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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)
                         ------------------------------
 
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 - -------------------------------------------------------- -------------------------------------------------------- Name of each exchange on Title of each class which registered ------------------- ---------------- Common Stock, $1$0.33 1/3 par value New York Stock Exchange
-------------------------------------- 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 --- -------------- At February 29, 1996, the/X/ ------------------------ The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on February 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. -------------- 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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). - --------------------------------- * 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 - ------------------------ + 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. - --------- * 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