dated November 25, 1998, and a Form 8-K/A dated December 24, 1998,
relating to the MSA. Subsequent to the last quarter of the period for
which this Report is filed, the Company filed itsa Current Report on Form
8-K dated February 1, 1996.January 27, 1999, relating to its 1998 financial statements.
23
(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.3-10.2610.1-10.15 are management contracts, compensatory plans or arrangements):
1.1. Form of Underwriting Agreement, including form of terms agreement. (1)
1.2. Form of First Amendment to Selling Agency Agreement. (2)
3.1. Restated Articles of Incorporation of the Company. (1)
3.2. By-Laws, as amended, of the Company.
(3)
4.1. Plan of Exchange and Articles of Incorporation. (4)
4.8. Indenture dated as of August 1, 1990, between the Company and The Chase Manhattan
Bank (formerly known as Chemical Bank,Bank), Trustee. (5)
4.9.(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,Bank), Trustee. (6)
4.10.(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. (7)
4.11.(5)
4.5. 5-Year Loan and GuarantyRevolving Credit Agreement dated as of October 26, 199514, 1997, among the Company,
and the BanksInitial Lenders named therein and Citibank, N.A., and The Chase Manhattan
Bank, as Administrative Agents, and Credit Suisse First Boston, as Syndication
Agent, and Deutsche Bank AG, New York Branch, as Documentation Agent. 10.3.(6)
10.1. Financial Counseling Program of PM Inc. and the Company. (8)
10.4.Program. (7)
10.2. Philip Morris Benefit Equalization Plan, as amended. (8)
17
10.5. Amendments, as of October 25, 1989, to the Philip Morris Benefit Equalization Plan, as amended. (9)
10.6. Automobile Policy of PM Inc. and the Company. (8)
10.9. 1982 Stock Option Plan, as amended. (8)
10.10. The Philip Morris 1987 Long Term Incentive Plan, as amended.(10)
10.12.10.3. Form of Executive MasterEmployee Grantor Trust between the Company, Chemical Bank and Handy
Associates.Enrollment Agreement. (9)
10.13. Agreement, dated October 12, 1987, between the Company and Murray H. Bring, as
amended. (2)
10.14. Agreement, dated November 1, 1989, between the Company and Murray H. Bring. (9)
10.15. Agreement, dated March 8, 1989, between the Company and James M. Kilts. (9)
10.20.10.4. Automobile Policy. (7)
10.5. Form of Employment Agreement between the Company and its executive officers. (9)
10.22.(10)
10.6. Supplemental Management Employees' Retirement Plan of the Company, as amended. (10)
10.23.(7)
10.7. The Philip Morris 1992 Incentive Compensation and Stock Option Plan. (11)
10.24.(7)
10.8. 1992 Compensation Plan for Non-Employee Directors, as amended. 10.25.(11)
10.9. Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996. 10.26.(9)
10.10. The Philip Morris 1987 Long Term Incentive Plan. (7)
10.11. Form of Employee GrantorExecutive Master Trust Enrollment Agreement.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. Amended and Restated Employment Agreement between the Company and Murray H. Bring.
10.16. Comprehensive Settlement Agreement and Release dated October 17, 1997, related to
settlement of Mississippi health care cost recovery action. (7)
10.17. Settlement Agreement dated August 25, 1997, related to settlement of Florida health
care cost recovery action. (13)
24
10.18. Comprehensive Settlement Agreement and Release dated January 16, 1998, related to
settlement of Texas health care cost recovery action. (14)
10.19. Settlement Agreement and Stipulation for Entry of Judgment, dated May 8, 1998,
regarding the claims of the State of Minnesota. (15)
10.20. Settlement Agreement and Release, dated May 8, 1998, regarding the claims of Blue
Cross and Blue Shield of Minnesota. (15)
10.21. 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)
10.22. 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)
10.23. 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)
10.24. Master Settlement Agreement relating to state health care cost recovery and other
claims. (18)
12. Statements re computation of ratios. (1)(19)
13. Pages 19-4721-60 of the Company's 19951998 Annual Report, but only to the extent set forth in
Items 1, 5, 6,
7,1-3, 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
Company's 19951998 Annual Report is not to be deemed "filed" as part of this Report.
21. Subsidiaries of the Company.
23. Consent of independent accountants.
24. Powers of attorney.
99.1. Certain Pending Litigation Matters and Recent Developments.
99.2. Status of the Company.
23. Consent of independent accountants.
24. Powers of attorney.Master Settlement Agreement.
99.3. Trial Schedule.
- ----------------------------------
(1) Incorporated by reference to the Company's CurrentQuarterly Report on Form 8-K10-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 1, 1996.
(2)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, 1993.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 33-59109) dated May 4, 1995.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-14 (No. 2-96149) dated March 1, 1985.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-36450) dated August 22, 1990.
(6) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-39059) dated February 21, 1991.
(7) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-45210) dated January 22, 1992.1997.
25
(8) Incorporated by reference to the Company's Registration StatementAnnual Report on Form 8-B (No. 1-8940) dated July 1, 1985.10-K for
the year ended December 31, 1996.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.1995.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990.1994.
(11) Incorporated by reference to the Company's Proxy Statement in connection
with its annual meeting of stockholders heldQuarterly Report on April 23, 1992, filedForm 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 12, 1992.
1831, 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 27, 1999.
26
SIGNATURES
Pursuant to the requirements of SectionPURSUANT TO THE REQUIREMENTS OF SECTION 13 orOR 15(d) of the Securities
Exchange Act ofOF 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.THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PHILIP MORRIS COMPANIES INC.
Date: March 27, 1996
By: /s/ GEOFFREY C. BIBLE
-----------------------------------------
(Geoffrey C. Bible,
Chairman of the Board and
Chief Executive Officer)
Date: March 17, 1999
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 -------------------------------------
(Geoffrey C. Bible,Director, Chairman of the
Board)
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- ------------------------------------- Board and in the capacitiesChief March 17, 1999
(Geoffrey C. Bible) Executive Officer
/s/ LOUIS C. CAMILLERI
- ------------------------------------- Senior Vice President and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ GEOFFREY C. BIBLE Director, Chairman of the March 17, 1999
(Louis C. Camilleri) Chief Financial Officer
/s/ FRANK T. TOSCANO
- ------------------------------------- Vice President and March 17, 1999
(Frank T. Toscano) Controller
* ELIZABETH E. BAILEY, MURRAY H.
BRING, HAROLD BROWN,
WILLIAM H. DONALDSON, JANE
EVANS, ROBERT E. R. HUNTLEY,
RUPERT MURDOCH, JOHN D.
NICHOLS, LUCIO A. NOTO,
RICHARD D. PARSONS,
JOHN S. REED, CARLOS SLIM HELU,
STEPHEN M. WOLF Directors
*BY: /S/ LOUIS C. CAMILLERI
- -------------------------------------
(Louis C. Camilleri March 17, 1999
Attorney-in-fact)
27 1996
- --------------------------------------------- Board and Chief
(Geoffrey C. Bible) Executive Officer
/s/ HANS G. STORR Director, Executive Vice March 27, 1996
- --------------------------------------------- President and Chief
(Hans G. Storr) Financial Officer
/s/ KATHERINE P. CLARK Vice President and March 27, 1996
- --------------------------------------------- Controller
(Katherine P. Clark)
*ELIZABETH E. BAILEY, MURRAY H. BRING, HAROLD
BROWN, WILLIAM H. DONALDSON, JANE
EVANS, ROBERT E. R. HUNTLEY, RUPERT
MURDOCH, JOHN D. NICHOLS, RICHARD D.
PARSONS, ROGER S. PENSKE, JOHN S.
REED, STEPHEN M. WOLF, Directors
*By: /s/ HANS G. STORR March 27, 1996
----------------------------------------
(Hans G. Storr
Attorney-in-fact)
19
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on our audits of the consolidated financial statements of Philip
Morris Companies Inc. has been incorporated by reference in this Form 10-K from
page 60 of the 19951998 annual report to stockholders of Philip Morris Companies
Inc. and appears on page 47 therein. In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in the index in Item
14(a) on page 1723 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.PRICEWATERHOUSECOOPERS LLP
New York, New York
January 29, 199625, 1999
S-1
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended DecemberFOR THE YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
(in millions)1998, 1997 AND 1996
(IN MILLIONS)
Col.COL. A Col.COL. B Col.COL. C Col.COL. D Col.COL. E
------ -------- ----------------------- ------- ---------
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period- ----------------------------------------- ----------- ---------- ------------ -------- ---------- ------------------------------------ ----------- -----------
ADDITIONS
--------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------------------------------------- ----------- ----------- ------------- ----------- -----------
(a) (b)
1995:1998:
CONSUMER PRODUCTS:
Allowance for discounts ...............................discounts................ $ 15 $5518 $ 607 $ -- $554 $ 12606 $ 9
Allowance for doubtful accounts ....................... 168 35 (12)accounts........ 157 36 27 28 163192
Allowance for returned goods .......................... 4 40goods........... 6 79 -- 41 3
---- ----64 21
----- ---- ----
$187 $626 $(12) $623 $178
==== ==== ===== ==== ====----- --- ----- -----
$ 171 $ 722 $ 27 $ 698 $ 222
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES AND REAL ESTATE:
ProvisionSERVICES:
Allowance for losses .................................. $104losses................... $ 101 $ 15 $ -- $ -- $ 3 $101
==== ==== ===== === ====
1994:116
----- ----- --- ----- -----
----- ----- --- ----- -----
1997:
CONSUMER PRODUCTS:
Allowance for discounts..................................discounts................ $ 18 $5385 $ 534 $ -- $541 $ 15531 $ 8
Allowance for doubtful accounts.......................... 153 38 8 31 168accounts........ 167 35 (13) 32 157
Allowance for returned goods............................. 4 100goods........... 5 66 -- 100 4
---- ----65 6
----- ---- ----
$175 $676----- --- ----- -----
$ 8 $672 $187
==== ==== ===== ==== ====177 $ 635 $ (13) $ 628 $ 171
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES AND REAL ESTATE:
Provision for losses..................................... $ 94 $ 10 $ -- $ -- $104
==== ==== ===== ==== ====
1993:
CONSUMER PRODUCTS:SERVICES:
Allowance for discounts ..................................losses................... $ 23 $572 $ -- $577 $ 18
Allowance for doubtful accounts........................... 157 35 2 41 153
Allowance for returned goods ............................. 7 134 -- 137 4
---- ---- ----- ---- ----
$187 $741 $ 2 $755 $175
==== ==== ===== ==== ====
FINANCIAL SERVICES AND REAL ESTATE:
Provision for losses .................................... $ 94101 $ -- $ -- $ -- $ 94
==== ==== ===== ==== ====101
----- ----- --- ----- -----
----- ----- --- ----- -----
1996:
CONSUMER PRODUCTS:
Allowance for discounts................ $ 12 $ 492 $ -- $ 499 $ 5
Allowance for doubtful accounts........ 163 27 16 39 167
Allowance for returned goods........... 3 64 -- 62 5
----- ----- --- ----- -----
$ 178 $ 583 $ 16 $ 600 $ 177
----- ----- --- ----- -----
----- ----- --- ----- -----
FINANCIAL SERVICES:
Allowance for losses................... $ 101 $ -- $ -- $ -- $ 101
----- ----- --- ----- -----
----- ----- --- ----- -----
- -----------------------------------
Notes:
(a) Related to divestitures, acquisitions, the consolidation of previously
unconsolidated subsidiaries and currency translation.
(b) Represents charges for which allowances were created.
S-2