-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Qj2PW2reWBE8ZrXbPd+9q46aaqTLfnEq0P0CvnbCkiv9ABhujTdlbBQNl5N8olFE TCnLgYiaJYjCSNp0NK76YQ== 0000950117-02-001872.txt : 20020813 0000950117-02-001872.hdr.sgml : 20020813 20020813161711 ACCESSION NUMBER: 0000950117-02-001872 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILIP MORRIS COMPANIES INC CENTRAL INDEX KEY: 0000764180 STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000] IRS NUMBER: 133260245 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08940 FILM NUMBER: 02729937 BUSINESS ADDRESS: STREET 1: 120 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 9176635000 MAIL ADDRESS: STREET 1: 120 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 10-Q 1 a33117.txt PHILIP MORRIS UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8940 Philip Morris Companies Inc. ----------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 13-3260245 - ------------------------------ ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 120 Park Avenue, New York, New York 10017 - --------------------------------------- --------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (917) 663-5000 -------------- - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] At July 31, 2002, there were 2,113,855,531 shares outstanding of the registrant's common stock, par value $0.33 1/3 per share. PHILIP MORRIS COMPANIES INC. TABLE OF CONTENTS Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 3 - 4 Condensed Consolidated Statements of Earnings for the Six Months Ended June 30, 2002 and 2001 5 Three Months Ended June 30, 2002 and 2001 6 Condensed Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 2001 and the Six Months Ended June 30, 2002 7 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 8 - 9 Notes to Condensed Consolidated Financial Statements 10 - 27 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28 - 50 PART II - OTHER INFORMATION Item 1. Legal Proceedings 51 Item 6. Exhibits and Reports on Form 8-K 51 Signature 52 -2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in millions of dollars) (Unaudited) June 30, December 31, 2002 2001 -------- ------------ ASSETS Consumer products Cash and cash equivalents $ 1,380 $ 453 Receivables (less allowances of $159 and $193) 5,567 5,148 Inventories: Leaf tobacco 3,517 3,827 Other raw materials 2,154 1,909 Finished product 3,416 3,187 ------- ------- 9,087 8,923 Other current assets 2,119 2,751 ------- ------- Total current assets 18,153 17,275 Property, plant and equipment, at cost 26,456 25,625 Less accumulated depreciation 11,066 10,488 ------- ------- 15,390 15,137 Goodwill and other intangible assets, net 37,879 37,548 Other assets 6,192 6,144 ------- ------- Total consumer products assets 77,614 76,104 Financial services Finance assets, net 8,381 8,691 Other assets 188 173 ------- ------- Total financial services assets 8,569 8,864 ------- ------- TOTAL ASSETS $86,183 $84,968 ======= ======= See notes to condensed consolidated financial statements. Continued -3- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Continued) (in millions of dollars, except per share data) (Unaudited) June 30, December 31, 2002 2001 -------- ------------ LIABILITIES Consumer products Short-term borrowings $ 468 $ 997 Current portion of long-term debt 3,213 1,942 Accounts payable 2,878 3,600 Accrued liabilities: Marketing 2,681 2,794 Taxes, except income taxes 1,958 1,654 Employment costs 916 1,192 Settlement charges 2,853 3,210 Other 2,480 2,480 Income taxes 1,829 1,021 Dividends payable 1,237 1,251 -------- -------- Total current liabilities 20,513 20,141 Long-term debt 16,576 17,159 Deferred income taxes 5,168 5,238 Accrued postretirement health care costs 3,393 3,315 Minority interest 4,198 4,013 Other liabilities 7,941 7,796 -------- -------- Total consumer products liabilities 57,789 57,662 Financial services Short-term borrowings 512 Long-term debt 2,091 1,492 Deferred income taxes 5,312 5,246 Other liabilities 450 436 -------- -------- Total financial services liabilities 7,853 7,686 -------- -------- Total liabilities 65,642 65,348 Contingencies (Note 8) STOCKHOLDERS' EQUITY Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) 935 935 Additional paid-in capital 4,646 4,503 Earnings reinvested in the business 39,773 37,269 Accumulated other comprehensive losses (including currency translation of $2,998 and $3,238) (3,265) (3,373) -------- -------- 42,089 39,334 Less cost of repurchased stock (679,266,327 and 653,458,100 shares) (21,548) (19,714) -------- -------- Total stockholders' equity 20,541 19,620 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 86,183 $ 84,968 ======== ======== See notes to condensed consolidated financial statements. -4- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (in millions of dollars, except per share data) (Unaudited)
For the Six Months Ended June 30, ------------------------ 2002 2001 ------- ------- Net revenues $41,638 $40,748 Cost of sales 17,033 17,131 Excise taxes on products 9,158 8,810 ------- ------- Gross profit 15,447 14,807 Marketing, administration and research costs 6,645 6,230 Litigation related expense 500 Amortization of intangibles 4 506 ------- ------- Operating income 8,798 7,571 Interest and other debt expense, net 602 889 ------- ------- Earnings before income taxes, minority interest and cumulative effect of accounting change 8,196 6,682 Provision for income taxes 2,909 2,526 ------- ------- Earnings before minority interest and cumulative effect of accounting change 5,287 4,156 Minority interest in earnings 312 82 ------- ------- Earnings before cumulative effect of accounting change 4,975 4,074 Cumulative effect of accounting change (6) ------- ------- Net earnings $ 4,975 $ 4,068 ======= ======= Per share data: Basic earnings per share before cumulative effect of accounting change $ 2.32 $ 1.86 Cumulative effect of accounting change (0.01) ------- ------- Basic earnings per share $ 2.32 $ 1.85 ======= ======= Diluted earnings per share before cumulative effect of accounting change $ 2.30 $ 1.83 Cumulative effect of accounting change ------- ------- Diluted earnings per share $ 2.30 $ 1.83 ======= ======= Dividends declared $ 1.16 $ 1.06 ======= =======
See notes to condensed consolidated financial statements. -5- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (in millions of dollars, except per share data) (Unaudited)
For the Three Months Ended June 30, -------------------------- 2002 2001 ------- ------- Net revenues $21,103 $20,789 Cost of sales 8,501 8,761 Excise taxes on products 4,583 4,377 ------- ------- Gross profit 8,019 7,651 Marketing, administration and research costs 3,390 3,194 Amortization of intangibles 2 253 ------- ------- Operating income 4,627 4,204 Interest and other debt expense, net 309 438 ------- ------- Earnings before income taxes and minority interest 4,318 3,766 Provision for income taxes 1,533 1,431 ------- ------- Earnings before minority interest 2,785 2,335 Minority interest in earnings 175 47 ------- ------- Net earnings $ 2,610 $ 2,288 ======= ======= Per share data: Basic earnings per share $ 1.22 $ 1.04 ======= ======= Diluted earnings per share $ 1.21 $ 1.03 ======= ======= Dividends declared $ 0.58 $ 0.53 ======= =======
See notes to condensed consolidated financial statements. -6- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 2001 and the Six Months Ended June 30, 2002 (in millions of dollars, except per share data) (Unaudited)
Accumulated Other Comprehensive Losses ----------------------------- Addi- Earnings Total tional Reinvested Currency Cost of Stock- Common Paid-in in the Translation Repurchased holders' Stock Capital Business Adjustments Other Total Stock Equity ------ ------- ---------- ----------- ----- ------- ----------- ------- Balances, January 1, 2001 $935 $ -- $33,481 $(2,864) $ (86) $(2,950) $(16,461) $15,005 Comprehensive earnings: Net earnings 8,560 8,560 Other comprehensive losses, net of income taxes: Currency translation adjustments (753) (753) (753) Additional minimum pension liability (89) (89) (89) Change in fair value of derivatives accounted for as hedges 33 33 33 ------- Total other comprehensive losses (809) ------- Total comprehensive earnings 7,751 ------- Exercise of stock options and issuance of other stock awards 138 70 747 955 Cash dividends declared ($2.22 per share) (4,842) (4,842) Stock repurchased (4,000) (4,000) Sale of Kraft Foods Inc. common stock 4,365 379 7 386 4,751 ---- ------ ------- ------- ----- ------- -------- ------- Balances, December 31, 2001 935 4,503 37,269 (3,238) (135) (3,373) (19,714) 19,620 Comprehensive earnings: Net earnings 4,975 4,975 Other comprehensive earnings, net of income taxes: Currency translation adjustments 240 240 240 Additional minimum pension liability (5) (5) (5) Change in fair value of derivatives accounted for as hedges (127) (127) (127) ------- Total other comprehensive earnings 108 ------- Total comprehensive earnings 5,083 ------- Exercise of stock options and issuance of other stock awards 143 8 513 664 Cash dividends declared ($1.16 per share) (2,479) (2,479) Stock repurchased (2,347) (2,347) ---- ------ ------- ------- ----- ------- -------- ------- Balances, June 30, 2002 $935 $4,646 $39,773 $(2,998) $(267) $(3,265) $(21,548) $20,541 ==== ====== ======= ======= ===== ======= ======== =======
Total comprehensive earnings, which represent net earnings and the change in fair value of derivatives accounted for as hedges, partially offset by currency translation adjustments, were $2,930 million and $1,896 million, respectively, for the quarters ended June 30, 2002 and 2001, and $3,531 million for the first six months of 2001. See notes to condensed consolidated financial statements. -7- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in millions of dollars) (Unaudited) For the Six Months Ended June 30, ------------------------ 2002 2001 ------- ------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net earnings - Consumer products $ 4,869 $ 3,984 - Financial services 106 84 ------- ------- Net earnings 4,975 4,068 Adjustments to reconcile net earnings to operating cash flows: Consumer products Cumulative effect of accounting change 6 Depreciation and amortization 664 1,163 Deferred income tax provision 590 296 Loss on sale of a North American food factory and integration costs 119 29 Voluntary retirement programs 175 Gains on sales of businesses (3) (8) Cash effects of changes, net of the effects from acquired and divested companies: Receivables, net (534) (439) Inventories 118 (54) Accounts payable (867) (999) Income taxes 953 884 Accrued liabilities and other current assets (639) (357) Other (51) (169) Financial services Deferred income tax provision 66 103 Other 170 103 ------- ------- Net cash provided by operating activities 5,736 4,626 ------- ------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES Consumer products Capital expenditures (834) (790) Purchases of businesses, net of acquired cash (72) (354) Proceeds from sales of businesses 86 9 Other 48 41 Financial services Investments in finance assets (113) (305) Proceeds from finance assets 249 105 ------- ------- Net cash used in investing activities (636) (1,294) ------- ------- See notes to condensed consolidated financial statements. Continued -8- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Continued) (in millions of dollars) (Unaudited) For the Six Months Ended June 30, ------------------------ 2002 2001 ------- ------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Consumer products Net repayment of short-term borrowings $(3,100) $(7,148) Long-term debt proceeds 4,536 47 Long-term debt repaid (1,466) (1,287) Financial services Net repayment of short-term borrowings (512) (673) Long-term debt proceeds 440 557 Repurchase of Philip Morris common stock (2,220) (1,971) Dividends paid on Philip Morris common stock (2,493) (2,342) Issuance of Philip Morris common stock 651 592 Issuance of Kraft Foods Inc. common stock 8,443 Other (99) (85) ------- ------- Net cash used in financing activities (4,263) (3,867) ------- ------- Effect of exchange rate changes on cash and cash equivalents 90 (7) ------- ------- Cash and cash equivalents: Increase (decrease) 927 (542) Balance at beginning of period 453 937 ------- ------- Balance at end of period $ 1,380 $ 395 ======= ======= See notes to condensed consolidated financial statements. -9- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Company Name Change: In April 2002, the stockholders of Philip Morris Companies Inc. (the "Company") approved changing the Company's name from Philip Morris Companies Inc. to Altria Group, Inc. The Company's Board of Directors retains the discretion to effect the name change, pending the resolution of legal challenges. Note 2. Accounting Policies: The interim condensed consolidated financial statements of the Company are unaudited. It is the opinion of the Company's management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year. These statements should be read in conjunction with the consolidated financial statements and related notes, and management's discussion and analysis of financial condition and results of operations, which appear in the Company's Annual Report to Stockholders and which are incorporated by reference into the Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 Form 10-K"). Balance sheet accounts are segregated by two broad types of businesses. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordance with respective industry practices. Certain prior year amounts have been reclassified to conform with the current year's presentation. Note 3. Recently Adopted Accounting Standards: On January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." As a result, the Company stopped recording the amortization of goodwill and indefinite life intangible assets as a charge to earnings as of January 1, 2002. The Company estimates that net earnings and diluted earnings per share ("EPS") would have been approximately $4.6 billion and $2.05, respectively, for the six months ended June 30, 2001, and approximately $2.5 billion and $1.14, respectively, for the three months ended June 30, 2001, had the provisions of the new standards been applied as of January 1, 2001. In addition, the Company is required to conduct an annual review of goodwill and intangible assets for potential impairment. The Company completed its review and did not have to record a charge to earnings for an impairment of goodwill or other intangible assets as a result of these new standards. At June 30, 2002, goodwill by segment was as follows (in millions): International tobacco $ 899 North American food 20,655 International food 4,255 Beer 186 ------- Total goodwill $25,995 ======= -10- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Intangible assets as of June 30, 2002 were as follows: Gross Carrying Accumulated Amount Amortization -------- ------------ (in millions) Non-amortizable intangible assets $11,855 Amortizable intangible assets 55 $26 ------- --- Total intangible assets $11,910 $26 ======= === Non-amortizable intangible assets substantially comprise brand names purchased through the Nabisco acquisition. Amortizable intangible assets consist primarily of certain trademark licenses and non-compete agreements. The pre-tax amortization expense for intangible assets during the six months and quarter ended June 30, 2002 was $4 million and $2 million, respectively. Based upon the amortizable intangible assets recorded on the balance sheet as of June 30, 2002, amortization expense for each of the next five years is estimated to be $8 million or less. The increase in goodwill and other intangible assets, net, at June 30, 2002 from December 31, 2001 of $331 million is primarily related to currency translation. Effective January 1, 2002, the Company also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on the Company's financial position, results of operations or cash flows. Effective January 1, 2002, the Company adopted Emerging Issues Task Force ("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." The adoption of EITF Issues No. 00-14 and No. 00-25 resulted in a reduction of revenues of approximately $4.8 billion and $2.4 billion in the first six months and the second quarter of 2001, respectively. In addition, the adoption reduced marketing, administration and research costs in the first six months and the second quarter of 2001 by approximately $5.2 billion and $2.6 billion, respectively. Cost of sales increased in the first six months and the second quarter of 2001 by approximately $307 million and $162 million, respectively, and excise taxes on products increased by approximately $114 million and $58 million, respectively. The adoption of these EITF Issues had no impact on net earnings or basic and diluted EPS. Note 4. Financial Instruments: Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (collectively referred to as "SFAS No. 133"). As of January 1, 2001, the adoption of these new standards resulted in a cumulative effect of an accounting change that reduced net earnings by $6 million, net of income taxes of $3 million, and decreased accumulated other comprehensive losses by $15 million, net of income taxes of $8 million. During the six months and three months ended June 30, 2002 and 2001, ineffectiveness related to fair value hedges and cash flow hedges was not material. The Company is hedging forecasted transactions for periods not exceeding the next nineteen months. At June 30, 2002, the Company estimates derivative gains of $56 million, -11- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) net of income taxes, reported in accumulated other comprehensive losses will be reclassified to the consolidated statement of earnings within the next twelve months. Within currency translation adjustments at June 30, 2002 and 2001, the Company recorded a loss of $113 million, net of income taxes of $60 million, and a gain of $8 million, net of income taxes of $4 million, respectively, which represented effective hedges of net investments. Hedging activity affected accumulated other comprehensive losses, net of income taxes, as follows:
For the Six Months Ended For the Three Months Ended June 30, June 30, ------------------------ -------------------------- 2002 2001 2002 2001 ----- ---- ----- ---- (in millions) (in millions) Balance at beginning of period $ 33 $ -- $ 75 $ 32 Impact of SFAS No. 133 adoption 15 Derivative losses (gains) transferred to earnings 79 (52) (13) (22) Change in fair value (206) 33 (156) (14) ----- ---- ----- ---- Balance as of June 30 $ (94) $ (4) $ (94) $ (4) ===== ==== ===== ====
Note 5. Acquisitions and Divestitures: On May 30, 2002, the Company announced an agreement with South African Breweries plc ("SAB") to merge Miller Brewing Company ("Miller") into SAB. The transaction closed on July 9, 2002 and SAB changed its name to SABMiller plc ("SABMiller"). At closing, the Company received 430 million shares of SABMiller valued at approximately $3.4 billion, based upon a share price of 5.12 British pounds per share, in exchange for Miller, which had $2.0 billion of existing debt. The shares in SABMiller owned by the Company resulted in an initial 36% economic interest in SABMiller and a 24.9% voting interest. The transaction resulted in a pre-tax gain of approximately $2.6 billion or approximately $1.7 billion after-tax. The gain will be recorded in the third quarter of 2002. Subsequent to the sale, the Company's ownership interest in SABMiller will be accounted for under the equity method, according to which the Company will record its percentage of SABMiller's net earnings going forward. During the first quarter of 2002, Kraft Foods International, Inc. ("KFI") acquired a biscuits company in Australia for an aggregate cost of $62 million. In addition, during 2002, Kraft Foods North America, Inc. ("KFNA") sold several small North American food businesses, most of which were previously classified as businesses held for sale. The net revenues and operating results of the businesses held for sale, which were not significant, were excluded from the Company's consolidated statements of earnings and no gain or loss was recognized on these sales. The aggregate proceeds received from sales of businesses during the first six months of 2002 were $86 million. During 2001, Philip Morris International Inc. ("PMI") increased its interest in an Argentine tobacco company for an aggregate cost of $255 million. In addition, KFI purchased coffee businesses in Romania, Morocco and Bulgaria. The operating results of businesses acquired and sold were not material to the consolidated operating results of the Company in any of the periods presented. -12- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 6. Earnings Per Share: Basic and diluted EPS were calculated using the following:
For the Six Months Ended June 30, ------------------------ 2002 2001 ------ ------ (in millions) Earnings before cumulative effect of accounting change $4,975 $4,074 Cumulative effect of accounting change (6) ------ ------ Net earnings $4,975 $4,068 ====== ====== Weighted average shares for basic EPS 2,140 2,196 Plus incremental shares from assumed conversions: Restricted stock and stock rights 2 6 Stock options 23 24 ------ ------ Weighted average shares for diluted EPS 2,165 2,226 ====== ======
For the Three Months Ended June 30, -------------------------- 2002 2001 ------ ------ (in millions) Net earnings $2,610 $2,288 ====== ====== Weighted average shares for basic EPS 2,135 2,191 Plus incremental shares from assumed conversions: Restricted stock and stock rights 1 6 Stock options 23 24 ------ ------ Weighted average shares for diluted EPS 2,159 2,221 ====== ======
The number of shares of common stock excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive was immaterial for all periods presented. Note 7. Segment Reporting: The products of the Company's subsidiaries include cigarettes, food (consisting principally of a wide variety of snacks, beverages, cheese, grocery products and convenient meals) and, prior to the merger of Miller into SAB on July 9, 2002, beer. Another subsidiary of the Company, Philip Morris Capital Corporation, is primarily engaged in leasing activities. The products and services of these subsidiaries constitute the Company's reportable segments of domestic tobacco, international tobacco, North American food, international food, beer and financial services. The Company's management reviews operating companies income to evaluate segment performance and allocate resources. Operating companies income for the segments excludes general corporate expenses and amortization of intangibles. Interest and other debt expense, net, and provision for income taxes are centrally -13- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by the Company's management. Segment data were as follows:
For the Six Months Ended June 30, ------------------------ 2002 2001 ------- ------- (in millions) Net revenues: Domestic tobacco $ 9,899 $ 9,682 International tobacco 14,173 13,721 North American food 10,862 10,662 International food 3,798 4,008 Beer 2,641 2,464 Financial services 265 211 ------- ------- Total net revenues $41,638 $40,748 ======= ======= Operating companies income: Domestic tobacco $ 2,704 $ 2,085 International tobacco 2,967 2,906 North American food 2,467 2,496 International food 551 537 Beer 276 292 Financial services 175 140 ------- ------- Total operating companies income 9,140 8,456 Amortization of intangibles (4) (506) General corporate expenses (338) (379) ------- ------- Total operating income 8,798 7,571 Interest and other debt expense, net (602) (889) ------- ------- Total earnings before income taxes, minority interest and cumulative effect of accounting change $ 8,196 $ 6,682 ======= =======
For the Three Months Ended June 30, -------------------------- 2002 2001 ------- ------- (in millions) Net revenues: Domestic tobacco $ 4,881 $ 5,105 International tobacco 7,139 6,750 North American food 5,568 5,428 International food 1,945 2,045 Beer 1,422 1,350 Financial services 148 111 ------- ------- Total net revenues $21,103 $20,789 ======= =======
-14- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)
For the Three Months Ended June 30, -------------------------- 2002 2001 ------ ------ (in millions) Operating companies income: Domestic tobacco $1,454 $1,383 International tobacco 1,403 1,348 North American food 1,369 1,353 International food 299 298 Beer 169 168 Financial services 104 76 ------ ------ Total operating companies income 4,798 4,626 Amortization of intangibles (2) (253) General corporate expenses (169) (169) ------ ------ Total operating income 4,627 4,204 Interest and other debt expense, net (309) (438) ------ ------ Total earnings before income taxes and minority interest $4,318 $3,766 ====== ======
During 2002, operating companies income for the North American food and international food segments included pre-tax charges related to the consolidation of production lines, the closing of a facility and other consolidation programs. Pre-tax charges of $102 million and $75 million were recorded in marketing, administration and research costs of the North American food segment for the six months and three months ended June 30, 2002, respectively, and $17 million was recorded in the international food segment for the six months and three months ended June 30, 2002. The 2002 integration related charges of $119 million included $21 million relating to severance, $82 million relating to asset write-offs and $16 million relating to other cash exit costs. Cash payments relating to this charge will approximate $37 million of which $1 million has been paid through June 30, 2002. The majority of the remaining payments are expected to be made by December 31, 2002. During the first quarter of 2002, a pre-tax charge of $15 million was recorded in marketing, administration and research costs for a beer asset impairment. During the second quarter of 2002, the international tobacco business announced a voluntary early retirement program in Germany and approximately 160 employees accepted the benefits offered by this program. As a result, in the second quarter of 2002, a pre-tax charge of $25 million, which includes enhanced pension and postretirement benefits, was recorded in marketing, administration and research costs of the international tobacco segment. During 2001, voluntary early retirement programs were announced for certain eligible salaried employees in the food and beer businesses. During the first quarter of 2002, approximately 800 employees accepted the benefits offered by these programs and elected to retire or terminate employment. Pre-tax charges of $135 million, $7 million and $8 million were recorded in marketing, administration and research costs of the North American food, international food and beer segments, respectively, in the first quarter of 2002 for these voluntary retirement programs. As discussed in Note 8. Contingencies, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among Philip Morris Incorporated ("PM Inc."), certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, a $500 million pre-tax charge was recorded by the domestic -15- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) tobacco business during the first quarter of 2001. In July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the June 30, 2002 and December 31, 2001 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM Inc. quarterly and is being recorded as earned in interest and other debt expense, net, in the consolidated statements of earnings. During the first quarter of 2001, KFNA sold a North American food factory, which resulted in a pre-tax loss of $29 million. Note 8. Contingencies: Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc. and Philip Morris International Inc. ("PMI"), the Company's international tobacco subsidiary, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Overview of Tobacco-Related Litigation Types and Number of Cases Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases primarily alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that the use of the terms "Lights" and "Ultra Lights" constitutes deceptive and unfair trade practices, suits by foreign governments seeking to recover damages resulting from the allegedly illegal importation of cigarettes into various jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking, and various antitrust suits. Damages claimed in some of the smoking and health class actions, health care cost recovery cases and other tobacco-related litigation range into the billions of dollars. In July 2000, a jury in a Florida smoking and health class action returned a punitive damages award of approximately $74 billion against PM Inc. (see discussion of the Engle case below). Plaintiffs' theories of recovery and the defenses raised in the smoking and health and health care cost recovery cases are discussed below. Exhibit 99.1 hereto lists the smoking and health class actions, health care cost recovery and certain other actions pending as of August 1, 2002, and discusses certain developments in such cases since May 10, 2002. As of August 1, 2002 there were approximately 1,500 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM Inc. and, in some instances, the Company, compared with approximately 1,500 such cases on August 1, 2001, and approximately 390 such cases on August 1, 2000. In certain jurisdictions, individual smoking and health cases have been aggregated for trial in a single proceeding; the largest such proceeding aggregates 1,250 cases in West Virginia and is currently scheduled for trial in June 2003. An estimated 14 of the individual cases involve allegations of various personal injuries allegedly related to exposure to environmental tobacco smoke ("ETS"). In addition, approximately 2,800 additional individual cases are pending in Florida by current and former flight attendants claiming personal injuries allegedly related to ETS. The flight attendants allege that they are members of an ETS smoking and health class action, which was settled in 1997. The terms of the court-approved settlement in that case allow class members to file -16- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages. As of August 1, 2002, there were an estimated 21 smoking and health purported class actions pending in the United States against PM Inc. and, in some cases, the Company (including two that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 28 such cases on August 1, 2001, and approximately 35 such cases on August 1, 2000. Some of these actions purport to constitute statewide class actions and were filed after May 1996, when the United States Court of Appeals for the Fifth Circuit reversed a federal district court's certification of a purported nationwide class action on behalf of persons who were allegedly "addicted" to tobacco products. As of August 1, 2002, there were an estimated 43 health care cost recovery actions, including the suit discussed below under "Federal Government's Lawsuit," filed by the United States government, pending in the United States against PM Inc. and, in some instances, the Company, compared with approximately 52 such cases pending on August 1, 2001, and 50 such cases on August 1, 2000. In addition, health care cost recovery actions are pending in Israel, the Province of British Columbia, Canada, France (in a case brought by a local agency of the French social security health insurance system) and Spain. There are also a number of other tobacco-related actions pending outside the United States against PMI and its affiliates and subsidiaries, including an estimated 73 smoking and health cases brought on behalf of individuals (Argentina (40), Australia (1), Brazil (19), Czech Republic (1), Ireland (1), Israel (2), Italy (4), Japan (1), the Philippines (1), Scotland (1), and Spain (2)), compared with approximately 69 such cases on August 1, 2001, and 45 such cases on August 1, 2000. In addition, as of August 1, 2002, there were eight smoking and health putative class actions pending outside the United States (Brazil (1), Canada (3), and Spain (4)), compared with 12 such cases on August 1, 2001 and ten such cases on August 1, 2000. Pending and Upcoming Trials Jury selection is proceeding in a smoking and health class action in Louisiana in which PM Inc. is a defendant and in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs. Jury selection is also proceeding in an individual smoking and health case against PM Inc. in California. In addition, later in August, trials are scheduled to begin in two cases in Florida brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by ETS; PM Inc. is a defendant in both cases. As set forth in Exhibit 99.2 hereto, additional cases against PM Inc. and, in some instances, the Company, are scheduled for trial through the end of 2003. They include two class actions in California in which plaintiffs seek damages under the California Business and Professions Code for the costs of cigarettes purchased by class members during the class period, a case in West Virginia that aggregates 1,250 individual smoking and health cases, a Lights/Ultra Lights class action in Illinois and the health care cost recovery case brought by the United States government as well as an estimated 26 individual smoking and health cases and 14 additional cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by ETS. Five of the trials in the individual smoking and health cases are scheduled to begin in October 2002 and one of the trials is scheduled to begin in November 2002. Trials are scheduled to begin in six of the cases brought by flight attendants in the next three months. Cases against other tobacco companies are also scheduled for trial through the end of 2003. Trial dates, however, are subject to change. Recent Trial Results Since January 1999, jury verdicts have been returned in 21 smoking and health and health care cost recovery cases in which PM Inc. was a defendant. Verdicts in favor of PM Inc. and other defendants were returned in 12 of the 21 cases. These 12 cases were tried in Rhode Island, West Virginia, Ohio (2), New Jersey, Florida (2), New York (2), Mississippi and Tennessee (2). Plaintiffs' appeals or post-trial motions challenging the verdicts are pending in West Virginia, Ohio and Florida. In May 2002, a mistrial was declared in a case brought by a flight attendant claiming personal injuries allegedly caused by ETS, and the case was subsequently dismissed. In -17- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) addition, in 2001, a mistrial was declared in New York in an asbestos contribution case, and plaintiffs subsequently voluntarily dismissed the case. The chart below lists the verdicts and post-trial developments in the nine cases that have gone to trial since January 1999 in which verdicts were returned in favor of plaintiffs.
Location Type of Post-Trial Date of Court Case Verdict Developments - -------- ---------- ------------- --------------------------------- ----------------------------------- June Florida Flight $5.5 million in compensatory Defendants have filed post-trial 2002 Attendant ETS damages against all motions challenging the verdict. Litigation defendants, including PM Inc. June Florida Individual $37.5 million in compensatory Defendants have filed post-trial 2002 Smoking and damages against all defendants, motions challenging the verdict. Health including PM Inc. March Oregon Individual $168,500 in compensatory damages In May 2002, the trial court reduced 2002 Smoking and and $150 million in punitive the punitive damages award to Health damages against PM Inc. $100 million, and in July 2002, the trial court denied PM Inc.'s post-trial motions challenging the verdict. PM Inc. has appealed. June California Individual $5.5 million in compensatory In August 2001, the trial court 2001 Smoking and damages, and $3 billion in reduced the punitive damages award Health punitive damages against PM Inc. to $100 million; PM Inc. has appealed. June New York Health Care $17.8 million in compensatory In February 2002, the trial court 2001 Cost damages, against all defendants awarded plaintiffs $38 million in Recovery including $6.8 million against attorneys' fees. Defendants have PM Inc. appealed. July Florida Smoking and $145 billion in punitive damages See "Engle Class Action," below. 2000 Health against all defendants, including Class Action $74 billion against PM Inc. March California Individual $1.72 million in compensatory Defendants have appealed. 2000 Smoking and damages against PM Inc. and Health another defendant, and $10 million in punitive damages against PM Inc. and $10 million in punitive damages against the other defendant.
-18- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited)
Location Type of Post-Trial Date of Court Case Verdict Developments - -------- ---------- ------------- --------------------------------- ----------------------------------- March Oregon Individual $800,000 in compensatory The trial court reduced the 1999 Smoking and damages, $21,500 in medical punitive damages award to $32 Health expenses and $79.5 million in million, and PM Inc. appealed. In punitive damages against PM Inc. June 2002, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award; PM Inc. has appealed to the Oregon Supreme Court. February California Individual $1.5 million in compensatory The trial court reduced the 1999 Smoking and damages and $50 million in punitive damages award to $25 Health punitive damages against PM Inc. million and PM Inc. appealed. In November 2001, a California District Court of Appeals affirmed the trial court's ruling, and PM Inc. has appealed to the California Supreme Court.
In addition, since January 1999, jury verdicts have been returned in 12 tobacco-related cases in which neither the Company nor any of its subsidiaries were defendants. Verdicts in favor of defendants were returned in eight of the 12 cases in cases tried in Connecticut, Texas, South Carolina, Mississippi, Louisiana, Missouri and Tennessee (2). Plaintiffs' appeal is pending in Mississippi. Verdicts in favor of plaintiffs were returned in four of the 12 cases in cases tried in Australia, Kansas and Florida (2). Defendants' appeals or post-trial motions are pending. In addition, in a case in France the trial court found in favor of plaintiff, however, the appellate court reversed the trial court's ruling and dismissed plaintiff's claim. Engle Class Action Verdicts have been returned and judgment has been entered against PM Inc. and other defendants in the first two phases of this three-phase smoking and health class action trial in Florida. The class consists of all Florida residents and citizens, and their survivors, "who have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarettes that contain nicotine." In July 1999, the jury returned a verdict against defendants in phase one of the trial concerning certain issues determined by the trial court to be "common" to the causes of action of the plaintiff class. Among other things, the jury found that smoking cigarettes causes 20 diseases or medical conditions, that cigarettes are addictive or dependence-producing, defective and unreasonably dangerous, that defendants made materially false statements with the intention of misleading smokers, that defendants concealed or omitted material information concerning the health effects and/or the addictive nature of smoking cigarettes, and that defendants were negligent and engaged in extreme and outrageous conduct or acted with reckless disregard with the intent to inflict emotional distress. During phase two of the trial, the claims of three of the named plaintiffs were adjudicated in a consolidated trial before the same jury that returned the verdict in phase one. In April 2000, the jury determined liability against the defendants and awarded $12.7 million in compensatory damages to the three named plaintiffs. In July 2000, the same jury returned a verdict assessing punitive damages on a lump sum basis for the entire class totaling approximately $145 billion against the various defendants in the case, including approximately $74 billion severally against PM Inc. PM Inc. believes that the punitive damages award was determined improperly and that it should ultimately be set aside on any one of numerous grounds. Included among these grounds are the following: under applicable law, (i) defendants are entitled to have liability and damages for each plaintiff tried by the same jury, an impossibility due to the jury's dismissal; (ii) punitive damages cannot -19- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) be assessed before the jury determines entitlement to, and the amount of, compensatory damages for all class members; (iii) punitive damages must bear a reasonable relationship to compensatory damages, a determination that cannot be made before compensatory damages are assessed for all class members; and (iv) punitive damages can "punish" but cannot "destroy" the defendant. In March 2000, at the request of the Florida legislature, the Attorney General of Florida issued an advisory legal opinion stating that "Florida law is clear that compensatory damages must be determined prior to an award of punitive damages" in cases such as Engle. As noted above, compensatory damages for all but three members of the class have not been determined. Following the verdict in the second phase of the trial, the jury was dismissed, notwithstanding that liability and compensatory damages for all but three class members have not yet been determined. According to the trial plan, phase three of the trial will address other class members' claims, including issues of specific causation, reliance, affirmative defenses and other individual-specific issues regarding entitlement to damages, in individual trials before separate juries. It is unclear how the trial plan will be further implemented. The trial plan provides that the punitive damages award should be standard as to each class member and acknowledges that the actual size of the class will not be known until the last class member's case has withstood appeal, i.e., the punitive damages amount would be divided equally among those plaintiffs who, in addition to the successful phase two plaintiffs, are ultimately successful in phase three of the trial and in any appeal. Following the jury's punitive damages verdict in July 2000, defendants removed the case to federal district court following the intervention application of a union health fund that raised federal issues in the case. In November 2000, the federal district court remanded the case to state court on the grounds that the removal was premature. The trial judge in the state court, without a hearing, then immediately denied the defendants' post-trial motions and entered judgment on the compensatory and punitive damages awarded by the jury. PM Inc. and the Company believe that the entry of judgment by the trial court is unconstitutional and violates Florida law. PM Inc. has filed an appeal with respect to the entry of judgment, class certification and numerous other reversible errors that have occurred during the trial. PM Inc. has also posted a $100 million bond to stay execution of the judgment with respect to the $74 billion in punitive damages that has been awarded against it. The bond was posted pursuant to legislation that was enacted in Florida in May 2000 that limits the size of the bond that must be posted in order to stay execution of a judgment for punitive damages in a certified class action to no more than $100 million, regardless of the amount of punitive damages ("bond cap legislation"). Plaintiffs had previously indicated that they believe the bond cap legislation is unconstitutional and might seek to challenge the $100 million bond. If the bond were found to be invalid, it would be commercially impossible for PM Inc. to post a bond in the full amount of the judgment and, absent appellate relief, PM Inc. would not be able to stay any attempted execution of the judgment in Florida. PM Inc. and the Company will take all appropriate steps to seek to prevent this worst-case scenario from occurring. In May 2001, the trial court approved a stipulation (the "Stipulation") among PM Inc., certain other defendants, plaintiffs and the plaintiff class that provides that execution or enforcement of the punitive damages component of the Engle judgment will remain stayed against PM Inc. and the other participating defendants through the completion of all judicial review. As a result of the Stipulation and in addition to the $100 million bond it previously posted, PM Inc. placed $1.2 billion into an interest-bearing escrow account for the benefit of the Engle class. Should PM Inc. prevail in its appeal of the case, both amounts are to be returned to PM Inc. PM Inc. also placed an additional $500 million into a separate interest-bearing escrow account for the benefit of the Engle class. If PM Inc. prevails in its appeal, this amount will be paid to the court, and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. In connection with the Stipulation, the Company recorded a $500 million pre-tax charge in its consolidated statement of earnings for the quarter ended March 31, 2001. -20- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) PM Inc. and the Company remain of the view that the Engle case should not have been certified as a class action. The certification is inconsistent with the overwhelming majority of federal and state court decisions that have held that mass smoking and health claims are inappropriate for class treatment. PM Inc. has filed an appeal challenging the class certification and the compensatory and punitive damages awards, as well as numerous other reversible errors that it believes occurred during the trial to date. Smoking and Health Litigation Plaintiffs' allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state RICO statutes. In certain of these cases, plaintiffs claim that cigarette smoking exacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act. In May 1996, the United States Court of Appeals for the Fifth Circuit held in the Castano case that a class consisting of all "addicted" smokers nationwide did not meet the standards and requirements of the federal rules governing class actions. Since this class decertification, lawyers for plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise "addiction" claims and, in many cases, claims of physical injury as well. As of August 1, 2002, smoking and health putative class actions were pending in Alabama, Florida, Illinois, Louisiana, Michigan, Missouri, New York, Ohio, Oregon, Tennessee, Utah, West Virginia and the District of Columbia, as well as in Brazil, Canada, Israel and Spain. Class certification has been denied or reversed by courts in 29 smoking and health class actions involving PM Inc. in Arkansas, the District of Columbia, Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Nevada (4), New Jersey (6), New York (2), Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin, while classes remain certified in the Engle case in Florida (discussed above) and a case in Louisiana in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs for class members. In May 1999, the United States Supreme Court declined to review the decision of the United States Court of Appeals for the Third Circuit affirming a lower court's decertification of a class. In November 2001, in the first medical monitoring class action case to go to trial, a West Virginia jury returned a verdict in favor of all defendants, including PM Inc. In January 2002, the trial court denied plaintiffs' motion for a new trial, and plaintiffs have appealed. Health Care Cost Recovery Litigation Overview In certain pending proceedings, domestic and foreign governmental entities and non-governmental plaintiffs, including union health and welfare funds ("unions"), Native American tribes, insurers and self-insurers such as Blue Cross and Blue Shield plans, hospitals, taxpayers and others, are seeking reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other -21- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees. Certain of the health care cost recovery cases purport to be brought on behalf of a class of plaintiffs. The claims asserted in the health care cost recovery actions include the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health care costs allegedly attributable to smoking, the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state RICO statutes. Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit, and statutes of limitations. In addition, defendants argue that they should be entitled to "set off" any alleged damages to the extent the plaintiff benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by "standing in the shoes" of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party. Although there have been some decisions to the contrary, most courts that have decided motions in these cases have dismissed all or most of the claims against the industry. In addition, eight federal circuit courts of appeals, the Second, Third, Fifth, Seventh, Eighth, Ninth, Eleventh and District of Columbia circuits, as well as California and Tennessee intermediate appellate courts, relying primarily on grounds that plaintiffs' claims were too remote, have affirmed dismissals of, or reversed trial courts that had refused to dismiss, health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs' appeals from the cases decided by the courts of appeals for the Second, Third, Ninth and District of Columbia circuits. As of August 1, 2002, there were an estimated 43 health care cost recovery cases pending in the United States against PM Inc., and in some instances, the Company, including the case filed by the United States government, which is discussed below under "Federal Government's Lawsuit." The cases brought in the United States include actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Canada, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 11 Brazilian states, 11 Brazilian cities and a group of Argentine unions. The actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 10 Brazilian states and 11 Brazilian cities were consolidated for pre-trial purposes and transferred to the United States District Court for the District of Columbia. The district court dismissed the cases brought by Guatemala, Nicaragua, Ukraine and the Province of Ontario, and the dismissals are now final. The district court has remanded to state courts the remaining cases except for the cases brought by Bolivia and Panama. Subsequent to remand, the Ecuador case was voluntarily dismissed. In November 2001, the cases brought by Venezuela and the Brazilian state of Espirito Santo were dismissed by the state court, and Venezuela has appealed. In January 2001, the Superior Court of the District of Columbia dismissed the suit brought by the Argentine unions, and the dismissal is now final. In addition to cases brought in the United States, health care cost recovery actions have also been brought in Israel, the Marshall Islands (dismissed), the Province of British Columbia, Canada, France and Spain, and other entities have stated that they are considering filing such actions. In March 1999, in the first health care cost recovery case to go to trial, an Ohio jury returned a verdict in favor of defendants on all counts. In June 2001, a New York jury returned a verdict awarding $6.83 million in -22- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) compensatory damages against PM Inc. and a total of $11 million against four other defendants in a health care cost recovery action brought by a Blue Cross and Blue Shield plan. In February 2002, the court awarded plaintiff approximately $38 million for attorneys' fees. Defendants, including PM Inc., have appealed. Settlements of Health Care Cost Recovery Litigation In November 1998, PM Inc. and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the "MSA") with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM Inc. and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the "State Settlement Agreements"). The MSA has received final judicial approval in all 52 settling jurisdictions. The State Settlement Agreements require that the domestic tobacco industry make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional annual payments of $250 million through 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers' domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped. The State Settlement Agreements also include provisions, discussed below in Management's Discussion and Analysis of Financial Condition and Results of Operations, relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions. As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quota-holders. To that end, four of the major domestic tobacco product manufacturers, including PM Inc., and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (2002 through 2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM Inc. records its portion of these payments as part of cost of sales as product is shipped. The State Settlement Agreements have materially adversely affected the volumes of PM Inc. and the Company; the Company believes that they may materially adversely affect the business, volumes, results of operations, cash flows or financial position of PM Inc. and the Company in future periods. The degree of the adverse impact will depend, among other things, on the rate of decline in United States cigarette sales in the premium and discount segments, PM Inc.'s share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements. Certain litigation, described in Exhibit 99.1, has arisen challenging the validity of the MSA and alleging violations of antitrust laws. -23- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Federal Government's Lawsuit In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia against various cigarette manufacturers and others, including PM Inc. and the Company, asserting claims under three federal statutes, the Medical Care Recovery Act ("MCRA"), the Medicare Secondary Payer ("MSP") provisions of the Social Security Act and the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The lawsuit seeks to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants' fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans' health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleges that such costs total more than $20 billion annually. It also seeks various types of what it alleges to be equitable and declaratory relief, including disgorgement, an injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal government's future costs of providing health care resulting from defendants' alleged past tortious and wrongful conduct. PM Inc. and the Company moved to dismiss this lawsuit on numerous grounds, including that the statutes invoked by the government do not provide a basis for the relief sought. In September 2000, the trial court dismissed the government's MCRA and MSP claims, but permitted discovery to proceed on the government's claims for relief under RICO. In October 2000, the government moved for reconsideration of the trial court's order to the extent that it dismissed the MCRA claims for health care costs paid pursuant to government health benefit programs other than Medicare and the Federal Employees Health Benefits Act. In February 2001, the government filed an amended complaint attempting to replead the MSP claims. In July 2001, the court denied the government's motion for reconsideration of the dismissal of the MCRA claims and dismissed the government's amended MSP claims. Trial of the case is currently scheduled for July 2003. In June 2001, representatives of the Department of Justice invited the defendants, including PM Inc. and the Company, to participate in settlement discussions. A meeting with representatives of the Department of Justice was held in July 2001. PM Inc. and the Company cannot predict whether discussions will continue or the outcome of any such discussions. Certain Other Tobacco-Related Litigation Lights/Ultra Lights Cases: As of August 1, 2002, there were 13 putative class actions pending against PM Inc. and, in some instances, the Company in California, Florida, Illinois, Massachusetts, Minnesota, Missouri, New Hampshire, New Jersey, Ohio (2), Oregon, Tennessee and West Virginia on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Plaintiffs in these cases allege, among other things, that the use of the terms "Lights" and/or "Ultra Lights" constitutes deceptive and unfair trade practices, and seek injunctive and equitable relief, including restitution. Classes have been certified in Illinois, Massachusetts and Florida. Trial in the Illinois case is scheduled for January 2003. Cigarette Contraband Cases: As of August 1, 2002, the European Community and ten member states, various Departments of Colombia, Ecuador, Belize and Honduras had filed suits in the United States against the Company and certain of its subsidiaries, including PM Inc. and PMI, and other cigarette manufacturers and their affiliates, alleging that defendants sold to distributors cigarettes that would be illegally imported into various jurisdictions. The claims asserted in these cases include negligence, negligent misrepresentation, fraud, unjust enrichment, violations of RICO and its state-law equivalents and conspiracy. Plaintiffs in these cases seek actual damages, treble damages and undisclosed injunctive relief. In February 2002, the courts granted defendants' motions to dismiss all of the actions. In the Colombia and European Community actions, however, the RICO and fraud claims predicated on allegations of money laundering claims were dismissed without prejudice. Plaintiffs in each of the cases have appealed. In October 2001, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a cigarette contraband case filed against another cigarette manufacturer and in March 2002, plaintiff in that case petitioned the United States Supreme Court for further review. -24- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Asbestos Contribution Cases: As of August 1, 2002, an estimated 9 suits were pending on behalf of former asbestos manufacturers and affiliated entities against domestic tobacco manufacturers, including PM Inc. These cases seek, among other things, contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages. Retail Leaders Case: Three domestic tobacco manufacturers filed suit against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that became available to retailers in October 1998. The complaint alleged that this retail merchandising program is exclusionary, creates an unreasonable restraint of trade and constitutes unlawful monopolization. In addition to an injunction, plaintiffs sought unspecified treble damages, attorneys' fees, costs and interest. In May 2002, the court granted PM Inc.'s motion for summary judgment and dismissed all of plaintiffs' claims with prejudice. Plaintiffs have appealed. Vending Machine Case: Plaintiffs, who began their case as a purported nationwide class of cigarette vending machine operators, allege that PM Inc. has violated the Robinson-Patman Act in connection with its promotional and merchandising programs available to retail stores and not available to cigarette vending machine operators. The initial complaint was amended to bring the total number of plaintiffs to 211, but by stipulated orders, all claims were stayed, except those of ten plaintiffs that proceeded to pre-trial discovery. Plaintiffs request actual damages, treble damages, injunctive relief, attorneys' fees and costs, and other unspecified relief. In June 1999, the court denied plaintiffs' motion for a preliminary injunction. Plaintiffs have withdrawn their request for class action status. In August 2001, the court granted PM Inc.'s motion for summary judgment and dismissed, with prejudice, the claims of the ten plaintiffs. In October 2001, the court certified its decision for appeal to the United States Court of Appeals for the Sixth Circuit following the stipulation of all plaintiffs that the district court's dismissal would, if affirmed, be binding on all plaintiffs. Tobacco Price Cases: As of August 1, 2002, there were 36 putative class actions pending against PM Inc. and other domestic tobacco manufacturers, as well as, in certain instances, the Company and PMI, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws. Seven of the putative class actions were filed in various federal district courts by direct purchasers of tobacco products, and the remaining 29 were filed in 14 states and the District of Columbia by retail purchasers of tobacco products. In November 2001, plaintiffs' motion for class certification was granted in a case pending in state court in Kansas, and trial in this case is scheduled for September 2003. In November 2001, plaintiffs' motion for class certification was denied in a case pending in state court in Minnesota. In June 2002, plaintiffs' motion for class certification was denied in a case pending in the State of Michigan. Plaintiffs' motion for reconsideration of this ruling and defendants' motions for summary judgment are pending. In May 2002, the Arizona Court of Appeals reversed the trial court's decision to dismiss an action, and defendants have appealed. The seven federal class actions have been consolidated in the United States District Court for the Northern District of Georgia. In July 2002, the court granted defendants' motion for summary judgment dismissing the case in its entirety, and plaintiffs have appealed. The cases are listed in Exhibit 99.1. Cases Under the California Business and Professions Code: In June 1997 and July 1998, two suits were filed in California courts alleging that domestic cigarette manufacturers, including PM Inc. and others, have violated California Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices. Class certification was granted as to plaintiffs' claims that defendants violated sections 17200 and/or 17500 of California Business and Professions Code pursuant to which plaintiffs allege that class members are entitled to reimbursement of the costs of cigarettes purchased during the class periods and injunctive relief. Trials in the cases are scheduled for October 2002 and April 2003. Tobacco Growers' Case: In February 2000, a suit was filed on behalf of a purported class of tobacco growers and quota-holders, and amended complaints were filed in May 2000 and in August 2000. The second amended complaint alleges that defendants, including PM Inc., violated antitrust laws by bid-rigging and allocating purchases at tobacco auctions and by conspiring to undermine the tobacco quota and price-support program administered by the federal government. In October 2000, defendants filed motions to dismiss the amended -25- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) complaint and to transfer the case, and plaintiffs filed a motion for class certification. In November 2000, the court granted defendants' motion to transfer the case to the United States District Court for the Middle District of North Carolina. In December 2000, plaintiffs served a motion for leave to file a third amended complaint to add tobacco leaf buyers as defendants. This motion was granted, and the additional parties were served in February 2001. In March 2001, the leaf buyer defendants filed a motion to dismiss the case. In July 2001, the court denied the manufacturer and leaf buyer defendants' motions to dismiss the case, and in April 2002 granted plaintiffs' motion for class certification. Defendants' petition for interlocutory review of the class certification order was denied in June 2002. Consolidated Putative Punitive Damages Cases: In September 2000, a putative class action was filed in the federal district court in the Eastern District of New York that purports to consolidate punitive damages claims in ten tobacco-related actions then pending in federal districts court New York and Pennsylvania. In July 2002, plaintiffs filed an amended consolidated class action complaint and a motion for class certification. The complaint seeks certification of a punitive damages class of persons residing in the United States who smoke or smoked defendants' cigarettes, and who have been diagnosed by a physician with an enumerated disease from April 1993 through the date notice of the certification of this class is disseminated. Certain Other Actions National Cheese Exchange Cases: Since 1996, seven putative class actions have been filed by various dairy farmers alleging that Kraft and others engaged in a conspiracy to fix and depress the prices of bulk cheese and milk through their trading activity on the National Cheese Exchange. Plaintiffs seek injunctive and equitable relief and unspecified treble damages. Plaintiffs voluntarily dismissed two of the actions after class certification was denied. Three cases were consolidated in state court in Wisconsin, and in November 1999, the court granted Kraft's motion for summary judgment. In June 2001, the Wisconsin Court of Appeals affirmed the trial court's ruling dismissing the cases. In April 2002, the Wisconsin Supreme Court affirmed the intermediate appellate court's ruling. In April 2002, Kraft's motion for summary judgment dismissing the case was granted in a case pending in the United States District Court for the Central District of California. In June 2002, the parties settled this dispute on an individual (non-class) basis, and plaintiffs dismissed their appeal. A case in Illinois state court has been settled and dismissed. Italian Tax Matters: One hundred ninety-four tax assessments alleging the nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1996 and income taxes for the years 1987 to 1996) have been served upon certain affiliates of the Company, including six new assessments (for the year 1996), which were served in October and December 2001. The aggregate amount of alleged unpaid taxes assessed to date is the euro equivalent of $2.3 billion. In addition, the euro equivalent of $3.5 billion in interest and penalties has been assessed. The Company anticipates that value-added and income tax assessments may also be received with respect to subsequent years. All of the assessments are being vigorously contested. To date, the Italian administrative tax court in Milan has overturned 188 of the assessments, and the tax authorities have appealed to the regional appellate court in Milan. To date, the regional appellate court has rejected 81 of the appeals filed by the tax authorities. The tax authorities have appealed 45 of the 81 decisions of the regional appellate court to the Italian Supreme Court, and a hearing on these cases was held in December 2001. Six of the 81 decisions were not appealed and are now final. In March and May 2002, the Italian Supreme Court issued its decision in 42 of the 45 appeals. The Italian Supreme Court rejected 12 of the 45 appeals and these 12 cases are now final. The Italian Supreme Court vacated the decisions of the regional appellate court in 30 of the cases and remanded these cases back to the regional appellate court for further hearings on the merits. Three decisions have not been issued. In a separate proceeding in October 1997, a Naples court dismissed charges of criminal association against certain present and former officers and directors of affiliates of the Company, but permitted tax evasion and related charges to remain pending. In February 1998, the criminal court in Naples determined that jurisdiction was not proper, and the case file was transmitted to the public prosecutor in Milan. In March 2002, after the Milan prosecutor's investigation into the matter, these present and former officers and directors received notices that an initial hearing would take place in June 2002 at which time the "preliminary judge" hearing the case would evaluate whether the Milan prosecutor's charges should be sent to a criminal judge for a full trial. At the June 2002 hearing, the "preliminary judge" ruled that there was no legal basis for the -26- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) prosecutor's charges and acquitted all of the defendants; the prosecutor has appealed. The Company, its affiliates and the officers and directors who are subject to the proceedings believe they have complied with applicable Italian tax laws and are vigorously contesting the pending assessments and proceedings. ---------- It is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries. Litigation is subject to many uncertainties. Unfavorable verdicts awarding compensatory and/or punitive damages against PM Inc. have been returned in the Engle smoking and health class action, several individual smoking and health cases, a flight attendant ETS lawsuit, and a health care cost recovery case and are being appealed. It is possible that there could be further adverse developments in these cases and that additional cases could be decided unfavorably. An unfavorable outcome or settlement of a pending tobacco-related litigation could encourage the commencement of additional litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending tobacco-related litigation, and the Company has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. The present legislative and litigation environment is substantially uncertain, and it is possible that the Company's business, volume, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal or state tobacco legislation. The Company and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, the Company and its subsidiaries may enter into discussions in an attempt to settle particular cases if they believe it is in the best interests of the Company's stockholders to do so. Note 9. Recently Issued Accounting Pronouncements: On July 30, 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. Accordingly, the Company will apply the provisions of SFAS No. 146 prospectively to exit or disposal activities initiated after December 31, 2002. -27- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Operating Results For the Six Months Ended June 30, Net Revenues ----------------- (in millions) 2002 2001 ------- ------- Domestic tobacco $ 9,899 $ 9,682 International tobacco 14,173 13,721 North American food 10,862 10,662 International food 3,798 4,008 Beer 2,641 2,464 Financial services 265 211 ------- ------- Net revenues $41,638 $40,748 ======= ======= Operating Income ----------------- (in millions) 2002 2001 ------- ------- Domestic tobacco $2,704 $2,085 International tobacco 2,967 2,906 North American food 2,467 2,496 International food 551 537 Beer 276 292 Financial services 175 140 ------ ------ Operating companies income 9,140 8,456 Amortization of intangibles (4) (506) General corporate expenses (338) (379) ------ ------ Operating income $8,798 $7,571 ====== ====== For the Three Months Ended June 30, Net Revenues ----------------- (in millions) 2002 2001 ------- ------- Domestic tobacco $ 4,881 $ 5,105 International tobacco 7,139 6,750 North American food 5,568 5,428 International food 1,945 2,045 Beer 1,422 1,350 Financial services 148 111 ------- ------- Net revenues $21,103 $20,789 ======= ======= -28- For the Three Months Ended June 30, Operating Income ---------------- (in millions) 2002 2001 ------ ------ Domestic tobacco $1,454 $1,383 International tobacco 1,403 1,348 North American food 1,369 1,353 International food 299 298 Beer 169 168 Financial services 104 76 ------ ------ Operating companies income 4,798 4,626 Amortization of intangibles (2) (253) General corporate expenses (169) (169) ------ ------ Operating income $4,627 $4,204 ====== ====== Several events occurred during the first six months of 2002 and 2001 that affected the comparability of statement of earnings amounts. In order to isolate the impact of these events and discuss underlying business trends, comparisons will be given both including and excluding these events, which were as follows: o Sale of Food Factory and Integration Costs - During the first six months and second quarter of 2002, Kraft Foods North America, Inc. ("KFNA") recorded pre-tax charges of $102 million and $75 million, respectively, related to the closing of a facility and other consolidation programs in North America. In addition, during the second quarter of 2002, Kraft Foods International, Inc. ("KFI") recorded pre-tax charges of $17 million to consolidate production lines and distribution networks in Latin America. These charges were part of the previously announced $200 million to $300 million original estimate to close or reconfigure existing Kraft facilities and integrate Nabisco. As of June 30, 2002, the aggregate pre-tax charges to the consolidated statement of earnings to close or reconfigure Kraft facilities and integrate Nabisco, including Kraft's voluntary early retirement programs discussed below, were $314 million, slightly above the original estimate. The 2002 integration related charges of $119 million included $21 million relating to severance, $82 million relating to asset write-offs and $16 million relating to other cash exit costs. Cash payments relating to this charge will approximate $37 million of which $1 million has been paid through June 30, 2002. The majority of the remaining payments are expected to be made by December 31, 2002. In addition, during the first quarter of 2001, KFNA recorded a pre-tax charge of $29 million on the sale of a North American food factory. These pre-tax charges were included in marketing, administration and research costs of the North American food and international food segments in their respective periods. o Voluntary Retirement Programs - In the second quarter of 2002, a voluntary early retirement program in the international tobacco business in Germany was announced and approximately 160 employees accepted the benefits offered by this program. As a result, in the second quarter of 2002, a pre-tax charge of $25 million was recorded in marketing, administration and research costs of the international tobacco segment. In the fourth quarter of 2001, voluntary early retirement programs were offered to certain salaried employees in the beer and food businesses. During the first quarter of 2002, approximately 800 employees accepted the benefits offered by these programs. Pre-tax charges of $135 million, $7 million and $8 million were recorded in marketing, administration and research costs of the North American food, international food and beer segments, respectively, in the first quarter of 2002 for these voluntary retirement programs. o Amortization of Intangibles - On January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." As a result, the Company stopped recording the amortization of goodwill and indefinite life intangible assets as a charge to earnings as of January 1, 2002. The Company estimates that net earnings would have been approximately $4.6 billion and $2.5 billion in the first six months and second quarter of 2001, respectively, and diluted earnings per share ("EPS") would have been $2.05 and $1.14, respectively, had the provisions of the new standards been applied as of January 1, 2001. -29- o Businesses Previously Held for Sale - During 2001, certain Nabisco businesses were reclassified to businesses held for sale, including their estimated results of operations through anticipated sale dates. These businesses have subsequently been sold with the exception of one business that had been held for sale since the acquisition of Nabisco. This business, which is no longer held for sale, has been included in the 2002 consolidated operating results of KFNA. o Asset Impairment - During the first quarter of 2002, a pre-tax charge of $15 million was recorded in marketing, administration and research costs for a beer asset impairment. o Litigation Related Expense - As discussed in Note 8. Contingencies, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among Philip Morris Incorporated ("PM Inc."), certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, a $500 million pre-tax charge was recorded by the domestic tobacco business during the first quarter of 2001. In July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the June 30, 2002 and December 31, 2001 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM Inc. quarterly and is being recorded as earned in interest and other debt expense, net, in the consolidated statements of earnings. o Kraft Foods Inc. ("Kraft") IPO - On June 13, 2001, Kraft completed an initial public offering ("IPO") of 280,000,000 shares of its Class A common stock at a price of $31.00 per share. The Company used the IPO proceeds, net of underwriting discount and expenses, of $8.4 billion to retire a portion of the debt incurred to finance the acquisition of Nabisco. After the completion of the IPO, the Company owns approximately 83.9% of the outstanding shares of Kraft's capital stock through the Company's ownership of 49.5% of Kraft's Class A common stock and 100% of Kraft's Class B common stock. Kraft's Class A common stock has one vote per share while Kraft's Class B common stock has ten votes per share. Therefore, the Company holds 97.7% of the combined voting power of Kraft's outstanding common stock. Results of Operations for the Six Months Ended June 30, 2002 Net revenues for the first six months of 2002 increased $890 million (2.2%) over 2001, due primarily to higher tobacco net revenues. Excluding the unusual items from each period and the results of operations divested since the beginning of 2001, net revenues for the first six months of 2002 increased $786 million (1.9%) over 2001. Operating income for the first six months of 2002 increased $1.2 billion (16.2%) over the comparable 2001 period. Excluding the unusual items from each period and the results of operations divested since the beginning of 2001, operating income for the first six months of 2002 increased $493 million (5.7%) over the first six months of 2001, due to increases from all business segments. Operating companies income, which is defined as operating income before general corporate expenses and amortization of intangibles, increased $684 million (8.1%) over the first six months of 2001, due primarily to higher operating income from the Company's tobacco operations and the 2001 litigation related expense. Excluding the unusual items from each period and the results of operations divested since the beginning of 2001, operating companies income increased $452 million (5.0%), due to higher operating income from all business segments. Currency movements have decreased net revenues by $1.0 billion ($583 million, after excluding the impact of currency movements on excise taxes) and operating companies income by $250 million from the first six months of 2001. Declines in net revenues and operating companies income are due primarily to the strength of the U.S. dollar against the euro, the Japanese yen, the Russian ruble and certain Latin American currencies. -30- Although the Company cannot predict future movements in currency rates, the recent weakening of the U.S. dollar, if sustained during the remainder of 2002, could have a favorable impact on net revenues and operating companies income comparisons in the second half of the year; although full-year net revenues and operating companies income comparisons with 2001 are expected to reflect an unfavorable impact due to currency. Interest and other debt expense, net, of $602 million for the first six months of 2002 decreased $287 million from the first six months of 2001. This decrease was due primarily to higher average debt outstanding in 2001 as a result of the Nabisco acquisition. The Kraft IPO proceeds, net of underwriting discount and expenses, of $8.4 billion were used to retire a portion of the Nabisco acquisition debt during June 2001. During the first six months of 2002, the Company's effective tax rate decreased by 2.3 percentage points to 35.5%. This decrease is due primarily to the adoption of SFAS No. 141 and SFAS No. 142, under which the Company is no longer required to amortize goodwill and indefinite life intangible assets as a charge to earnings. Diluted and basic EPS of $2.30 and $2.32, respectively, for the first six months of 2002, increased by 25.7% and 25.4%, respectively, over the first six months of 2001. Net earnings of $5.0 billion for the first six months of 2002 increased $907 million (22.3%) over the comparable period of 2001. These results include the unusual items previously discussed. Excluding the after-tax impact of the unusual items, net earnings increased 7.0% to $5.1 billion, diluted EPS increased 10.2% to $2.38 and basic EPS increased 10.0% to $2.41. Results of Operations for the Three Months Ended June 30, 2002 Net revenues for the second quarter of 2002 increased $314 million (1.5%) over 2001, due primarily to higher international tobacco, North American food and beer net revenues, partially offset by lower domestic tobacco and international food net revenues. Excluding the unusual items from each period and the results of operations divested since the beginning of 2001, net revenues for the second quarter of 2002 increased $190 million (0.9%) over 2001. Operating income for the second quarter of 2002 increased $423 million (10.1%) over the comparable 2001 period. Excluding the unusual items from each period and the results of operations divested since the beginning of 2001, operating income for the second quarter of 2002 increased $280 million (6.3%) over the second quarter of 2001, due to increases from all business segments. Operating companies income increased $172 million (3.7%) over the second quarter of 2001, due primarily to the Company's tobacco segments. Excluding the unusual items from each period and the results of operations divested since the beginning of 2001, operating companies income increased $280 million (6.0%), due to increases from all business segments. Currency movements have decreased net revenues by $349 million ($207 million, after excluding the impact of currency movements on excise taxes) and operating companies income by $66 million from the second quarter of 2001. Declines in net revenues and operating companies income are due primarily to the strength of the U.S. dollar against the Russian ruble, the Japanese yen and certain Latin American currencies. Although the Company cannot predict future movements in currency rates, the recent weakening of the U.S. dollar, if sustained during the remainder of 2002, could have a favorable impact on net revenues and operating companies income comparisons in the second half of the year; although full-year net revenues and operating companies income comparisons with 2001 are expected to reflect an unfavorable impact due to currency. Interest and other debt expense, net, of $309 million for the second quarter of 2002 decreased $129 million from the second quarter of 2001. This decrease was due primarily to higher average debt outstanding in 2001 as a result of the Nabisco acquisition. The Kraft IPO proceeds, net of underwriting discount and expenses, of $8.4 billion were used to retire a portion of the Nabisco acquisition debt during June 2001. Diluted and basic EPS of $1.21 and $1.22, respectively, for the second quarter of 2002, increased by 17.5% and 17.3%, respectively, over the second quarter of 2001. Net earnings of $2.6 billion for the second quarter of -31- 2002 increased $322 million (14.1%) over the comparable period of 2001. These results include the unusual items previously discussed. Excluding the after-tax impact of the unusual items, net earnings increased 8.0% to $2.7 billion, diluted EPS increased 11.7% to $1.24 and basic EPS increased 10.6% to $1.25. Operating Results by Business Segment Tobacco Business Environment The tobacco industry, both in the United States and abroad, has faced, and continues to face, a number of issues that may adversely affect the business, volume, results of operations, cash flows and financial position of PM Inc., Philip Morris International Inc. ("PMI") and the Company. These issues, some of which are more fully discussed below, include pending and threatened smoking and health litigation and certain jury verdicts against PM Inc., including a $74 billion punitive damages verdict in the Engle smoking and health class action case discussed in Note 8 and punitive damages awards in individual smoking and health cases discussed in Note 8; the civil lawsuit filed by the United States federal government against various cigarette manufacturers, including PM Inc., and others discussed in Note 8; legislation or other governmental action seeking to ascribe to the industry responsibility and liability for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke ("ETS"); price increases in the United States related to the settlement of certain tobacco litigation, and the effect of any resulting cost advantage of manufacturers not subject to these settlements; actual and proposed excise tax increases in the United States and foreign markets; diversion into the United States market of products intended for sale outside the United States; the sale of counterfeit cigarettes by third parties; price disparities and changes in price disparities between premium and lowest price brands; the outcome of proceedings and investigations involving contraband shipments of cigarettes; governmental investigations; actual and proposed requirements regarding the use and disclosure of cigarette ingredients and other proprietary information; governmental and private bans and restrictions on smoking; actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States; actual and proposed restrictions affecting tobacco manufacturing, marketing, advertising and sales outside the United States; actual and proposed legislation in Congress, the State of New York and other jurisdictions inside and outside the United States to require the establishment of fire-safety standards for cigarettes; the diminishing social acceptance of smoking and increased pressure from tobacco control advocates and unfavorable press reports; and other tobacco legislation that may be considered by Congress, the states and other jurisdictions inside and outside the United States. Excise Taxes: Cigarettes are subject to substantial federal, state and local excise taxes in the United States and to similar taxes in most foreign markets. In general, such taxes have been increasing. The United States federal excise tax on cigarettes is currently $0.39 per pack of 20 cigarettes. In the United States, state and local sales and excise taxes vary considerably and, when combined with sales taxes, local taxes and the current federal excise tax, may currently be as high as $4.03. Proposed further tax increases in various jurisdictions are currently under consideration or pending. Thus far in 2002, 18 states have passed excise tax increases, ranging from $0.07 per pack of 20 in Tennessee to as much as $1.81 per pack of 20 in New York City and New York State combined. Congress has considered significant increases in the federal excise tax or other payments from tobacco manufacturers, and significant increases in excise and other cigarette-related taxes have been proposed or enacted at the state and local levels within the United States and in many jurisdictions outside the United States. In the European Union (the "EU"), taxes on cigarettes vary considerably and currently may be as high as the equivalent of $5.58 per pack on the most popular brands (using the exchange rate at July 24, 2002). In Germany, where total tax on cigarettes is currently equivalent to $2.27 per pack on the most popular brands, the excise tax is scheduled to increase by approximately the equivalent of $0.20 ((euro)0.20 at the exchange rate on July 24, 2002) per pack by January 2003. In the opinion of PM Inc. and PMI, increases in excise and similar taxes have had an adverse impact on sales of cigarettes. Any future increases, the extent of which cannot be predicted, may result in volume declines for the cigarette industry, including PM Inc. and PMI, and might cause sales to shift from the premium segment to the discount segment. -32- Tar and Nicotine Test Methods and Brand Descriptors: Jurisdictions around the world have questioned the utility of standardized test methods to measure tar and nicotine yields of cigarettes. In September 1997, the United States Federal Trade Commission ("FTC") issued a request for public comment on its proposed revision of its tar and nicotine test methodology and reporting procedures established by a 1970 voluntary agreement among domestic cigarette manufacturers. In February 1998, PM Inc. and three other domestic cigarette manufacturers filed comments on the proposed revisions. In November 1998, the FTC wrote to the Department of Health and Human Services ("HHS") requesting its assistance in developing specific recommendations on the future of the FTC's program for testing the tar, nicotine, and carbon monoxide content of cigarettes. In November 2001, the National Cancer Institute issued a report as a part of HHS' response to the FTC's request. The report concluded, among other things, that because there was no meaningful difference in smoke exposure or risk to smokers between cigarettes with different machine-measured tar and nicotine yields, the marketing of low yield cigarettes was deceptive. Similarly, public health officials in other countries and the EU have found that the marketing of low yield cigarettes is deceptive and have questioned the relevance of the related International Organization for Standardization test method for measuring tar, nicotine, and carbon monoxide yields. The EU Commission has been directed to establish a committee to address, among other things, alternative methods for measuring tar, nicotine and carbon monoxide yields. In addition, public health authorities in the United States, the EU, Brazil and other countries have called for the prohibition of or passed legislation prohibiting the use of brand descriptors such as "Lights" and "Ultra Lights." Brazil banned the use of descriptors in January 2002. In the United States, as of August 1, there were 11 putative class actions pending against PM Inc. and the Company in which plaintiffs allege, among other things, that the use of the terms "Lights" and/or "Ultra Lights" constitutes deceptive and unfair trade practices. Food and Drug Administration ("FDA") Regulations: In August 1996, the FDA promulgated regulations asserting jurisdiction over cigarettes as "drugs" or "medical devices" under the provisions of the Food, Drug and Cosmetic Act ("FDCA"). The regulations, which included severe restrictions on the distribution, marketing and advertising of cigarettes, and would have required the industry to comply with a wide range of labeling, reporting, record keeping, manufacturing and other requirements, were declared invalid by the United States Supreme Court in March 2000. The Company has stated that while it continues to oppose FDA regulation over cigarettes as "drugs" or "medical devices" under the provisions of the FDCA, it would support new legislation that would provide for reasonable regulation by the FDA of cigarettes as cigarettes. Currently, there are several bills pending in Congress that, if enacted, would give the FDA authority to regulate tobacco products; PM Inc. has expressed support for one of the bills. The bills take a variety of approaches to the issue of the FDA's proposed regulation of tobacco products ranging from codification of the original FDA regulations under the "drug" and "medical device" provisions of the FDCA to the creation of provisions that would apply uniquely to tobacco products. All of the pending legislation could result in substantial federal regulation of the design, performance, manufacture and marketing of cigarettes. The ultimate outcome of the pending bills cannot be predicted. Ingredient Disclosure Laws: Jurisdictions inside and outside the United States have enacted or proposed legislation or regulations that would require cigarette manufacturers to disclose the ingredients used in the manufacture of cigarettes, and in certain cases, to provide toxicological information regarding the ingredients. In the United States, the Commonwealth of Massachusetts has enacted legislation to require cigarette manufacturers to report the flavorings and other ingredients used in each brand-style of cigarettes sold in the Commonwealth. Cigarette manufacturers sued to have the statute declared unconstitutional, arguing that it could result in the public disclosure of valuable proprietary information. In September 2000, the district court granted the plaintiffs' motion for summary judgment and permanently enjoined the defendants from requiring cigarette manufacturers to disclose brand-specific information on ingredients in their products, and defendants appealed. In October 2001, the United States Court of Appeals for the First Circuit reversed the district court's decision, holding that the Massachusetts disclosure statute does not constitute an impermissible taking of private property. In November 2001, the First Circuit granted the cigarette manufacturers' petition for rehearing en banc and withdrew the prior opinion. The First Circuit, sitting en banc, heard oral argument in January 2002. The ultimate outcome of this lawsuit cannot be predicted. Similar legislation has been enacted or proposed in other states and in jurisdictions outside the United States, including the EU. Under the EU tobacco product directive described below, tobacco companies must disclose the use of, and provide toxicological information -33- about, all ingredients by October 2002. PMI has voluntarily disclosed the ingredients in its brands in a number of EU member states and in other countries. Other jurisdictions have also enacted or proposed legislation that would require the submission of toxicological information about ingredients and would permit governments to prohibit their use. Health Effects of Smoking and Exposure to ETS: Reports with respect to the health risks of cigarette smoking have been publicized for many years, and the sale, promotion, and use of cigarettes continue to be subject to increasing governmental regulation. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports linking cigarette smoking with a broad range of health hazards, including various types of cancer, coronary heart disease and chronic lung disease, and recommended various governmental measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994 reports focus on the addictive nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, the economic and regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particularly the addictive nature of cigarette smoking during adolescence. Studies with respect to the health risks of ETS to nonsmokers (including lung cancer, respiratory and coronary illnesses, and other conditions) have also received significant publicity. In 1986, the Surgeon General of the United States and the National Academy of Sciences reported that nonsmokers were at increased risk of lung cancer and respiratory illness due to ETS. Since then, a number of government agencies around the world have concluded that ETS causes diseases--including lung cancer and heart disease--in nonsmokers. In 2002, the International Agency for Research on Cancer concluded that ETS is carcinogenic and that exposure to ETS causes disease in non-smokers. It is the policy of each of PM Inc. and PMI to support a single, consistent public health message on the health effects of cigarette smoking in the development of diseases in smokers, and on smoking and addiction. It is also their policy to defer to the judgment of public health authorities as to the text of warnings regarding the health effects of smoking, addiction and exposure to ETS. In 1999, PM Inc. and PMI established web sites that include, among other things, views of public health authorities on smoking, disease causation in smokers, addiction and ETS. In October 2000, the sites were updated to reflect PM Inc.'s and PMI's agreement with the overwhelming medical and scientific consensus that cigarette smoking is addictive, and causes lung cancer, heart disease, emphysema and other serious diseases in smokers. The web sites advise smokers, and those considering smoking, to rely on the messages of public health authorities in making all smoking-related decisions. The sites also state that public health officials have concluded that ETS causes or increases the risk of diseases--including lung cancer and heart disease--in non-smoking adults, as well as conditions in children such as asthma, respiratory infections, cough wheeze, otitis media (middle ear infection) and Sudden Infant Death Syndrome. The sites also state that public health officials have concluded that secondhand smoke can exacerbate adult asthma and cause eye, throat and nasal irritation. In addition, PM Inc. and PMI also state on their web sites that they believe that particular care should be exercised where children are concerned, and that smokers who have children--particularly young ones--should avoid smoking around them. The World Health Organization's Framework Convention for Tobacco Control: The World Health Organization and its member states are negotiating a proposed Framework Convention for Tobacco Control. The proposed treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would, among other things, establish specific actions to prevent youth smoking; restrict and gradually eliminate tobacco product marketing; inform the public about the health consequences of smoking and the benefits of quitting; regulate the ingredients of tobacco products; impose new package warning requirements that would include the use of pictures or graphic images; eliminate cigarette smuggling and counterfeit cigarettes; restrict smoking in public places; increase cigarette taxes; prohibit the use of terms that suggest one brand of cigarettes is safer than another; abolish duty-free tobacco sales; and encourage litigation against tobacco product manufacturers. PM Inc. and PMI have stated that they would support a -34- treaty that member states could consider for ratification, based on the following four principles: (1) smoking-related decisions should be made on the basis of a consistent public health message; (2) effective measures should be taken to prevent minors from smoking; (3) the right of adults to choose to smoke should be preserved; and (4) all manufacturers of tobacco products should compete on a level playing field. The outcome of the treaty negotiations cannot be predicted. Other Legislative Initiatives: In recent years, various members of the United States Congress have introduced legislation, some of which has been the subject of hearings or floor debate, that would subject cigarettes to various regulations under the HHS or regulation under the Consumer Products Safety Act, establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities, further restrict the advertising of cigarettes, require additional warnings, including graphic warnings, on packages and in advertising, eliminate or reduce the tax deductibility of tobacco advertising, provide that the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act not be used as a defense against liability under state statutory or common law, and allow state and local governments to restrict the sale and distribution of cigarettes. Legislative initiatives affecting the regulation of the tobacco industry have also been considered in a number of jurisdictions outside the United States. In 2001, the EU issued a directive on tobacco product regulation that, among other things, reduces maximum permitted levels of tar, nicotine and carbon monoxide yields to 10, 1 and 10 milligrams, respectively, requires manufacturers to disclose ingredients and toxicological data on ingredients, requires health warnings on the front of a pack that cover at least 30% of the front panel and 14 rotational warnings that cover no less than 40% of the back panel, requires the health warnings to be surrounded by a black border, requires the printing of tar, nicotine and carbon monoxide numbers on the side panel of the pack at a minimum size of 10% of the side panel, and as described above, prohibits the use of texts, names, trademarks and figurative or other signs suggesting that a particular tobacco product is less harmful than others. The EU member states are in the process of drafting and adopting legislation that implements the provisions of the directive. The European Commission is also considering a new directive that would further restrict tobacco marketing and advertising in the EU. Tobacco control legislation addressing the manufacture, marketing and sale of tobacco products has been proposed in numerous other jurisdictions. In August 2000, New York State enacted legislation that requires the State's Office of Fire Prevention and Control to promulgate by January 1, 2003, fire-safety standards for cigarettes sold in New York. The legislation requires that cigarettes sold in New York stop burning within a time period to be specified by the standards or meet other performance standards set by the Office of Fire Prevention and Control. All cigarettes sold in New York will be required to meet the established standards within 180 days after the standards are promulgated. It is not possible to predict the impact of this law on PM Inc. until the standards are published. Similar legislation is being considered in other states and localities and at the federal level, as well as in jurisdictions outside the United States. It is not possible to predict what, if any, additional foreign or domestic governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or to the tobacco industry generally. However, if any or all of the foregoing were to be implemented, the business, volume, results of operations, cash flows and financial position of PM Inc., PMI and the Company could be materially adversely affected. Governmental Investigations: The Company and its subsidiaries are subject to governmental investigations on a range of matters, including the following: based on recent developments, the Company believes that Canadian authorities are contemplating a legal proceeding based on a previously disclosed investigation of PMI and its subsidiary, Philip Morris Duty Free, Inc., relating to allegations of contraband shipments of cigarettes into Canada in the early to mid 1990s. During 2001, the competition authorities in Italy and Turkey initiated separate previously disclosed investigations into the pricing activities among participants in the cigarette markets of those countries. The order initiating the Italian investigation named the Company and certain of its affiliates as well as all other parties purportedly engaged in the sale of cigarettes in Italy, including the Italian state tobacco monopoly. The Turkish investigation is directed at one of the Company's Turkish affiliates and another cigarette manufacturer. In 2002, the Italian authorities, at the request of a consumer group, initiated a -35- previously disclosed investigation into the use of descriptors for Marlboro Lights. The investigation is directed at the Company's German and Dutch affiliates, which manufacture product for sale in Italy. Similarly, in 2001, authorities in Australia initiated a previously disclosed investigation into the use of descriptors, alleging that their use was false and misleading. The investigation is directed at one of the Company's Australian affiliates and other cigarette manufacturers. The Company cannot predict the outcome of these investigations or whether additional investigations may be commenced. Tobacco-Related Litigation: There is substantial litigation pending related to tobacco products in the United States and certain foreign jurisdictions, including the Engle class action case in Florida, in which PM Inc. is a defendant, and a civil health care cost recovery action filed by the United States Department of Justice in September 1999 against domestic tobacco manufacturers and others, including PM Inc. and, in some instances, the Company. (See Note 8 for a discussion of such litigation.) State Settlement Agreements: As discussed in Note 8, during 1997 and 1998, PM Inc. and other major domestic tobacco product manufacturers entered into agreements with states and various United States jurisdictions settling asserted and unasserted health care cost recovery and other claims. These settlements provide for substantial annual payments. They also place numerous restrictions on the tobacco industry's conduct of its business operations, including restrictions on the advertising and marketing of cigarettes. Among these are restrictions or prohibitions on the following: targeting youth; use of cartoon characters; use of brand name sponsorships and brand name non-tobacco products; outdoor and transit brand advertising; payments for product placement; and free sampling. In addition, the settlement agreements require companies to affirm corporate principles to reduce underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry's ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations. Operating Results For the Six Months Ended June 30, ------------------------------------ Operating Net Revenues Companies Income ----------------- ---------------- (in millions) 2002 2001 2002 2001 ------- ------- ------ ------ Domestic tobacco $ 9,899 $ 9,682 $2,704 $2,085 International tobacco 14,173 13,721 2,967 2,906 ------- ------- ------ ------ Total tobacco $24,072 $23,403 $5,671 $4,991 ======= ======= ====== ====== Domestic tobacco. During the first six months of 2002, PM Inc.'s net revenues, which include excise taxes billed to customers, increased $217 million (2.2%) over the comparable 2001 period. Excluding excise taxes, net revenues increased $86 million (1.1%), due primarily to higher pricing ($729 million), partially offset by lower volume ($649 million). Operating companies income for the first six months of 2002 increased $619 million (29.7%) over the comparable 2001 period, due primarily to the 2001 litigation related expense ($500 million) and price increases as well as lower product costs (aggregating $772 million), partially offset by lower volume ($429 million) and higher marketing, administration and research costs ($235 million, primarily promotions). Excluding the impact of the 2001 litigation related expense, operating companies income increased 4.6%. As reported by Management Science Associates, shipment volume for the domestic tobacco industry during the first six months of 2002 decreased to 199.5 billion units, a 2.2% decrease from the first six months of 2001. PM Inc.'s shipment volume for the first six months of 2002 was 98.5 billion units, a decrease of 6.4% from the comparable 2001 period, due primarily to the timing of promotions and increased price competition. During July 2002, plans were announced to invest approximately $350 million to promote the premium brands and retail presence of PM Inc. and Philip Morris International Inc. ("PMI") to enhance future volumes and market shares. This additional investment by PM Inc. and PMI will be made during the remainder of 2002. -36- It should be noted that Management Science Associates' current measurements of the domestic cigarette industry's total shipments and related share data do not include all shipments of some smaller manufacturers that Management Science Associates is presently unable to monitor effectively. Accordingly, it should also be noted that the discussion herein of PM Inc.'s performance within the industry is based upon Management Science Associates' estimates of total industry volume. For the first six months of 2002, PM Inc.'s shipment share was 49.4%, a decrease of 2.2 share points from the comparable period of 2001. Marlboro shipment volume decreased 4.3 billion units (5.4%) from the first six months of 2001 to 76.0 billion units for a 38.1% share of the total industry, a decrease of 1.2 share points from the comparable period of 2001. This volume and share performance was due primarily to the timing of promotions and increased price competition. Based on shipments, the premium segment accounted for approximately 73.3% of the domestic cigarette industry volume in the first six months of 2002, a decrease of 1.0 share point from the comparable period of 2001. In the premium segment, PM Inc.'s volume decreased 5.9% during the first six months of 2002, compared with a 3.6% decrease for the industry, resulting in a premium segment share of 60.6%, a decrease of 1.5 share points from the first six months of 2001, due primarily to the factors mentioned above. In the discount segment, PM Inc.'s shipments decreased 10.8% to 9.9 billion units in the first six months of 2002, compared with an industry increase of 1.8%, resulting in a discount segment share of 18.6%, a decrease of 2.6 share points from the comparable period of 2001. Basic shipment volume for the first six months of 2002 was down 6.6% to 9.4 billion units, for a 17.5% share of the discount segment, down 1.6 share points compared to the first six months of 2001, due primarily to increased price competition. According to consumer purchase data from Information Resources Inc./Capstone, PM Inc.'s share of cigarettes sold at retail decreased 0.4 share points to 50.5% for the first six months of 2002. Marlboro's retail share for the first six months of 2002 increased 0.3 share points to 38.4% and PM Inc.'s retail share of the premium segment grew 0.7 share points to 62.2%. Retail share for Basic, PM Inc.'s major discount brand, decreased 0.1 share points to 5.0%. Information Resources Inc./Capstone is a proprietary retail tracking service that uses a sample of stores to extrapolate market share performance in the universe of stores PM Inc.'s sales representatives regularly visit. PM Inc. currently estimates that this universe represents approximately 87% of estimated industry volume. In March 2002, PM Inc. announced a price increase of $6.00 per thousand cigarettes on its domestic premium and discount brands. The price increase was effective April 1, 2002. This followed a price increase of $2.50 per thousand in October 2001 and a price increase of $7.00 per thousand in April 2001. Each $1.00 per thousand increase by PM Inc. equates to a $0.02 increase in the price to wholesalers of each pack of twenty cigarettes. PM Inc. cannot predict future changes or rates of change in domestic tobacco industry volume, the relative sizes of the premium and discount segments or in PM Inc.'s shipments, shipment market share or retail market share; however, it believes that PM Inc.'s results may be materially adversely affected by price increases related to increased excise taxes and tobacco litigation settlements, as well as by the other items discussed under the caption "Tobacco--Business Environment." International tobacco. During the first six months of 2002, international tobacco net revenues, which include excise taxes billed to customers, increased $452 million (3.3%) over the first six months of 2001. Excluding excise taxes, net revenues increased $246 million (3.4%), due primarily to higher volume/mix ($312 million) and price increases ($180 million), partially offset by unfavorable currency movements. Operating companies income for the first six months of 2002 increased $61 million (2.1%) over the comparable 2001 period, due primarily to price increases ($180 million) and higher volume/mix ($126 million), partially offset by unfavorable currency movements ($236 million) and a pre-tax charge for a voluntary retirement -37- program ($25 million) in 2002. Excluding the 2002 pre-tax charge for the voluntary retirement program, operating companies income increased 3.0%. PMI's volume for the first six months of 2002 of 369.5 billion units increased 9.9 billion units (2.8%) over the first six months of 2001, due primarily to volume increases in Eastern Europe, Asia and Turkey, partially offset by the timing of shipments and lower overall markets in Italy and Spain, economic weakness in Egypt and continued price competition in Poland. Volume advanced in a number of important markets, including Austria, Belgium, the Netherlands, the United Kingdom, Turkey, Russia, Indonesia, Japan (due primarily to favorable timing of shipments), Taiwan, Thailand, Brazil and Mexico. International volume for Marlboro decreased 1.5%, due to the timing of shipments in Spain, consumer downtrading to lower-priced brands in the Czech Republic, Turkey, Egypt, the Philippines and Argentina, and intense price competition in Poland, partially offset by higher volumes in Austria, the United Kingdom, Japan, Indonesia, Mexico and worldwide duty-free. In most markets exhibiting downtrading from Marlboro, volume increased for other brands in PMI's portfolio. PMI recorded market share gains in many of its major markets. For the Three Months Ended June 30, ------------------------------------ Operating Net Revenues Companies Income ----------------- ---------------- (in millions) 2002 2001 2002 2001 ------- ------- ------ ------ Domestic tobacco $ 4,881 $ 5,105 $1,454 $1,383 International tobacco 7,139 6,750 1,403 1,348 ------- ------- ------ ------ Total tobacco $12,020 $11,855 $2,857 $2,731 ======= ======= ====== ====== Domestic tobacco. During the second quarter of 2002, PM Inc.'s net revenues, which include excise taxes billed to customers, decreased $224 million (4.4%) from the comparable 2001 period. Excluding excise taxes, net revenues decreased $213 million (5.1%), due primarily to lower volume ($718 million), partially offset by higher pricing ($504 million). Operating companies income for the second quarter of 2002 increased $71 million (5.1%) over the comparable 2001 period, due primarily to higher pricing and lower product costs (aggregating $570 million), partially offset by lower volume ($493 million). As reported by Management Science Associates, shipment volume for the domestic tobacco industry during the second quarter of 2002 decreased to 98.2 billion units, a 7.0% decrease from the second quarter of 2001. PM Inc.'s shipment volume for the second quarter of 2002 was 46.2 billion units, a decrease of 13.8% from the comparable 2001 period. PM Inc.'s shipment volumes for the second quarter of 2002 were negatively affected by trade inventory depletions following the April 2002 price increase, the timing of promotions in the second quarter of 2002 versus the second quarter of 2001 and increased price competition. It should be noted that Management Science Associates' current measurements of the domestic cigarette industry's total shipments and related share data do not include all shipments of some smaller manufacturers that Management Science Associates is presently unable to monitor effectively. Accordingly, it should also be noted that the discussion herein of PM Inc.'s performance within the industry is based upon Management Science Associates' estimates of total industry volume. For the second quarter of 2002, PM Inc.'s shipment share was 47.1%, a decrease of 3.7 share points from the comparable period of 2001. Marlboro shipment volume decreased 5.8 billion units (14.1%) from the second quarter of 2001 to 35.2 billion units for a 35.9% share of the total industry, a decrease of 2.9 share points from the comparable period of 2001. Based on shipments, the premium segment accounted for approximately 72.0% of the domestic cigarette industry volume in the second quarter of 2002, a decrease of 2.0 share points from the comparable period of 2001. In the premium segment, PM Inc.'s volume decreased 13.6% during the second quarter of 2002, compared with a 9.5% decrease for the industry, resulting in a premium segment share of 58.5%, a decrease of 2.8 share points from the second quarter of 2001. This volume and share performance was due primarily to the timing of promotions, the depletion of trade inventories and increased price competition. -38- In the discount segment, PM Inc.'s shipments decreased 15.3% to 4.9 billion units in the second quarter of 2002, compared with an industry increase of 0.2%, resulting in a discount segment share of 17.7%, a decrease of 3.2 share points from the comparable period of 2001. Basic shipment volume for the second quarter of 2002 was down 11.7% to 4.6 billion units, for a 16.8% share of the discount segment, down 2.2 share points compared to the second quarter of 2001, due primarily to a reduction in trade inventories versus the prior year and increased price competition. According to consumer purchase data from Information Resources Inc./Capstone, PM Inc.'s share of cigarettes sold at retail decreased 0.7 share points to 50.2% for the second quarter of 2002, due primarily to a 0.9 share point decline in its brands, Merit, Benson & Hedges, and Cambridge, which were not supported by promotional activity. However, the combined retail share for PM Inc.'s four focus brands that received promotional support, Marlboro, Parliament, Virginia Slims and Basic was up 0.2 share points to 47.3%, due to the growth of Marlboro and Parliament, which increased their combined retail share by 0.4 share points. The second quarter of 2002 retail share for Marlboro increased 0.1 share points to 38.3% and PM Inc.'s retail share of the premium segment grew 0.6 share points to 62.1%. Retail share for Basic, PM Inc.'s major discount brand, decreased 0.1 share points to 4.9%. Information Resources Inc./Capstone is a proprietary retail tracking service that uses a sample of stores to extrapolate market share performance in the universe of stores PM Inc.'s sales representatives regularly visit. PM Inc. currently estimates that this universe represents approximately 87% of estimated industry volume. PM Inc. cannot predict future changes or rates of change in domestic tobacco industry volume, the relative sizes of the premium and discount segments or in PM Inc.'s shipments, shipment market share or retail market share; however, it believes that PM Inc.'s results may be materially adversely affected by price increases related to increased excise taxes and tobacco litigation settlements, as well as by the other items discussed under the caption "Tobacco--Business Environment." International tobacco. During the second quarter of 2002, international tobacco net revenues, which include excise taxes billed to customers, increased $389 million (5.8%) over the second quarter of 2001. Excluding excise taxes, net revenues increased $172 million (4.9%), due primarily to higher volume/mix ($122 million) and price increases ($90 million), partially offset by unfavorable currency movements. Operating companies income for the second quarter of 2002 increased $55 million (4.1%) over the comparable 2001 period, due primarily to price increases ($90 million) and higher volume/mix ($47 million), partially offset by unfavorable currency movements ($58 million) and a pre-tax charge for a voluntary retirement program ($25 million) in 2002. Excluding the 2002 pre-tax charge for the voluntary retirement program, operating companies income increased 5.9%. PMI's volume for the second quarter of 2002 of 185.5 billion units increased 5.6 billion units (3.1%) over the second quarter of 2001, due primarily to volume increases in Eastern Europe, Asia and Turkey. Volume advanced in a number of important markets, including Belgium, Greece, Spain, the Czech Republic, Romania, Turkey, Russia, Indonesia, Japan, Taiwan, Thailand, Brazil and Mexico. In Germany, volume was flat while share was up 0.1 share points, reflecting PMI's improving performance in that market. In France, Italy, Portugal, Saudi Arabia and Lithuania, volume decreased due primarily to the timing of shipments; and in Japan, volume increased due primarily to favorable timing of shipments. Volume declined in Egypt, Poland and the Ukraine, due to intense price competition. In Korea, volume declined due to heightened competition and trade inventory reductions. Volume declined in the Philippines, due to a weak economy and growth in the low-price segment. International volume for Marlboro decreased 1.8%, as lower volumes in Italy, France, the United Kingdom, Russia, Egypt, Saudi Arabia, Korea, the Philippines and Argentina were partially offset by higher volumes in Japan, Spain, Romania, Thailand, Indonesia and Mexico. In most markets exhibiting downtrading from Marlboro, volume increased for other brands in PMI's portfolio. PMI recorded market share gains in most of its major markets. -39- Food Business Environment Kraft, the largest branded food and beverage company headquartered in the United States, conducts its global business through two subsidiaries. KFNA manufactures and markets a wide variety of snacks, beverages, cheese, grocery products and convenient meals in the United States, Canada and Mexico. Subsidiaries and affiliates of KFI manufacture and market a wide variety of snacks, beverages, cheese, grocery products and convenient meals in Europe, the Middle East and Africa, as well as the Latin America and Asia Pacific regions. KFNA and KFI are subject to fluctuating commodity costs, currency movements and competitive challenges in various product categories and markets, including a trend toward increasing consolidation in the retail trade and consequent inventory reductions, and changing consumer preferences. In addition, certain competitors may have different profit objectives and some international competitors may be more or less susceptible to currency exchange rates. To confront these challenges, Kraft continues to take steps to build the value of its brands and improve its food business portfolio with new product and marketing initiatives. Fluctuations in commodity costs can cause retail price volatility, intensify price competition and influence consumer and trade buying patterns. The North American and international food businesses are subject to fluctuating commodity costs, including dairy, coffee bean and cocoa costs. Dairy commodity costs on average in the second quarter of 2002 have been lower than those incurred in the second quarter of 2001. However, for the first six months of 2002, dairy commodity costs have been higher than the first six months of 2001. Cocoa bean prices have been higher than in 2001, while coffee bean prices have been lower than in 2001. On December 11, 2000, the Company, through Kraft, acquired all of the outstanding shares of Nabisco. During 2001, certain Nabisco businesses were reclassified as businesses held for sale, including their estimated results of operations through anticipated sale dates. These businesses have subsequently been sold with the exception of one business that had been held for sale since the acquisition of Nabisco. This business has been included in the 2002 reported operating results of KFNA. The closure of a number of Nabisco domestic and international facilities resulted in severance and other exit costs of $379 million, which were included in the adjustments for the allocation of the Nabisco purchase price. The closures will result in the termination of approximately 7,500 employees and will require total cash payments of $373 million, of which approximately $170 million has been spent through June 30, 2002. Substantially all of the closures will be completed by the end of 2002. The integration of Nabisco into the operations of Kraft also resulted in the closure or reconfiguration of several existing Kraft facilities. The aggregate charges to the consolidated statement of earnings to close or reconfigure facilities and integrate Nabisco were originally estimated to be in the range of $200 million to $300 million. As of June 30, 2002, the aggregate pre-tax charges to the consolidated statement of earnings to close or reconfigure its facilities and integrate Nabisco were $314 million, slightly above the original estimate. KFNA incurred pre-tax integration costs of $75 million during the second quarter of 2002, in addition to $27 million incurred during the first quarter of 2002 and $53 million incurred during the third and fourth quarters of 2001. KFI incurred pre-tax integration costs of $17 million during the second quarter of 2002. During the first quarter of 2002, approximately 700 employees accepted the benefits offered by a voluntary retirement program. As a result, Kraft recorded a pre-tax charge of $142 million related to the voluntary retirement program, of which $135 million related to KFNA. During the first quarter of 2002, KFI acquired a biscuits company in Australia for an aggregate cost of $62 million. During the first six months of 2001, KFI purchased coffee businesses in Romania, Morocco and Bulgaria. The operating results of the businesses acquired and divested were not material to the consolidated operating results of KFI or the Company in any of the periods presented. During the first six months of 2002, KFNA sold several North American food businesses, which were previously classified as businesses held for sale, for $81 million. The operating results of the businesses divested were not material to KFNA's or the Company's consolidated financial position or results of operations in any of the periods presented. -40- Operating Results For the Six Months Ended June 30, ------------------------------------ Operating Net Revenues Companies Income ----------------- ---------------- (in millions) 2002 2001 2002 2001 ------- ------- ------ ------ North American food $10,862 $10,662 $2,467 $2,496 International food 3,798 4,008 551 537 ------- ------- ------ ------ Total food $14,660 $14,670 $3,018 $3,033 ======= ======= ====== ====== North American food. During the first six months of 2002, net revenues increased $200 million (1.9%) over the first six months of 2001. Excluding businesses divested since the beginning of 2001 and adjusting for businesses previously held for sale, net revenues increased $98 million (0.9%), due primarily to higher volume/mix ($107 million), partially offset by lower pricing ($12 million). Operating companies income for the first six months of 2002 decreased $29 million (1.2%) from the comparable period of 2001. Excluding the 2002 pre-tax charges for the voluntary retirement program ($135 million) and integration costs ($102 million) and a 2001 loss on the sale of a food factory ($29 million), as well as the impact of businesses previously held for sale, operating companies income increased $167 million (6.6%), due primarily to lower marketing, administration and research costs ($128 million, including synergy savings), productivity savings and higher volume/mix. Volume for the first six months of 2002 increased 7.1% over the comparable period for 2001. Excluding the impact of businesses divested and after adjusting for businesses previously held for sale (the basis of presentation for all of the following KFNA volume comparisons), volume increased 2.2%. In Cheese, Meals and Enhancers, volume decreased due primarily to lower shipments in cheese and food service. Cheese volume declined, due to aggressive competitive activity and the challenges associated with translating lower commodity costs into lower retail prices during the second quarter of 2002. Shipments to food service customers were also lower, driven by the exit of non-branded businesses and distributor consolidation in the food service industry. These decreases were partially offset by higher shipments of macaroni & cheese dinners, and the 2001 acquisition of It's Pasta Anytime. Volume increased in Biscuits, Snacks and Confectionery, driven primarily by higher shipments of biscuits, higher shipments of snacking nuts to non-grocery channels and the introduction of new confectionery products. Volume gains were achieved in Beverages, Desserts and Cereals, driven primarily by ready-to-drink beverages, coffee and desserts, partially offset by trade inventory reductions in cereals. In Oscar Mayer and Pizza, volume increased due primarily to increases in hot dogs, bacon, lunch combinations, soy-based meat alternatives and frozen pizza. International food. Net revenues for the first six months of 2002 decreased $210 million (5.2%) from the first six months of 2001. Excluding businesses divested since the beginning of 2001, net revenues decreased $212 million (5.3%), due primarily to unfavorable currency movements ($243 million) and unfavorable volume/mix ($60 million), partially offset by the impact of acquisitions. Operating companies income for the first six months of 2002 increased $14 million (2.6%) over the first six months of 2001. Excluding pre-tax charges for the voluntary retirement program ($7 million) and integration costs ($17 million), as well as the impact of businesses divested since the beginning of 2001, operating companies income increased $38 million (7.1%), due primarily to lower marketing, administration and research costs ($76 million), partially offset by unfavorable volume/mix ($25 million) and unfavorable currency movements ($14 million). Volume for the first six months of 2002 increased 1.6% over the first six months of 2001. Excluding the impact of divested businesses and after adjusting for the impact of businesses previously held for sale (the basis of presentation for -41- all of the following KFI volume comparisons), volume increased 2.5%, benefiting from acquisitions and the introduction of new products. In Europe, Middle East and Africa, volume increased over the first six months of 2001, benefiting from acquisitions and from growth in most countries across the region. In beverages, volume increased in both coffee and refreshment beverages. Coffee volume grew in Sweden, the United Kingdom, Poland, Italy and the Ukraine, and benefited from acquisitions in Romania, Morocco and Bulgaria. Refreshment beverage volume increased, driven by higher sales to the Middle East, Turkey and Morocco. Snacks volume increased, driven by higher confectionery and salty snacks volume in several markets and an acquisition in Russia and Poland, partially offset by lower volume in Germany. Cheese volume decreased, due primarily to increased price competition in Europe, partially offset by gains in the Middle East. In grocery, volume increased, due primarily to higher spoonable dressings volume in Germany, and higher shipments of ready-to-serve desserts and pourable dressings in the United Kingdom. Volume for convenient meals also increased, due primarily to lunch combinations in the United Kingdom and higher shipments of canned meats in Italy against a weak comparison in 2001. Volume increased in the Latin America and Asia Pacific region driven by gains in many markets and an acquisition in Australia, partially offset by declines in certain countries due to the impact of weak economies and lower results in China. Beverages volume increased, due primarily to growth in refreshment beverages in Brazil, Argentina, the Philippines and Venezuela. Snacks volume increased, driven primarily by biscuit growth in Brazil and Indonesia, and an acquisition in Australia, partially offset by lower volume in Argentina and China. Cheese volume decreased, due primarily to lower sales in Latin America and Japan, partially offset by higher volume in the Philippines and Indonesia. Grocery volume was lower, due primarily to lower sales in Latin America and price competition in Australia. For the Three Months Ended June 30, ------------------------------------ Operating Net Revenues Companies Income --------------- ---------------- (in millions) 2002 2001 2002 2001 ------ ------ ------ ------ North American food $5,568 $5,428 $1,369 $1,353 International food 1,945 2,045 299 298 ------ ------ ------ ------ Total food $7,513 $7,473 $1,668 $1,651 ====== ====== ====== ====== North American food. During the second quarter of 2002, net revenues increased $140 million (2.6%) over the second quarter of 2001, due primarily to businesses previously held for sale ($122 million) and higher volume/mix ($76 million), partially offset by lower pricing ($55 million). Excluding the businesses divested since the beginning of 2001 and adjusting for businesses previously held for sale, net revenues increased 0.4%. Operating companies income for the second quarter of 2002 increased $16 million (1.2%) over the comparable period of 2001, due primarily to higher margins, higher volume/mix ($26 million) and lower marketing, administration and research costs ($26 million, including synergy savings), partially offset by integration costs ($75 million). Excluding the 2002 pre-tax charge for integration costs and adjusting for businesses previously held for sale, operating companies income increased 6.0%. Volume for the second quarter of 2002 increased 8.7% over the comparable period of 2001. Excluding the impact of businesses divested and after adjusting for businesses previously held for sale (the basis of presentation for all of the following KFNA volume comparisons), volume increased 2.0%. In Cheese, Meals and Enhancers, volume decreased due primarily to lower cheese and food service volume. Cheese volume declined due to aggressive competitive activity and the challenges associated with translating lower commodity costs into lower retail prices. Shipments to food service customers also declined, driven by the exit of non-branded businesses and distributor consolidation in the food service industry. These decreases were partially offset by higher shipments of macaroni & cheese dinners, the 2001 acquisition of It's Pasta Anytime and higher volumes in enhancers. Volume increased in Biscuits, Snacks and Confectionery, driven primarily by new product introductions in -42- biscuits and confectionery, and higher shipments of snacking nuts. Volume gains were achieved in Beverages, Desserts and Cereals, driven primarily by ready-to-drink beverages, coffee and desserts, partially offset by trade inventory reductions in cereals. In Oscar Mayer and Pizza, volume increased due primarily to increases in hot dogs, lunch combinations, soy-based meat alternatives and frozen pizza. International food. Net revenues for the second quarter of 2002 decreased $100 million (4.9%) from the second quarter of 2001. After adjusting for businesses held for sale, net revenues decreased $105 million (5.1%), due primarily to unfavorable currency movements ($114 million) and lower volume/mix ($61 million), partially offset by higher pricing ($18 million) and the impact of acquisitions. Operating companies income for the second quarter of 2002 increased slightly over the second quarter of 2001. Excluding the 2002 pre-tax charges for integration costs, operating companies income increased $18 million (6.0%), due primarily to lower marketing, administration and research costs ($33 million, including synergy savings and other operating efficiencies), acquisitions and productivity savings, partially offset by lower volume/mix ($22 million) and unfavorable currency movements ($8 million). Volume for the second quarter of 2002 increased 2.2% over the second quarter of 2001. Excluding the impact of divested businesses and after adjusting for the impact of businesses held for sale (the basis of presentation for all of the following KFI volume comparisons), volume increased 2.4%. In Europe, Middle East and Africa, volume increased over the second quarter of 2001, driven by acquisitions and growth in most countries across the region, partially offset by a decline in Germany. In beverages, volume decreased as lower coffee shipments were partially offset by growth in refreshment beverages. Snacks volume increased, driven by higher confectionery volume reflecting new product introductions and an acquisition of businesses in Russia and Poland, partially offset by price competition in Germany. Cheese volume increased, driven by gains in the Middle East and Africa, Spain and the Nordic markets. In grocery, volume increased due primarily to higher spoonable dressings volume in Germany, benefiting from new product introductions. Volume for convenient meals also increased, due primarily to lunch combinations in the United Kingdom and higher shipments of canned meats in Italy against a weak comparison in 2001. Volume increased in the Latin America and Asia Pacific region driven by gains in many markets and the acquisition of a biscuits company in Australia, partially offset by declines in certain countries due to the impact of weak economies and lower results in China. Beverages volume increased, due primarily to growth in powdered beverages in Brazil, Argentina, the Philippines and Venezuela. Cheese volume decreased, due to lower sales in Latin America and Japan, partially offset by higher volume in the Philippines and Indonesia. Grocery volume was lower, due primarily to lower sales in Latin America and Australia. Snacks volume increased, driven primarily by new product introductions and line extensions in Brazil, biscuits growth in Indonesia, and an acquisition in Australia, partially offset by lower volume in Argentina and China. Beer Business Environment On May 30, 2002, the Company announced an agreement with South African Breweries plc ("SAB") to merge Miller Brewing Company ("Miller") into SAB. The transaction closed on July 9, 2002 and SAB changed its name to SABMiller plc ("SABMiller"). At closing, the Company received 430 million shares of SABMiller valued at approximately $3.4 billion, based upon a share price of 5.12 British pounds per share, in exchange for Miller, which had $2.0 billion of existing debt. The shares in SABMiller owned by the Company resulted in an initial 36% economic interest in SABMiller and a 24.9% voting interest. The transaction resulted in a pre-tax gain of approximately $2.6 billion or approximately $1.7 billion after-tax. The gain will be recorded in the third quarter of 2002. The Company's ownership interest in SABMiller will be accounted for under the equity method, according to which the Company will record its percentage of SABMiller's net earnings going forward. -43- Operating Results
2002 2001 ------ ------ (in millions) Net revenues: Six months ended June 30, $2,641 $2,464 ====== ====== Quarter ended June 30, $1,422 $1,350 ====== ====== Operating companies income: Six months ended June 30, $276 $292 ==== ==== Quarter ended June 30, $169 $168 ==== ====
Six Months Ended June 30 Net revenues for the first six months of 2002 increased $177 million (7.2%) over the first six months of 2001, due primarily to higher pricing ($105 million) and increased contract brewing revenues. Operating companies income for the first six months of 2002 decreased $16 million (5.5%) from the first six months of 2001, due primarily to pre-tax charges for an asset impairment and a voluntary retirement program. Excluding the pre-tax charges for an asset impairment and a voluntary retirement program, operating companies income increased $7 million (2.4%) to $299 million, due primarily to higher pricing ($58 million) and increased contract brewing, partially offset by higher marketing, administration and research costs ($55 million). Domestic shipment volume of 20.4 million barrels for the first six months of 2002 decreased 0.6% from the first six months of 2001. The majority of Miller's decrease in domestic shipments was due to lower shipments for both core brands and lower-priced, non-core brands, partially offset by the 2002 introduction of Skyy Blue'TM', Stolichnaya Citrona'TM' and Sauza Diablo'TM'. Three Months Ended June 30 Net revenues for the second quarter of 2002 increased $72 million (5.3%) over the second quarter of 2001, due primarily to higher pricing ($64 million) and increased contract brewing revenues, partially offset by lower volume ($22 million). Operating companies income for the second quarter of 2002 increased slightly over the second quarter of 2001, due primarily to higher pricing ($37 million) and increased contract brewing, partially offset by lower volume ($12 million) and higher marketing, administration and research costs ($25 million). Domestic shipment volume of 10.9 million barrels for the second quarter of 2002 decreased 2.5% from the second quarter of 2001. The majority of Miller's decrease in domestic shipments was due to lower shipments for both core brands and lower-priced, non-core brands, partially offset by the 2002 introduction of Skyy Blue'TM', Stolichnaya Citrona'TM' and Sauza Diablo'TM'. Financial Services Operating Results
2002 2001 ------ ------ (in millions) Net revenues: Six months ended June 30, $265 $211 ==== ==== Quarter ended June 30, $148 $111 ==== ==== Operating companies income: Six months ended June 30, $175 $140 ==== ==== Quarter ended June 30, $104 $ 76 ==== ====
Philip Morris Capital Corporation's ("PMCC") net revenues and operating companies income for the first six months of 2002 increased $54 million (25.6%) and $35 million (25.0%), respectively, over the first six months of 2001. During the second quarter of 2002, net revenues and operating companies income increased $37 million (33.3%) and $28 million (36.8%), respectively, over the second quarter of 2001. These increases were due primarily to growth in leasing activities and continued gains derived from PMCC's finance asset portfolio, including a significant gain during the second quarter from the early termination of a lease. Financial Review Net Cash Provided by Operating Activities During the first six months of 2002, net cash provided by operating activities was $5.7 billion compared with $4.6 billion during the comparable 2001 period. The increase is due primarily to higher net earnings. Net Cash Used in Investing Activities One element of the growth strategy of the Company's operating subsidiaries is to strengthen their brand portfolios through active programs of selective acquisitions and divestitures. The Company's subsidiaries are constantly investigating potential acquisition candidates and from time to time sell businesses that are outside their core categories or that do not meet their growth or profitability targets. During the first six months of 2002, net cash used in investing activities was $636 million, compared with $1.3 billion during the first six months of 2001. The decrease reflects lower levels of cash used for acquisitions in -44- 2002 and the cash provided by the 2002 divestiture of several North American food businesses, as well as lower uses of cash by the Company's financial services business. Net Cash Used in Financing Activities During the first six months of 2002, net cash used in financing activities was $4.3 billion, compared with $3.9 billion during the first six months of 2001. This difference was due primarily to an increase in cash used during 2002 to repurchase Philip Morris common stock and to pay dividends on Philip Morris common stock. During 2002, Miller borrowed $2.0 billion under a one-year bank term loan agreement, and Kraft issued $2.5 billion of global bonds. These debt issuances were mostly offset by debt repayments made during 2002. In 2001, the proceeds from the Kraft IPO were used to repay debt and, as a result, had no net impact on financing cash flows. Debt and Liquidity Debt - The Company's total debt (consumer products and financial services) was $22.3 billion and $22.1 billion at June 30, 2002 and December 31, 2001, respectively. Total consumer products debt was $20.3 billion and $20.1 billion at June 30, 2002 and December 31, 2001, respectively. At June 30, 2002 and December 31, 2001, the Company's ratio of consumer products debt to total equity was 0.99 and 1.02, respectively. The ratio of total debt to total equity was 1.09 and 1.13 at June 30, 2002 and December 31, 2001, respectively. In April 2002, Kraft filed a Form S-3 shelf registration statement with the Securities and Exchange Commission, under which Kraft may sell debt securities and/or warrants to purchase debt securities in one or more offerings up to a total amount of $5.0 billion. In May 2002, Kraft issued $2.5 billion of global bonds under the shelf registration. The bond offering included $1.0 billion of 5-year notes bearing interest at a rate of 5.25% and $1.5 billion of 10-year notes bearing interest at a rate of 6.25%. At June 30, 2002, Kraft had $2.5 billion of capacity remaining under its shelf registration statement. In May 2002, Miller borrowed $2.0 billion under a one-year bank term loan agreement. This Miller borrowing was outstanding as of July 9, 2002, the date of the merger transaction with SAB. Credit Lines - At June 30, 2002, the Company and its subsidiaries maintained credit lines with a number of lending institutions amounting to approximately $16.2 billion. Certain of these credit lines were used to support $889 million of commercial paper borrowings at June 30, 2002, the proceeds of which were used for general corporate purposes. A portion of these lines is also used to meet the short-term working capital needs of the Company's international businesses. At June 30, 2002, the Company's credit facilities included $7.0 billion (of which $2.0 billion is for the sole use of Kraft) of 5-year revolving credit facilities expiring in July 2006, and $7.0 billion (of which $4.0 billion is for the sole use of Kraft) of 364-day revolving credit facilities expiring in July 2002. During July 2002, the expiring 364-day revolving credit facilities were replaced by $6.0 billion (of which $3.0 billion is for the sole use of Kraft) of new 364-day revolving credit facilities expiring in July 2003. As a result, the amount of existing credit lines has declined by $1.0 billion to approximately $15.2 billion. The Philip Morris facilities require the maintenance of a fixed charges coverage ratio and the Kraft facilities require the maintenance of a minimum net worth. Philip Morris and Kraft exceeded these covenants at June 30, 2002 and do not currently anticipate any difficulty in continuing to exceed these covenant requirements. The foregoing revolving credit facilities do not include any other covenants that could require an acceleration of maturity or the posting of collateral. The majority of the Company's remaining lines expire within one year. The 5-year revolving credit facilities enable the Company to reclassify short-term debt on a long-term basis. At June 30, 2002, approximately $0.9 billion of short-term borrowings that the Company intends to refinance were reclassified as long-term debt, as compared with $3.5 billion at December 31, 2001. The Company expects to continue to refinance long-term and short-term debt from time to time. The nature and amount of the Company's long-term and short-term debt and the proportionate amount of each can be expected to vary as a result of future business requirements, market conditions and other factors. -45- Guarantees - At June 30, 2002, the Company was contingently liable for guarantees and commitments of $1.1 billion, consisting of the following: o $0.8 billion of guarantees of excise tax and import duties related to international shipments of tobacco products. In these agreements, a bank provides a guarantee of tax payments to respective governments. PMI then issues a guarantee to the respective banks for the payment of the taxes. These are revolving facilities that are integral to the shipment of tobacco products in international markets, and the underlying taxes payable are recorded on the Company's consolidated balance sheet. o $0.2 billion, primarily surety bonds to a non-U.S. governmental entity, related to capacity expansion commitments at an international tobacco facility. The surety bonds expire in 2002. o $0.1 billion, including various guarantees relating to the tobacco and food businesses. Although these guarantees are typically short-term in nature, they are expected to be replaced, upon expiration, with similar guarantees of similar amounts. Guarantees do not have, and are not expected to have, a significant impact on the Company's liquidity. Litigation Escrow Deposits - As discussed in Note 8. Contingencies, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among PM Inc., certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, a $500 million pre-tax charge was recorded by the domestic tobacco business during the first quarter of 2001. In July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the June 30, 2002 and December 31, 2001 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM Inc. quarterly and is being recorded as earned in interest and other debt expense, net, in the consolidated statement of earnings. Tobacco Litigation Settlement Payments - As discussed in Note 8. Contingencies, PM Inc., along with other domestic tobacco companies, has entered into tobacco litigation settlement agreements that require the domestic tobacco industry to make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as an additional $250 million each year in 2002 and 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers' domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. Accordingly, PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped. As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quota-holders. To that end, four of the major domestic tobacco product manufacturers, including PM Inc., and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (in 2002 through 2008, $500 million each year; and 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each -46- manufacturer's relative market share. PM Inc. records its portion of these payments as part of cost of sales as product is shipped. During the six months ended June 30, 2002 and 2001, and the quarters ended June 30, 2002 and 2001, PM Inc. recognized $2.8 billion and $3.1 billion, respectively, and $1.3 billion and $1.6 billion, respectively, as part of cost of sales attributable to the foregoing settlement obligations. As discussed above under "Tobacco--Business Environment," the present legislative and litigation environment is substantially uncertain and could result in material adverse consequences for the business, financial condition, cash flows or results of operations of the Company, PM Inc. and PMI. Assuming there are no material adverse developments in the legislative and litigation environment, the Company expects its cash flow from operations and its access to global capital markets to provide sufficient liquidity to meet the ongoing needs of the business. Leveraged Leases - As part of its lease portfolio, PMCC invests in leveraged leases. At June 30, 2002, PMCC's net finance receivable of $7.1 billion in leveraged leases, which is included in the Company's consolidated balance sheet as finance assets, net, is comprised of total lease payments receivable ($26.4 billion) and the residual value of assets under lease ($2.7 billion), reduced by non-recourse third-party debt ($18.2 billion) and unearned income ($3.8 billion). PMCC has no obligation for the payment of the non-recourse third-party debt issued to purchase the assets under lease. The payment of the debt is collateralized only by lease payments receivable and the leased property, and is non-recourse to all other assets of PMCC or the Company. As required by accounting principles generally accepted in the United States of America ("U.S. GAAP"), the non-recourse debt has been offset against the related rentals receivable and the residual value of the property, and has been presented on a net basis within finance assets, net, in the Company's consolidated balance sheet. PMCC leases aircraft to a number of major U.S. and overseas airlines. On August 11, 2002, US Airways Group Inc. ("US Air") filed for Chapter 11 bankruptcy protection. PMCC currently leases to US Air 16 Airbus A319 aircraft under long- term leveraged leases, which expire in 2018 and 2019. The aircraft were leased in 1998 and 1999 and represent a net finance receivable of $150 million, which equals 1.8% of PMCC's portfolio of finance assets at June 30, 2002. PMCC is currently evaluating the effect of the US Air bankruptcy filing and has placed the leases on non-accrual status pending further developments in the bankruptcy proceedings. Equity and Dividends The Company repurchased 45.0 million and 41.8 million shares of its common stock during the first six months of 2002 and 2001, respectively, at a cost of $2.3 billion and $2.0 billion, respectively. At June 30, 2002, cumulative repurchases under its previously announced $10 billion authority totaled 114.6 million shares at an aggregate cost of $5.6 billion. The Company has announced its intention to accelerate its rate of share repurchase during the second half of 2002 by utilizing approximately $1.7 billion of cash flow to the Company resulting from the transfer of the Miller debt as a consequence of the merger of Miller with SAB in July 2002. Total share repurchases in 2002 are expected to exceed $6.0 billion. On June 21, 2002, Kraft's board of directors approved the repurchase from time to time of up to $500 million of Kraft's Class A common stock solely to satisfy the obligations of Kraft to provide shares under its 2001 Performance Incentive Plan, 2001 Compensation Plan for non-employee directors, and other plans where options to purchase Kraft's Class A common stock are granted to employees of Kraft. At July 31, 2002, no shares had been repurchased. Dividends paid in the first six months of 2002 and 2001 were $2.49 billion and $2.34 billion, respectively, an increase of 6.4%, reflecting a higher dividend rate in 2002, partially offset by a lower number of shares outstanding as a result of ongoing share repurchases. During the third quarter of 2001, the Company's Board of Directors approved a 9.4% increase in the quarterly dividend rate to $0.58 per share. As a result, the present annualized dividend rate is $2.32 per share. -47- Market Risk The Company operates globally, with manufacturing and sales facilities in various locations around the world, and utilizes certain financial instruments to manage its foreign currency, interest rate and commodity exposures, which primarily relate to forecasted transactions and debt. Derivative financial instruments are used by the Company, principally to reduce exposures to market risks resulting from fluctuations in foreign exchange rates, commodity prices and interest rates, by creating offsetting exposures. The Company is not a party to leveraged derivatives. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company does not use derivative financial instruments for speculative purposes. Substantially all of the Company's derivative financial instruments are effective as hedges under U.S. GAAP. Accordingly, the Company increased accumulated other comprehensive losses by $127 million during the first six months of 2002. This reflects a decrease in the fair value of derivatives of $206 million, partially offset by deferred losses transferred to earnings of $79 million. For the three months ended June 30, 2002, the Company increased accumulated other comprehensive losses by $169 million. This reflects deferred gains transferred to earnings of $13 million and a decrease in the fair value of derivatives of $156 million. The fair value of all derivative financial instruments has been calculated based on active market quotes. Foreign exchange rates. The Company uses forward foreign exchange contracts and foreign currency options to mitigate its exposure to changes in exchange rates from third-party and intercompany forecasted transactions. The primary currencies to which the Company is exposed include the Japanese yen, Swiss franc and the euro. At June 30, 2002 and December 31, 2001, the Company had option and forward foreign exchange contracts with aggregate notional amounts of $8.9 billion and $3.7 billion, respectively, for the purchase or sale of foreign currencies. The Company uses foreign currency swaps to mitigate its exposure to changes in exchange rates related to foreign currency denominated debt. These swaps typically convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. Foreign currency swap agreements are accounted for as cash flow hedges. At June 30, 2002 and December 31, 2001, the notional amounts of foreign currency swap agreements aggregated $2.5 billion and $2.3 billion, respectively. The Company also uses certain foreign currency denominated debt as net investment hedges of foreign operations. At June 30, 2002, a loss of $113 million, net of income taxes of $60 million, which represented effective hedges of net investments, was reported as a component of accumulated other comprehensive earnings (losses) within currency translation adjustments. Commodities. The Company is exposed to price risk related to forecasted purchases of certain commodities used as raw materials by the Company's businesses. Accordingly, the Company uses commodity forward contracts, as cash flow hedges, primarily for coffee, cocoa, milk, cheese and wheat. Commodity futures and options are also used to hedge the price of certain commodities, including milk, coffee, cocoa, wheat, corn, sugar and soybean oil. At June 30, 2002 and December 31, 2001, the Company had net long commodity positions of $527 million and $589 million, respectively. Interest rates. The Company uses interest rate swaps to hedge the fair value of an insignificant portion of its long-term debt. The differential to be paid or received is accrued and recognized as interest expense. If an interest rate swap agreement is terminated prior to maturity, the realized gain or loss is recognized over the remaining life of the agreement if the hedged amount remains outstanding, or immediately if the underlying hedged exposure does not remain outstanding. If the underlying exposure is terminated prior to the maturity of -48- the interest rate swap, the unrealized gain or loss on the related interest rate swap is recognized in earnings currently. During the six months ended June 30, 2002, there was no ineffectiveness relating to these fair value hedges. At June 30, 2002, the Company had interest rate swap agreements that converted $102 million of fixed-rate debt to variable-rate debt, of which $29 million will mature in 2003 and $73 million will mature in 2004. ---------- Use of the above-mentioned financial instruments has not had a material impact on the Company's financial position at June 30, 2002 and December 31, 2001, or the Company's results of operations for the three months ended June 30, 2002 or the year ended December 31, 2001. ---------- Contingencies See Note 8 to the Condensed Consolidated Financial Statements for a discussion of contingencies. New Accounting Standards On July 30, 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. Accordingly, the Company will apply the provisions of SFAS No. 146 prospectively to exit or disposal activities initiated after December 31, 2002. On January 1, 2002, the Company adopted SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." As a result, the Company stopped recording the amortization of goodwill and indefinite life intangible assets as a charge to earnings as of January 1, 2002. The Company estimates that net earnings and diluted EPS would have been approximately $4.6 billion and $2.05, respectively, for the six months ended June 30, 2001, and approximately $2.5 billion and $1.14, respectively, for the three months ended June 30, 2001, had the provisions of the new standards been applied as of January 1, 2001. In addition, the Company is required to conduct an annual review of goodwill and intangible assets for potential impairment. The Company completed its review and did not have to record a charge to earnings for an impairment of goodwill or other intangible assets as a result of these new standards. Effective January 1, 2002, the Company also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on the Company's financial position, results of operations or cash flows. Effective January 1, 2002, the Company adopted Emerging Issues Task Force ("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." The adoption of EITF Issues No. 00-14 and No. 00-25 resulted in a reduction of revenues of approximately $4.8 billion and $2.4 billion in the first six months and the second quarter of 2001, respectively. In addition, the adoption reduced marketing, administration and research costs in the first six months and the second quarter of 2001 by approximately $5.2 billion and $2.6 billion, respectively. Cost of sales increased in the first six months and the second quarter of 2001 by approximately $307 million and $162 million, respectively, and excise taxes on products increased by -49- approximately $114 million and $58 million, respectively. The adoption of these EITF Issues had no impact on net earnings or basic and diluted EPS. Forward-Looking and Cautionary Statements The Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to stockholders, including this Quarterly Report on Form 10-Q. One can identify these forward-looking statements by use of words such as "strategy," "expects," "continues," "plans," "anticipates," "believes," "will," "estimates," "intends," "projects," "goals," "targets" and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results and outcomes to differ materially from those contained in any forward-looking statement made by or on behalf of the Company; any such statement is qualified by reference to the following cautionary statements. The tobacco industry continues to be subject to health concerns relating to the use of tobacco products and exposure to ETS; legislation, including actual and potential excise tax increases; increasing marketing and regulatory restrictions; governmental regulation; privately imposed smoking restrictions; governmental and grand jury investigations; litigation, including risks associated with adverse jury and judicial determinations, courts reaching conclusions at variance with the Company's understanding of applicable law, bonding requirements and the absence of adequate appellate remedies to get timely relief from any of the foregoing; and the effects of price increases related to excise tax increases and concluded tobacco litigation settlements on consumption rates and consumer preferences within price segments. The food industry continues to be subject to recalls if products become adulterated or misbranded; liability if product consumption causes injury; ingredient disclosure and labeling laws and regulations; and the possibility that consumers could lose confidence in the safety and quality of certain food products. Each of the Company's consumer products subsidiaries is subject to intense competition, changes in consumer preferences and local economic conditions. Their results are dependent upon their continued ability to promote brand equity successfully; to anticipate and respond to new consumer trends; to develop new products and markets and to broaden brand portfolios in order to compete effectively with lower priced products in a consolidating environment at the retail and manufacturing levels; to improve productivity; and to respond to changing prices for their raw materials. In addition, PMI, KFI and KFNA are subject to the effects of foreign economies and the related shifts in consumer preferences, currency movements and fluctuations in levels of customer inventories. Developments in any of these areas, which are more fully described above and which descriptions are incorporated into this section by reference, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. -50- Part II - OTHER INFORMATION Item 1. Legal Proceedings. See Note 8. Contingencies, of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for a discussion of legal proceedings pending against the Company and its subsidiaries. See also Exhibits 99.1 and 99.2 to this report. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Agreement between the Company and William H. Webb. 10.2 Agreement among the Company, PM Inc. and Michael E. Szymanczyk. 12 Statement regarding computation of ratios of earnings to fixed charges. 99.1 Certain Pending Litigation Matters and Recent Developments. 99.2 Trial Schedule for Certain Cases. (b) Reports on Form 8-K. The Registrant filed Current Reports on Form 8-K on May 30, 2002 and June 11, 2002, each of which covered Item 5 (Other Events), and related to an agreement with South African Breweries plc ("SAB") to merge Miller Brewing Company with a wholly-owned subsidiary of SAB. -51- Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHILIP MORRIS COMPANIES INC. /s/ DINYAR S. DEVITRE Dinyar S. Devitre, Senior Vice President and Chief Financial Officer August 13, 2002 -52- EX-10 3 ex10-1.txt EXHIBIT 10.1 Exhibit 10.1 Agreement with William H. Webb July 12, 2002 Mr. William H. Webb 120 Park Avenue New York, NY 10017 Dear Bill: This letter agreement ("Agreement") will set forth and confirm the undertakings and agreements with respect to which you will retire as Vice Chairman of Philip Morris Companies Inc. ("PMC") and resign as a director of PMC and from any director or officer positions with PMC's subsidiaries or affiliates effective August 31, 2002. PMC, its subsidiaries, affiliates, successors and assigns will hereinafter be collectively referred to as the "Company." A release of claims herein will form a part of those undertakings and agreements. 1. You shall remain an employee through September 30, 2002 and be paid your normal salary, less applicable withholding. From October 1, 2002 through September 30, 2004 you shall receive salary continuation payments at the same rate as your current normal salary, less applicable withholding, in lieu of any payments to which you might be entitled under any severance plan of the Company, and you shall hold yourself available to consult with and advise the officers, directors and other representatives of the Company as reasonably requested by the Chief Executive Officer of PMC ("Chief Executive"). 2. From October 1, 2004 through September 30, 2007, you will hold yourself available to consult with and advise the officers, directors and other representatives of the Company as reasonably requested by the Chief Executive. In this regard you acknowledge that the terms of the Consulting Agreement attached as Exhibit A are acceptable to you and that you will execute an identical or virtually identical document on October 1, 2004. 3a. You will receive a pro-rated 2002 Annual Incentive Compensation Award as determined by the PMC Compensation Committee in January 2003 for the period January 2002 through August of 2002, inclusive. In addition, you shall receive a prorated Long-Term Incentive Award for the three-year performance cycle 2001-2003, as determined by the PMC Compensation Committee in January 2004 for the period January 2001 through August of 2002, inclusive. 3b(1). Provided you comply with paragraph 15 below, your June 2001 stock option grant will vest in accordance with its terms in the same manner as if you remained actively employed by the Company. If you should obtain other full-time noncompetitive employment, which shall mean, full-time active employment for an entity that is not a "competitor" (defined in paragraph 15 below), before the vesting of this grant, you must apply for accelerated vesting as a retiree in accordance with the terms of the option agreements, by giving written notice to the Senior Vice President of Human Resources, PMC at the address specified in paragraph 22 below. The Company agrees that for the purposes of determining the period available to you for exercising all vested stock options issued to you by the Company, your employment with the Company will be deemed to have terminated on account of retirement at the earlier of September 30, 2004 or the date you commence other full-time non-competitive Exhibit 10.1 employment. You shall have the right to exercise such options in accordance with the terms of the applicable option agreements and the applicable stock option plans. You will not be eligible for any future stock option grants, but you will be granted any reload Executive Ownership Stock Options in connection with the exercise of any of your vested options prior to the earlier of the date you commence other full-time noncompetitive employment or September 30, 2004. Provided that you have not accepted full-time noncompetitve employment and have complied with paragraph 15 below, any unvested reload Executive Ownership Stock Options outstanding on September 30, 2004 shall vest on the six month anniversary of their date of grant. 3b(2). Provided you comply with paragraph 15 below, your restricted stock will vest in accordance with its terms in the same manner as if you remained actively employed by the Company or upon such earlier date as shall be approved by the Compensation Committee of the Board of Directors. If you should obtain other full-time noncompetitive employment before the vesting of any restricted stock, you will forfeit the stock unless you have obtained the prior approval of the Chief Executive before commencement of such employment. 3b(3). Subject to the terms of paragraph 3b(4), you shall remain an active participant in and be eligible to receive benefits under the following benefit programs generally applicable to salaried employees through September 30, 2004: Medical, Vision and Dental, Dependent Care Flexible Spending Account, Survivor Income Benefit, Retirement, Deferred Profit Sharing (including any Company contribution thereunder), in accordance with its terms (including the Benefit Equalization Plan) and Life Insurance. Company-paid life insurance shall remain at two times salary through your 65th birthday. Thereafter, beginning at age 65, your life insurance benefit will be reduced in accordance with Company policy. 3b(4). In the event you accept other full-time noncompetitive employment prior to September 30, 2004, upon commencement of such employment you shall no longer remain on salary continuation pursuant to paragraph 1, and you shall cease to be eligible for active participation in the benefit programs described in paragraph 3b(3) as of the last day of the month during which you commence such employment. At such time, you shall be entitled to a lump-sum payment equal to the sum of the remaining salary continuation payments to which you would have been entitled less applicable withholding, pursuant to paragraph 1, had you not accepted such employment. In such eventuality, you will receive the amounts payable under paragraph 3a in accordance with its terms. For purposes of this Agreement, full-time noncompetitive employment shall not include noncompetitive self-employment or services as an independent contractor, nor noncompetitive services that do not involve a full-time schedule or are not intended to be long-term. 3b(5). Within 10 days following your acceptance of such other full-time noncompetitive employment, you shall notify the Company of that fact in writing by sending such notification to the Senior Vice President of Human Resources of PMC at the address specified in paragraph 22, advising of the details of such employment and the date such employment is expected to begin. 4. As of October 1, 2004, you will be eligible to retire with service credit to age 65 (capped at 35 years) and your earnings will be projected to age 65 at 5% per year on total compensation (base plus annual bonus). This benefit is expressed as a 100% Joint & Survivor 2 Exhibit 10.1 annuity (the "Annual Pension Benefit") payable from three sources: (1) the Company's tax-qualified pension plan; (2) the Company's non-qualified pension plan; and (3) the Company's supplemental pension plan. It is assumed that you will also elect to receive your qualified benefit as a 100% Joint and Survivor benefit. Your qualified benefit is provided on pre-tax basis and is subject to applicable taxes. Your nonqualified pension and supplemental pension benefits will be paid on an after-tax basis in accordance with the provisions of the Secular Trust program. 5. If you die prior to September 30, 2004, your estate or your designated beneficiary shall receive an amount equal to the remaining salary continuation and prorated incentive payments to which you are entitled under paragraphs 1 and 3a, less all such payments previously made pursuant to this Agreement, plus any amounts payable pursuant to the death benefit provisions of the benefit programs referred to in paragraph 3b(3), and any unvested equity awards shall vest in accordance with their terms. Further, your spouse would be entitled to the survivor portion (100%) of the pension benefits payable in accordance with paragraph 4, as of the first of the month following your death. 6. In the event you become disabled and file for disability benefits under the Company's Long-Term Disability Program prior to September 30, 2004, your salary continuation payments will continue to be paid pursuant to the terms of paragraph 1, reduced by any salary replacement amounts you receive pursuant to the Company's Long-Term Disability Program. You will continue to be entitled to the other payments and benefits set forth in this Agreement pursuant to the terms of this Agreement as well as vested retirement benefits in accordance with the provisions of the applicable plans. 7. The Company will provide you with an office in the Greenwich, Connecticut area, together with secretarial service, office furniture, supplies and equipment, and a telephone credit card, from September 1, 2002 until the earlier of the date you commence other full-time noncompetitive employment or September 30, 2004. 8. The Company will provide you with a Company vehicle and driver until the earlier of the date you commence other full-time noncompetitive employment or September 30, 2004. 9. You shall continue to be reimbursed for financial counseling (including, without limitation, legal, tax and investment advice) through 2004 up to the current annual maximum. In addition, the Company shall reimburse you for all legal and accounting fees and expenses incurred by you in connection with the analysis and negotiation of this agreement. 10. The Company will continue to maintain and support your security systems at your homes in New York City and Greenwich, Connecticut until September 30, 2004. 11. Should you repatriate to Australia prior to age 70 the Company shall: (i) provide you with a one month relocation allowance equal to your current monthly salary, less applicable withholding; (ii) pay for the shipment of your household goods; (iii) pay for storage of your household goods in Australia for up to six months or until you move into your new home, if earlier; (iv) pay your temporary living expenses for 30 days; and (v) pay for first class air tickets 3 Exhibit 10.1 from the United States to Australia for yourself, your wife and your son, (should he choose to relocate with you to Australia). In the event you repatriate to Australia, the Company will no longer have an obligation to provide you with an office and secretarial service as provided in paragraph 7 or a Company vehicle and driver as provided in paragraph 8. In lieu thereof, the Company shall provide you with an office and secretarial service at a Company facility in Australia, and, provided you have entered into the Consulting Agreement referred to in paragraph 2 above, pay for the cost of car and driver up to the annual limit provided for in such Agreement. In the event you repatriate to Australia, the Company will continue to maintain and support security systems at your homes in New York City and Greenwich, Connecticut (if you continue to own them) until the earlier of September 30, 2004 or the date you commence other full-time noncompetitive employment. 12. In exchange for the payments and other consideration described above, which you acknowledge you would not otherwise be entitled to, you release and forever discharge, and by this instrument release and forever discharge, the Company, including without limitation, its shareholders, subsidiaries, divisions, affiliates, successors, assigns, representatives, attorneys, directors and employees, from all debts, obligations, promises, covenants, agreements, contracts, endorsements, bonds, controversies, suits, actions, causes of action, judgments, damages, expenses, claims or demands of any kind whatsoever (whether known or unknown) in law or in equity, which you ever had, now have, or which may arise in the future regarding any matter arising on or before the date this Agreement is executed by you, regarding your employment with or your leaving the employment of the Company, any contract (express or implied), any claim for equitable relief or recovery of punitive, compensatory, or other damages or monies, commissions, attorneys' fees, any tort, and all claims for wrongful termination or alleged violation of applicable wage payment or benefits law, or alleged discrimination based upon sex, religion, age, race, color, national origin, sexual orientation, handicap or disability, including but not limited to any claim, asserted or unasserted, which could arise under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the Americans With Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Family and Medical Leave Act of 1993, the Civil Rights Act of 1991, the Civil Rights Act of 1866, the Rehabilitation Act of 1973, Executive Order 11246, the New York State Human Rights Law, the New York City Human Rights Law, the Connecticut Law on Human Rights and Opportunities, as each of those statutes and orders have been and may be amended from time to time and any other federal, state or local equal employment opportunity laws, regulations or ordinances. The Company releases and forever discharges, and by this instrument releases and forever discharges, you from all debts, obligations, promises, covenants, agreements, endorsements, bonds, controversies, suits, actions, causes of action, judgments, damages, expenses, claims or demands of any kind whatsoever (whether known or unknown), in law or in equity, which it ever had, now has, or which may arise in the future regarding any matter arising on or before the execution of this Agreement regarding your employment with or your leaving the employment of the Company. 4 Exhibit 10.1 Anything herein to the contrary notwithstanding, neither party is releasing the other from its obligations under this Agreement, including your rights under any employee benefit plan and your rights to indemnification. 13. Pursuant to and as a part of your complete and total release and discharge of the Company, you agree, to the extent consistent with applicable law, not to initiate any legal action, charge or complaint ("Action") against the Company, in any forum whatsoever, in connection with the claims released herein. In addition, to the extent any such Action is pending or may be brought, you expressly waive any claim to any form of monetary or other damages, or any other form of recovery or relief (including, but not limited to, injunctive relief) in connection with any such Action, or in any Action brought against the Company by a third party. Further, to the extent consistent with the law, you agree not to aid, assist or participate in any Action filed by third parties against the Company. The Company agrees, to the extent consistent with applicable law, not to initiate any Action against you, in any forum whatsoever, in connection with any claims released herein. 14. You understand and agree that, unless required by lawful subpoena or court order, or as may be disclosed to the public generally through no fault of your own, neither you nor anyone acting on your behalf will publish, publicize, disseminate or communicate or cause to be published, publicized, disseminated or communicated, to any entity or person whatsoever, directly or indirectly, any of the Company's proprietary information, data or documents relating to its operations, including: any trade secrets; information, whether or not proprietary, not publicly known regarding the business or operations of the Company; information concerning any disputes giving rise to this Agreement; any claims giving rise to this Agreement; this Agreement; the terms of settlement; or the discussions and circumstances preceding settlement, except to your legal counsel and tax advisors after first informing them that they must maintain the confidentiality of such information or risk breaching this Agreement. Moreover, where required by subpoena or court order to publish, publicize, etc. such information, you agree to notify the Company in advance of same by providing written notice via overnight courier or hand delivery, to the Senior Vice President of Human Resources of PMC, at the address specified in paragraph 22. You also agree that if any confidential information is requested by lawful subpoena or court, governmental or regulatory order, if requested by the Company, you will undertake your best efforts to assist the Company in obtaining a confidentiality order from the court or governmental or regulatory agency requesting such information. The Company agrees that, unless required by lawful subpoena, court order or federal securities laws, neither it nor anyone acting on its behalf will publicize, disseminate or communicate or cause to be published, disseminated or communicated, to any entity or person whatsoever, directly or indirectly, confidential information relating to your personal affairs and finances, and any information concerning any disputes giving rise to this Agreement, any claims giving rise to this Agreement, this Agreement, the terms of settlement, or the discussions and circumstances preceding settlement except to the Company's legal advisors after first advising them that they must maintain the confidentiality of such information or risk breaching this Agreement. Moreover, where required by subpoena, court order or federal securities laws to disclose such information, the Company agrees to notify you in advance of same by providing written notice via overnight courier or hand delivery to your home address in Greenwich, Connecticut. 5 Exhibit 10.1 15a. You agree that for the period August 31, 2002 through September 30, 2004, you will not accept employment, act as a consultant, provide services to or otherwise be affiliated as a trustee, partner, principal, officer, or director with any other corporation, partnership, proprietorship, firm, or other business entity or otherwise engage in any business which in any material manner competes with the tobacco, food or beer businesses of the Company, as conducted during your employment ("competitor") unless you receive advance written permission from the Senior Vice President of Human Resources (hereafter "Executive") or his or her designee. Should any dispute arise over what is a "competitor," the Company's reasonable determination of what is a competitor shall govern. 15b. You also agree that for the period August 31, 2002 through September 30, 2004 you shall not solicit or encourage any incumbent employee of the Company to leave the employ of the Company or otherwise assist any third party in soliciting or encouraging any such employees to leave the employ of the Company. 15c. You acknowledge and agree that you will be reasonably able to earn a livelihood without violating the terms of this paragraph 15. Further, in the event you violate the terms of this paragraph 15 in any material respect, you agree that in addition to any other remedies that may be available to the Company, the Company will be entitled to terminate (i) the salary continuation payments pursuant to paragraph 1 and/or (ii) the consulting arrangement provided for in paragraph 2 herein, as the case may be, and that in such event you will not be entitled to any payment pursuant to paragraph 1 and/or 2 for any period subsequent to the date on which the Company elects to terminate the salary continuation payments or consulting arrangement described in paragraph 1 and/or 2. You also agree that the payment of the amounts and benefits and the vesting of equity awards set forth in paragraphs 1, 3(a) through 3b(3) and 7 through 11 are conditioned upon your meeting the terms of this Agreement, and that notwithstanding anything in this Agreement to the contrary, if you fail (or have failed) to comply with any of the material terms of this Agreement, in addition to any other damages or remedies, the Company will no longer be obligated to pay or provide to you any unpaid amounts or benefits to which you may be entitled under paragraphs 1, 3(a) through 3b(3) and 7 through 11 hereunder, provided however that the Company's obligations shall continue with respect only to accrued and vested pension benefits and retiree health and life insurance benefits and any rights to which you may be entitled under paragraph 17. 15d. The parties acknowledge that they intend this paragraph 15 to be enforced according to its terms. If, however, a court determines that any restrictions contained in this paragraph are overly broad, void or unenforceable for any reason, the parties hereby consent to have the court modify any such restrictions to make them reasonable and enforceable in all respects and come closest to the meaning intended by the parties. 16. You acknowledge that a breach of the confidentiality, noncompetition and nonsolicitation provisions contained in paragraphs 14 and 15 of this Agreement could cause immediate and irreparable harm to the Company and/or its affiliates or subsidiaries and their competitive position and that such provisions provide a material element of the Company's consideration for and inducement to enter into this Agreement. Accordingly, it is expressly agreed and understood that, should you breach such provisions, the Company, notwithstanding paragraph 6 Exhibit 10.1 21 herein, in addition to pursuing other remedies that it may have in law or equity, may obtain an injunction in a court of law to restrain you from further violating paragraphs 14 and 15. The parties further agree that in the event of a breach of paragraphs 14 and 15 hereof by you, the Company's damages will be incalculable with any degree of certainty and thus the Company will be entitled to liquidated damages in an amount equal to the payments made to you pursuant to paragraphs 1, 3(a) through 3b(3) and 7 through 11 hereof. 17. If at any time in the future you are made a party or witness, or are threatened to be made a party or witness, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding") by reason of the fact that you are or were an officer or employee of the Company (or any subsidiary or affiliate thereof) whether or not the basis for such proceedings is your alleged action in an official capacity while serving as a director, officer, member, employee or agent, the Company agrees that you shall be indemnified and held harmless by the Company to the fullest extent permitted or authorized by applicable law against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by you in connection therewith, and such indemnification will continue after you have ceased to be an officer, director, member, employee or agent of the Company and will inure to the benefit of your heirs, executors and administrators. The Company shall advance to you all reasonable costs and expenses incurred by you in connection with a Proceeding within 20 days after receipt by the Company of a written request for such advance as well as your written agreement to submit subsequent documentation of such costs. Such request shall include a written statement, executed personally, of your good faith belief that you met any standard of conduct that is a prerequisite to your entitlement to indemnification under applicable law and a written undertaking by you to repay the amount of such advance if it shall ultimately be determined that you did not meet such standard of conduct. 18. This Agreement will not be construed as an admission by the Company of any unlawful action. The Company expressly denies that it has acted unlawfully toward you and denies any liability to you other than as specifically provided herein. 19. This Agreement is not assignable, other than to a successor of the Company pursuant to a merger of the Company or a purchase of the Company of all or substantially all of the Company's assets. 20. You acknowledge that you have been informed that you have up to 21-days to consider this Agreement, and a period of seven days following execution to revoke your acceptance by providing written notice via overnight courier or hand delivery to the Senior Vice President of Human Resources of PMC at the address specified in paragraph 22. You further acknowledge that you have been advised to consult with an attorney regarding the terms and conditions of this Agreement and that you have in fact done so. 21. Except as otherwise provided in this paragraph, any disputes arising under or in connection with this Agreement shall be resolved by arbitration to be held in New York, New York in accordance with the rules and procedures for the Resolution of Employment Disputes of the American Arbitration Association and the laws of the State of New York then in effect. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Each party shall bear its own costs of the arbitration, including, without limitation, reasonable 7 Exhibit 10.1 attorneys' fees. Pending the resolution of any arbitration or court proceeding, the Company shall continue payment of all amounts due to you under this Agreement and all benefits to which you are entitled at the time the dispute arises. It is expressly agreed that arbitration, as provided herein, shall be the exclusive means for determination of all matters arising in connection with this Agreement and neither of the parties hereto shall institute any action or proceeding in any court of law or equity other than: (a) to request enforcement of the arbitrator's award hereunder; or (b) for the Company to bring an action or proceeding seeking injunctive relief from a Court of competent jurisdiction as set forth in paragraph 16. The foregoing sentence shall be a bona fide defense to any action or proceeding instituted contrary to this Agreement. 22. Any notices under this Agreement will be sent by overnight courier or hand delivery and, if to the Company, to the Senior Vice President of Human Resources, Philip Morris Companies Inc., 120 Park Avenue, New York, New York 10017-5592 or, if to you, to the address set forth on the first page hereof, with a copy to John J. Cannon III, Esq., Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022. 23. The terms of this Agreement, including all facts, circumstances, statements and documents relating thereto, shall not be admissible or submitted as evidence in any litigation in any forum for any purpose other than to secure enforcement of the terms and conditions of this Agreement. In this regard, the Company agrees in the event that it is found by a court of law with appropriate jurisdiction, after all appeals have been exhausted, to have been in default with respect to the terms and conditions set forth in this Agreement, it will be responsible for your reasonable attorney's fees incurred in enforcing this Agreement. 24. The validity and construction of this Agreement shall be governed by the laws of the State of New York, without regard to its conflicts of law principles. 25. This Agreement sets forth the entire agreement between you and the Company, and supersedes any and all prior oral and/or written agreements between you and the Company, with respect to the subject matter hereof. This Agreement may not be altered, amended or modified except by a further writing signed by you and the Company. 26. The failure of you or the Company to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver thereof nor deprive either party of the right thereafter to insist upon strict adherence to that term or any other term of the Agreement. 27. This Agreement may be pleaded as a full and complete defense to, and may be used as the basis for an injunction against, any action, suit or other proceeding that may be instituted, prosecuted or attempted in breach of this Agreement. 28. In the event that any provision or portion of this Agreement shall be determined by a court of competent jurisdiction to be invalid or unenforceable for any reason, the remaining provisions or portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. The parties agree that if a court of competent jurisdiction should determine that any provision herein is invalid or unenforceable the parties will mutually request that such court revise such provision so as to comply with applicable 8 Exhibit 10.1 law and that, the provision as revised shall come closest to the meaning intended by the parties and be enforced as rewritten and the remaining provisions of this Agreement shall be unaffected thereby. If at any time the release contained herein is deemed ineffective, the parties agree that the consideration, benefits or other monies provided herein shall be returned to PMC. If you agree to the terms set forth herein, please sign, date and return the enclosed counterpart of this Agreement in accordance with paragraph 20, under which your right to revoke your acceptance will expire seven days after the date of your signature. Provided you do not revoke your acceptance of this Agreement, it will become binding upon you and the Company when the Company executes this Agreement. If you have any questions regarding payments to be made pursuant to this Agreement, please address such questions to Timothy A. Sompolski, Senior Vice President, Human Resources, Philip Morris Companies Inc. at 917-663-3312. I certify and acknowledge that I have consulted an attorney, John J. Cannon III, Esq., about this Agreement prior to executing same, and have read this document, understand it and agree to be bound by its terms. Date: July 12, 2002 /s/ WILLIAM H. WEBB ------------- ---------------------------------------- William H. Webb WITNESS: /s/ JOHN J. CANNON III ------------------------------- John J. Cannon III, Esq. PHILIP MORRIS COMPANIES INC. Date: July 12, 2002 By: /s/ TIMOTHY A. SOMPOLSKI ------------- ------------------------------------ Timothy A. Sompolski 9 Exhibit 10.1 Exhibit A CONSULTING AGREEMENT AGREEMENT, effective the 1st day of October, 2004 between Philip Morris Companies Inc., a corporation organized and existing under the laws of the Commonwealth of Virginia (the "Company") and William H. Webb (the "Consultant"). WHEREAS, Consultant had been the Vice Chairman of the Company, is currently on salary continuation through September 30, 2004 and will retire effective October 1, 2004 (the "Retirement Date"); WHEREAS, the Company wishes to retain the services of Consultant as a consultant after the Retirement Date on the terms herein provided; WHEREAS, Consultant is willing to provide consulting services to the Company on the terms herein provided; NOW, THEREFORE, in consideration of the premises and of the mutual agreements contained herein, the parties agree as follows: 1) During the three-year term commencing October 1, 2004 and ending September 30, 2007 (the "Consulting Term"), Consultant shall make himself available at reasonable times to provide business consulting services to the officers, directors and other representatives of the Company as reasonably requested by the Chairman and Chief Executive Officer of the Company (hereafter, the "Executive"). It is understood that this paragraph will require Consultant to provide consultation regarding the Company's business which may require the Company to disclose to Consultant secret, proprietary and confidential information concerning the Company and its business affairs. It is further understood that this undertaking shall not, without Consultant's consent, require his presence outside of the New York City Metropolitan area. 2) For the consulting services provided pursuant to paragraph 1, the Company shall pay Consultant an annual retainer of $75,000, payable at the end of each year of the Consulting Term, and provide Consultant at Company expense the following: a) an office in the Greenwich, Connecticut area, together with secretarial service, office furniture, supplies and equipment, and a telephone credit card; b) maintain and support the security systems currently in existence at Consultant's residences in New York City and Greenwich, Connecticut; c) reasonable access to Company facilities, including the Dining Rooms, Fitness Center and the Company doctor; Exhibit 10.1 d) a Company car, garage expenses for a Company-provided car, and Company-paid driver or assistance in obtaining automobile or limousine transportation when Consultant reasonably requests it. Any cost incurred by the Company in this regard shall be limited to and applied against the retainer provided for in this paragraph 2. Any transportation costs in excess of the retainer provided for in this paragraph 2 shall be borne by Consultant. 3) Should Consultant repatriate to Australia during the term of this Consulting Agreement, the Company will no longer have the obligation to provide Consultant with an office and secretarial service as provided in paragraph 2(a). In lieu thereof, the Company shall provide you with an office and secretarial service at a Company facility in Australia. The Company's obligations under paragraphs 2(b), 2(c) and 2(d) shall continue as long as this agreement is in effect, provided that the Company's obligations under paragraph 2(b) will cease if Consultant ceases to own those residences. 4) This Agreement and the provisions of paragraphs l and 2 above may be renewed for an additional three-year term, at the election of Consultant with the concurrence of the Company. Consultant shall inform the Senior Vice President of Human Resources of the Company in writing sixty (60) days prior to the expiration of the Consulting Term whether he wishes to renew the Consulting Term and provide the consulting services described in paragraph 1 above for an additional three-year term. 5) The Company shall reimburse Consultant for reasonable business expenses incurred in providing consulting services pursuant to this Agreement. 6) In rendering services as a consultant hereunder, Consultant shall be an independent contractor. As an independent contractor, the Company will issue an IRS Form 1099 for payments made pursuant to this Agreement and Consultant will be responsible for paying all federal, state and local income and social security taxes arising out of any such payments. In addition, during the Consulting Term, Consultant will not accrue further service or compensation credit or benefits for any purpose under any of the Company's retirement, profit-sharing, disability, survivor's income, medical, dental or other plans of the Company, or any of its affiliated companies. 7) In exchange for the payments and other consideration described above, which Consultant acknowledges he would not otherwise be entitled to, Consultant releases and forever discharges, and by this instrument release and forever discharge, the Company, including without limitation, its shareholders, subsidiaries, divisions, affiliates, successors, assigns, representatives, attorneys, directors and employees, from all debts, obligations, promises, covenants, agreements, contracts, endorsements, bonds, controversies, suits, actions, causes of action, judgments, damages, expenses, claims or demands of any kind whatsoever (whether known or unknown) in law or in equity, which Consultant ever had, now have, or which may arise in the future regarding any matter arising on or before -2- Exhibit 10.1 the date this Agreement is executed by Consultant, regarding his employment with or your leaving the employment of the Company, any contract (express or implied), any claim for equitable relief or recovery of punitive, compensatory, or other damages or monies, commissions, attorneys' fees, any tort, and all claims for wrongful termination, or alleged violation of applicable wage payment or benefits law, or alleged discrimination based upon sex, religion, age, race, color, national origin, sexual orientation, handicap or disability, including but not limited to any claim, asserted or unasserted, which could arise under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the Americans With Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Family and Medical Leave Act of 1993, the Civil Rights Act of 1991, the Civil Rights Act of 1866, the Rehabilitation Act of 1973, Executive Order 11246, the New York State Human Rights Law, the New York City Human Rights Law, the Connecticut Law on Human Rights and Opportunities, as each of those statutes and orders have been and may be amended from time to time and any other federal, state or local equal employment opportunity laws, regulations or ordinances. The Company releases and forever discharges, and by this instrument releases and forever discharges, Consultant from all debts, obligations, promises, covenants, agreements, endorsements, bonds, controversies, suits, actions, causes of action, judgments, damages, expenses, claims or demands of any kind whatsoever (whether known or unknown), in law or in equity, which it ever had, now has, or which may arise in the future regarding any matter arising on or before the execution of this Agreement regarding Consultant's employment with or Consultant's leaving the employment of the Company. 8) Consultant agrees to maintain the confidentiality of all Company trade secrets and proprietary information. Consultant also acknowledges that, during the course of his employment with the Company, he has been entrusted with certain personnel, business, financial, technical and other information and material which are the property of the Company and which involve trade secrets or "confidential information" of the Company and the Company's employees. Consultant agrees that he will not communicate or disclose to any third party (and acknowledges that he has not communicated or disclosed), or use (or has used) for his own account, without first obtaining written consent of the Company, any of such confidential information or material, except in response to a lawfully issued subpoena, court order or other lawful request by any regulatory agency or government authority having supervisory authority over the business of the Company, unless and until such information or material becomes generally available to the public through no fault of Consultant. 9) Consultant agrees that if any confidential information is requested by subpoena or court, governmental or regulatory order, he will notify the Company as soon as practicable and if requested by the Company, he will undertake his best efforts to assist the Company in obtaining a confidentiality order from the court or governmental or regulatory agency requesting such information. -3- Exhibit 10.1 10) Consultant agrees that after his retirement and during the Consulting Term, he will not accept employment with or act as a consultant or provide services to a competitor in the tobacco, food or beer businesses of the Company unless he receives advance written permission from the Senior Vice President of Human Resources, Philip Morris Companies Inc. 11) Consultant acknowledges and agrees that after his retirement, he will reasonably be able to earn a livelihood without violating the terms of paragraph 10 and that employment or engagement with competitors or any activities in violation of paragraph 10 could result in immediate and irreparable harm to the Company and/or its affiliates or subsidiaries or their competitive position. Consultant further acknowledges and agrees that the Company is entitled to preliminary and permanent injunctive relief in order to prevent or stop such violations, in addition to damages, costs and other relief that may be appropriate. 12) This Agreement is not assignable, other than to a successor of the Company pursuant to a merger of the Company or a purchase of the Company of all or substantially all of the Company's assets. 13) In the event that any provision or portion of this Agreement will be determined to be invalid or unenforceable for any reason, the remaining provisions or portions of this Agreement will be unaffected thereby and will remain in full force and effect to the fullest extent permitted by the law. 14) This Agreement has been entered into in New York, New York, and will be governed by and construed, interpreted and enforced in accordance with the laws of the State of New York without giving effect to the principles thereof relating to the conflict of laws. Consultant and the Company irrevocably submit to the jurisdiction of the United States District Court for the Southern District of New York and of any New York state court sitting in New York City for the purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated thereby, and agree that all such suits, actions or proceedings brought by either Consultant or the Company will be brought in such courts. Consultant and the Company also irrevocably waive, to the fullest extent permitted by applicable law, any objection which he or it may now have or hereafter may have to the venue of such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. -4- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first mentioned above. PHILIP MORRIS COMPANIES INC. By: ------------------------- --------------------- Timothy A. Sompolski William H. Webb -5- EX-10 4 ex10-2.txt EXHIBIT 10.2 Exhibit 10.2 Agreement with Michael E. Szymanczyk May 15, 2002 Michael E. Szymanczyk Chairman Philip Morris Incorporated 120 Park Avenue New York, NY 10017 Dear Mike: This letter agreement sets forth the terms of certain enhanced retirement arrangements that will be provided to you by Philip Morris Incorporated (the "Company") if you satisfy the applicable terms and conditions set forth in this letter. 1. Pension Benefits. a. In General. If you continue in employment with the Company, the parent corporation of the Company, or any subsidiary of such parent (collectively, the "Affiliated Group") until you attain the age of 55 on January 3, 2004, or if, prior to such date, you suffer a Termination Event (as hereinafter defined), then the Company will at any subsequent retirement date or, in the case of a Termination Event, at your termination of employment (a) credit you with an additional five years of service for all purposes in calculating your benefits under the defined benefit portion of the Philip Morris Benefit Equalization Plan (the "DB BEP") and (b) calculate your benefits under the DB BEP as of your retirement or termination date without any actuarial reduction for early commencement. To the extent that you continue in employment with the Affiliated Group after attaining age 55, you will also be credited for all purposes under the DB BEP with two years of service, rather than one, for each year of service that would otherwise have been credited for continued employment after attaining age 55 and before attaining age 60. The enhanced benefits payable under this paragraph (that is, those benefits exceeding those provided for under the regular terms of the DB BEP) will be paid pursuant to the Supplemental Management Employees' Retirement Plan of Philip Morris Companies Inc., in which the Company is a Participating Company, and will be subject to the provisions of your Employee Grantor Trust Enrollment Agreement dated January 15, 1996, or any successor agreement. b. Termination Event. For purposes of this letter agreement, "Termination Event" means an involuntary termination of your employment with the Affiliated Group without "Cause" (as defined in the Employment Agreement dated November 1, 1997, between Philip Morris Companies Inc. and you, or in the most recent of any successor employment agreements between you and any member of the Affiliated Group that defines "Cause" (the relevant agreement being referred to herein as the "Employment Agreement")), whether or not such termination occurs during the "Employment Period" as defined in the Employment Agreement. Thus, by way of illustration, if your employment with the Affiliated Group were terminated without Cause prior to a Change of Control (as defined in Exhibit 10.2 Michael E. Szymanczyk May 15, 2002 Page 2 the Employment Agreement) such occurrence would constitute a Termination Event hereunder notwithstanding that you might not be entitled to severance pursuant to the Employment Agreement. c. Enhancement Upon Death or Disability. If during your continued employment with the Affiliated Group you die or become disabled prior to attaining age 55, you or your spouse would be entitled to receive a Philip Morris pension benefit enhancement based on adding five years to your actual service as of your date of death or disability. During such continued employment: (1) if you become disabled prior to age 55, you will be entitled to receive an immediate Philip Morris and Kraft Foods 100% Joint and Survivor pension benefit without reduction for early commencement; (2) if you die prior to age 55, your spouse will be entitled to receive commencing as of the date you would have attained age 55 the survivor portion of a Philip Morris and Kraft Foods 100% Joint and Survivor pension benefit without reduction for early commencement; and (3) should you die on or after attaining age 55 and prior to retirement, your spouse would be entitled to receive the survivor portion of an immediate Philip Morris and Kraft Foods 100% Joint and Survivor pension benefit without reduction for early commencement. The enhanced benefits would be payable pursuant to the Supplemental Management Employees Retirement Plan of Philip Morris Companies Inc., and offset by (i) benefits payable from the Philip Morris Salaried Employees' Retirement Plan, the Philip Morris Benefit Equalization Plan, the Kraft Foods, Inc. Retirement Plan, and the Kraft Foods, Inc. Supplemental Benefits Plan I and II and (ii) the amounts determined under your Employee Grantor Trust Enrollment Agreement referred to in paragraph 1.a above. 2. Post-retirement Health Benefits. If you continue in employment with the Affiliated Group until you attain the age of 57 on January 3, 2006, or if you suffer a Termination Event prior to such date, the Company will make arrangements (which may include making payments on your behalf on a basis that holds you harmless for taxes on such payments) ensuring that the cost to you and your eligible dependents of any post-retirement health benefits provided by the Company are no greater than the contributions required of Company employees who retire with 25 years of service. 3. Restricted Stock. If you continue in employment with the Affiliated Group until you attain the age of 57 on January 3, 2006 but thereafter retire before June 23, 2008, the Company will recommend that the Compensation Committee of the Board of Directors of Philip Morris Companies Inc. (the "Compensation Committee") exercise its discretion to vest your 61,000 shares of restricted common stock of Philip Morris Companies Inc. that would otherwise vest if you continued employment until June 23, 2008. The decision whether to follow the Company's recommendation is within the discretion of that Committee; however, to the extent that the Compensation Committee does not follow such recommendation, the Company shall promptly pay you, in exchange for such restricted shares, an amount in cash equal to the product of the then fair market value of a share of common stock of Philip Morris Companies Inc. multiplied by the number of such 61,000 restricted shares that the Compensation Committee has not elected to vest. 4. Termination Before Retirement Eligibility. If you should suffer a Termination Event before attaining age 55, (a) you will be treated for purposes of Annual Incentive Awards, Long-Term Incentive Awards, and stock awards other than options in the same manner (generally, under current practice, the receipt of a prorated award) as executives then retiring after attaining age 55; and (b) you Exhibit 10.2 Michael E. Szymanczyk May 15, 2002 Page 3 will be treated, for purposes of any outstanding stock options awarded to you by the Company or Philip Morris Companies Inc., as having terminated employment by "Retirement." 5. Agreement Contingent on Non-competition. Subject to the last sentence of this paragraph 5, all of the enhanced retirement and termination arrangements described in paragraphs 1 through 4 above are contingent on your agreement that you will not while employed by any member of the Affiliated Group and for a period of 24 months thereafter (a) acquire an ownership interest exceeding five percent in or (b) become employed by, enter into a consulting arrangement with, or otherwise perform services for any company or business that is in competition with any material business of any member of the Affiliated Group to which you devoted substantive attention during your employment with the Affiliated Group, except with the written permission of the Chief Executive Officer of Philip Morris Companies Inc. You acknowledge that the enhanced arrangements described in this agreement are sufficient consideration for this non-competition agreement and that, in light of the positions you hold and have held as an executive of members of the Affiliated Group, the constraint imposed on your rending services to others is a reasonable one. You further agree that, if reasonably requested to do so by the Company and as a condition for receiving the benefits of paragraphs 1 through 4 of this agreement, you will upon your termination of employment with the Affiliated Group enter into a non-competition agreement that further defines the companies or businesses to which you may not provide services during the 24-month period referred to in this paragraph and that may provide for enforcement of your agreement not to compete by requiring the return of any such benefits received, by injunctive relief, or by other means. Notwithstanding the foregoing, the post-employment restrictions contained in this paragraph 5 shall not apply following the occurrence of the "Effective Date", as defined in the Employment Agreement. 6. Vacation. Effective upon your execution of this letter agreement, you will become entitled to five weeks of paid vacation per calendar year during each year of your continued employment with the Affiliated Group. 7. Miscellaneous. a. Letter Agreement Interpretation and Amendment. This letter agreement is governed by the laws of New York, without regard to any jurisdiction's choice of law principles. The invalidity or unenforceability of any provision or any portion of a provision of this letter agreement shall not affect the validity or enforceability of any other provision or any other portion of a provision of this letter agreement. This letter agreement may not be amended or otherwise modified other than by a written agreement executed by the parties to this letter agreement or their respective successors or legal representatives. b. Other Agreements. This agreement provides benefits and reflects agreements that supplement any prior written agreements between you and members of the Affiliated Group regarding the subject matter hereof and shall be construed accordingly. Nothing herein is intended to affect any rights or claims you may have to severance and similar benefits upon the termination of your employment with the Affiliated Group, except that the benefits payable under this letter agreement upon any Termination Event that occurs prior to the occurrence of a Change of Control as defined in the Employment Agreement shall be in lieu of any other severance or similar benefits, or to Exhibit 10.2 Michael E. Szymanczyk May 15, 2002 Page 4 suggest that the parties intend this letter agreement to embody all their respective obligations in connection with any such termination. c. Dispute Resolution. Any disputes arising under or in connection with this letter agreement will be resolved by binding arbitration to be held in New York City in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Each party will pay its own costs of arbitration or litigation, including, without limitation, its own attorneys' fees. Notwithstanding the preceding sentence, reasonable costs of arbitration or litigation relating to a particular issue, including, without limitation, your attorneys' fees, will be borne by the Company if you prevail on that issue in a final determination by a tribunal of competent jurisdiction, including binding arbitration under this paragraph. d. Successors and Assignment. This letter agreement will be binding on and inure to the benefit of you, the Company, and your and the Company's respective heirs, executors, successors, and permitted assigns. If for any reason the Company is unable to make payments or provide benefits that become due under this letter agreement, Philip Morris Companies Inc. will promptly make such payments or provide such benefits and, to the extent it does so, shall become subrogated to your rights against the Company. This letter agreement may not be assigned in whole or in part by either party without the written consent of the other, except that the Company may assign this letter agreement, without your consent, to any business entity into which or with which it may merge or to which it may transfer substantially all of its assets, provided that the assignee assumes the liabilities, obligations, and duties of the Company contained in this letter agreement either contractually or as a matter of law. If the terms of this letter agreement are acceptable to you, please sign and date this letter as indicated below and return it to me. Very truly yours, /s/ KENNETH MURPHY -------------------------------------- Kenneth Murphy Senior Vice President, Human Resources Philip Morris Incorporated Exhibit 10.2 Michael E. Szymanczyk May 15, 2002 Page 5 Accepted and agreed this 15th day of May, 2002 /s/ MICHAEL E. SZYMANCZYK - --------------------------------- Michael E. Szymanczyk Accepted and agreed this 15th day of May, 2002 /s/ TIMOTHY A. SOMPOLSKI - --------------------------------- Timothy A. Sompolski Senior Vice President, Human Resources and Administration Philip Morris Companies Inc. EX-12 5 ex12.txt EXHIBIT 12 Exhibit 12 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges (in millions of dollars) ----------
Six Months Ended Three Months Ended June 30, 2002 June 30, 2002 ---------------- ------------------ Earnings before income taxes and minority interest $8,196 $4,318 Add (deduct): Equity in net earnings of less than 50% owned affiliates (105) (49) Dividends from less than 50% owned affiliates 27 5 Fixed charges 824 424 Interest capitalized, net of amortization 5 2 ------ ------ Earnings available for fixed charges $8,947 $4,700 ====== ====== Fixed charges: Interest incurred: Consumer products $ 686 $ 355 Financial services 49 25 ------ ------ 735 380 Portion of rent expense deemed to represent interest factor 89 44 ------ ------ Fixed charges $ 824 $ 424 ====== ====== Ratio of earnings to fixed charges 10.9 11.1 ====== ======
Exhibit 12 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges (in millions of dollars) ----------
For the Years Ended December 31, ----------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- Earnings before income taxes, minority interest and cumulative effect of accounting change $14,284 $14,087 $12,821 $ 9,215 $10,698 Add (deduct): Equity in net earnings of less than 50% owned affiliates (228) (228) (197) (195) (207) Dividends from less than 50% owned affiliates 29 70 56 70 138 Fixed charges 1,945 1,348 1,363 1,386 1,438 Interest capitalized, net of amortization 10 7 (2) (5) (16) ------- ------- ------- ------- ------- Earnings available for fixed charges $16,040 $15,284 $14,041 $10,471 $12,051 ======= ======= ======= ======= ======= Fixed charges: Interest incurred: Consumer products $ 1,665 $ 1,087 $ 1,118 $ 1,166 $ 1,224 Financial services 102 114 89 77 67 ------- ------- ------- ------- ------- 1,767 1,201 1,207 1,243 1,291 Portion of rent expense deemed to represent interest factor 178 147 156 143 147 ------- ------- ------- ------- ------- Fixed charges $ 1,945 $ 1,348 $ 1,363 $ 1,386 $ 1,438 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges 8.2 11.3 10.3 7.6 8.4 ======= ======= ======= ======= =======
EX-99 6 ex99-1.txt EXHIBIT 99-1 Exhibit 99.1 CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS As described in Note 8. Contingencies of this Report on Form 10-Q, there are legal proceedings covering a wide range of matters pending in various U.S. and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc. and PMI, and their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost recovery cases brought by governmental and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that the use of the terms "Lights" and "Ultra Lights" constitutes deceptive and unfair trade practices, suits by foreign governments seeking to recover damages resulting from the allegedly illegal importation of cigarettes into various jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking and various antitrust suits. Governmental plaintiffs in the health care cost recovery actions include the federal government, various cities and counties in the United States and certain foreign governmental entities. Non-governmental plaintiffs in these cases include union health and welfare trust funds ("unions"), Native American tribes, insurers and self-insurers, taxpayers and others. The following lists certain of the pending claims included in these categories and certain other pending claims. Certain developments in these cases since May 10, 2002 are also described. SMOKING AND HEALTH LITIGATION The following lists the consolidated individual smoking and health cases as well as smoking and health class actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates, including PMI, as of August 1, 2002, and describes certain developments in these cases since May 10, 2002. Consolidated Individual Smoking and Health Cases In Re Tobacco Litigation (Individual Personal Injury cases), Circuit Court, Ohio County, West Virginia, consolidated January 11, 2000. In West Virginia, all smoking and health cases alleging personal injury have been transferred to the State's Mass Litigation Panel. The transferred cases include individual cases and putative class actions. All pending individual cases as well as cases filed in or transferred to the court by September 8, 2000 are to be included in a single consolidated trial. Approximately 1,250 individual cases are pending. The trial court's order provides for the trial to be conducted in two phases. The issues to be tried in phase one are "general liability issues common to all defendants including, if appropriate, defective product theory, negligence theory, warranty theory; and any other theories supported by pretrial development" as well as entitlement to punitive damages and a punitive damages multiplier. Pursuant to the court's order, the individual claims of the plaintiffs whose cases have been consolidated will be tried on an individual basis or "in reasonably sized trial groups" during the second phase of the trial. Trial is scheduled to begin in June 2003. Flight Attendant Litigation The settlement agreement entered into in the case of Broin, et al. v. Philip Morris Companies Inc., et al., permitted members of the purported class to bring individual suits as to their alleged injuries. As of August 1, 2002, approximately 2,800 of these suits were pending in the Circuit Court of Dade County, Florida against PM Inc. and three other cigarette manufacturers. In October 2000, the court held that the flight attendants will not be required to prove the substantive liability elements of their claims for negligence, strict liability and breach of implied warranty in order to recover damages, if any, other than establishing that the plaintiffs' alleged injuries 1 Exhibit 99.1 were caused by their exposure to environmental tobacco smoke and, if so, the amount of damages to be awarded. In October 2001, the appellate court dismissed defendants' appeal of the trial court's ruling. Defendants have appealed to the Florida Supreme Court which has rejected defendants' appeal. To date, an estimated 14 such cases are scheduled for trial through the end of 2003. Domestic Class Actions Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 5, 1994. See Note 8. Contingencies for a discussion of this case. Norton, et al. v. RJR Nabisco Holdings Corporation, et al., Superior Court, Madison County, Indiana, filed May 3, 1996. In July 2002, the court granted plaintiffs' motion to voluntarily dismiss the case. Scott, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed May 24, 1996. The court granted plaintiffs' motion for class certification on behalf of Louisiana cigarette smokers seeking the creation of funds to pay the costs of monitoring the medical conditions of members of the purported class and providing them with smoking cessation programs. In May 2001, the trial court issued a trial plan that calls for adjudication of defendants' liability to the entire class based solely on evidence of the two class representatives and defendants appealed to the intermediate appellate court and the Louisiana Supreme Court seeking to vacate the trial plan. In June 2001, the appeals were denied. Jury selection in the case began in June 2001. Defendants filed writs challenging the trial court's jury selection procedures with the intermediate appellate court and the Louisiana Supreme Court, which were granted in part. In December 2001, defendants again filed writs with the intermediate appellate court asserting that there were errors in the jury selection. The writs were granted in part and jury selection was reopened. In March 2002, the Louisiana Supreme Court granted defendants' application for a supervisory writ and struck four jurors from the panel due to possible bias. Jury selection is continuing. In Re: Tobacco Litigation (Medical Monitoring cases) (formerly McCune, et al. v. The American Tobacco Company, et al.), Circuit Court, Kanawha County, West Virginia, filed January 31, 1997. In November 2001, the jury returned a verdict in favor of all defendants. In January 2002, the court denied plaintiffs' motion for a new trial, and plaintiffs have appealed. Muncie (formerly Ingle and formerly Woods), et al. v. Philip Morris Incorporated, et al., Circuit Court, McDowell County, West Virginia, filed February 4, 1997. Anderson, et al. v. The American Tobacco Company, Inc., et al., United States District Court, Middle District, Tennessee, filed May 23, 1997. Mahoney (formerly Fitz), et al. v. R.J. Reynolds Tobacco Company, et al., United States District Court, Southern District, Iowa, filed June 20, 1997. In October 2001, the court denied plaintiffs' motion for class certification. In November 2001, the United States Court of Appeals for the Eighth Circuit denied plaintiffs' motion for leave to appeal. Badillo, et al. v. The American Tobacco Company, et al., United States District Court, Nevada, filed October 8,1997. In July 2001, the court denied plaintiffs' motion for class certification, and plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit. In April 2002, the Ninth Circuit denied plaintiffs' petition for leave to appeal. In May 2002, the trial court dismissed the case. Young, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed November 12, 1997. Jackson, et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, Utah, filed February 13, 1998. 2 Exhibit 99.1 Parsons, et al. v. A C & S, Inc., et al., Circuit Court, Kanawha County, West Virginia, filed February 27, 1998. Christensen, et al. v. Philip Morris Companies Inc., et al., United States District Court, Nevada, filed April 3, 1998. In July 2001, the court denied plaintiffs' motion for class certification, and plaintiffs have appealed to the United States Court of Appeals for the Ninth Circuit. In April 2002, the Ninth Circuit denied plaintiffs' petition for leave to appeal. Cleary, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed June 3, 1998. Cypret (formerly Jones), et al. v. The American Tobacco Company, et al., Circuit Court, Jackson County, Missouri, filed December 22, 1998. Simon, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed April 9, 1999. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases then pending in the federal courts in New York and Pennsylvania. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) In November 2000, the court denied plaintiffs' motion for class certification, but indicated its intent to certify a class in Simon II. Julian, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Montgomery County, Alabama, filed April 14, 1999. Decie, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed April 21, 2000. In September 2000, a putative class action was filed which purports to consolidate punitive damage claims in this case with certain other cases then pending in the federal courts in New York and Pennsylvania. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) Ebert, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed August 9, 2000 (not yet served). In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases then pending in federal courts in New York and Pennsylvania. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) Vandermeulen, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Wayne County, Michigan, filed September 18, 2000. Sims, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed May 23, 2001. Johnson, et al. v. Newport Lorillard, et al., United States District Court, Southern District, New York, filed October 31, 2001. In May 2002, the court dismissed the case. Lowe, et al. v. Philip Morris Incorporated, et al., Circuit Court, Multomah, Oregon, filed November 19, 2001. Trivisonno, et al. v. Philip Morris Incorporated, et al., United States District Court, Northern District, Ohio, filed January 14, 2002. In July 2002, the court granted defendants' motions to dismiss the case. International Class Actions Caputo (formerly LeTourneau) v. Imperial Tobacco Limited, et al., Ontario Court of Justice, Toronto, Canada, filed January 13, 1995. The Smoker Health Defense Association (ADESF) v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., 3 Exhibit 99.1 Nineteenth Lower Civil Court of the Central Courts of the Judiciary District of Sao Paulo, Brazil, filed July 25, 1995. Anacont-Associacao Nacional de Assistencia ao Consumidor e Trebalhador v. Souza Cruz S.A., et al., State Bankruptcy Court, Rio de Janiero, Brazil, filed March 10, 1998. During 2000, the court dismissed the action, and plaintiff appealed. The appellate court rejected plaintiff's appeal, thereby concluding the case. Fortin, et al. v. Imperial Tobacco Ltd., et al., Quebec Superior Court, Canada, filed on or about September 11, 1998. Conseil Quebecois sur le Tabac v. RJR-Macdonald Inc., et al., Quebec Superior Court, Canada, filed November 20, 1998. Yabin Galidi, et al. v. Dubek Ltd., et al., Tel Aviv-Yaffo Region Court, Israel, filed July 12, 1999. In March 2002, the case was dismissed. Ragoonanan, et al. v. Imperial Tobacco Limited, et al., Superior Court of Justice, Ontario, Canada, filed January 11, 2000. Asociacion Espanola de Laringectomizados y Multiados de la voz v. Altadis S.A., et al., Court of First Instance, Barcelona, Spain, filed January 3, 2001. In April 2002, the court dismissed the case, and plaintiffs have appealed. Asociacion Vallisoletana de Laringectomizados v. Altadis S.A., et al., Court of First Instance, Valadolid, Spain, filed January 4, 2001. In February 2002, the case was dismissed and plaintiff has appealed. Asociacion Viscaina de Laringectomizados v. Altadis S.A., et al., Court of First Instance, Bilbao, Spain, filed January 5, 2001. Asociacion de Laringectomizados de Leon v. Altadis S.A., et al., Court of First Instance, Leon, Spain, filed January 3, 2001. HEALTH CARE COST RECOVERY LITIGATION The following lists the health care cost recovery actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates as of August 1, 2002, and describes certain developments in these cases since May 10, 2002. As discussed in Note 8. Contingencies in 1998 PM Inc. and certain other United States tobacco product manufacturers entered into a Master Settlement Agreement (the "MSA") settling the health care cost recovery claims of 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas. Settlement agreements settling similar claims had previously been entered into with the states of Mississippi, Florida, Texas and Minnesota. The Company believes that the claims in the city/county, taxpayer and certain of the other health care cost recovery actions listed below are released in whole or in part by the MSA or that recovery in any such actions should be subject to the offset provisions of the MSA. City/County Cases County of Cook v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed April 18, 1997. In September 1999, the judge granted in part and denied in part defendants' motion to dismiss the complaint. In August 2001, the trial court granted defendants' motion for judgment on the pleadings and dismissed the case in its entirety, and plaintiffs have appealed. City of St. Louis, et al. v. American Tobacco, et al., Circuit Court, City of St. Louis, Missouri, filed November 4 Exhibit 99.1 23, 1998. In November 2001, the court granted in part and denied in part defendants' motion to dismiss and dismissed three of plaintiffs' 11 claims. County of St. Louis v. American Tobacco, et al., Circuit Court, City of St. Louis, Missouri, filed December 3, 1998. The case is currently stayed. County of McHenry, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed July 13, 2000. The case has been stayed pending the outcome of the appeal in County of Cook v. Philip Morris Incorporated, et al., discussed above. Department of Justice Case The United States of America v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed September 22, 1999. See Note 8. Contingencies, for a discussion of this case. International Cases The Republic of Panama v. The American Tobacco Company, Inc., United States District Court, District of Columbia, filed September 11, 1998. In July 2000, the United States Court of Appeals for the Fifth Circuit vacated the ruling by the United States District Court for the Eastern District of Louisiana that granted plaintiff's motion to remand the case to the Civil District Court, Orleans Parish, Louisiana. In November 2000, the case was transferred to the Multidistrict Litigation Proceeding pending before the United States District Court for the District of Columbia (see In re: Tobacco/Government Health Care Cost Litigation (MDL No. 1279) (the "MDL Proceeding," discussed below)). Plaintiff's motion to remand this case is pending before the court hearing the MDL Proceeding. Kupat Holim Clalit v. Philip Morris Incorporated, et al., Jerusalem District Court, Israel, filed September 28, 1998. The Republic of Bolivia v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed January 20, 1999. In February 1999, this case was removed to federal court by defendants and subsequently transferred on the court's own motion to the federal district court for the District of Columbia in March 1999. It is currently pending in the MDL Proceeding discussed below. The Republic of Venezuela v. Philip Morris Companies Inc., et al., Eleventh Judicial Circuit, Dade County, Florida, filed January 27, 1999. In November 2001, the court dismissed the case, and plaintiff has appealed. The Caisse Primaire d'Assurance Maladie of Saint-Nazaires v. SEITA, et al., Civil Court of Saint-Nazaires, France, filed June 1999. In re: Tobacco/Governmental Health Care Costs Litigation (MDL No. 1279), United States District Court, District of Columbia, consolidated June 1999. In June 1999, the United States Judicial Panel on Multidistrict Litigation transferred foreign government health care cost recovery actions brought by Nicaragua, Venezuela, and Thailand to the District of Columbia for coordinated pretrial proceedings with two such actions brought by Bolivia and Guatemala already pending in that court. Subsequently, the resulting proceeding has also included filed cases brought by the following foreign governments: Ukraine; the Brazilian States of Espirito Santo, Goias, Mato Grosso do Sul, Para, Parana, Pernambuco, Piaui, Rondonia, Sao Paulo and Tocantins; Panama; the Province of Ontario, Canada; Ecuador; the Russian Federation; Honduras; Tajikistan; Belize; the Kyrgyz Republic and 11 Brazilian cities. The cases brought by Thailand and the Kyrgyz Republic were voluntarily dismissed. The complaints filed by Guatemala, Nicaragua, Ukraine and the Province of Ontario, have been dismissed, and the dismissals are now final. The district court has remanded the cases brought by Belize, Ecuador, Honduras, the Russian Federation, Tajikistan, Venezuela, the 10 Brazilian states listed and the 11 Brazilian cities to state courts. Subsequent to remand, the Ecuador case was voluntarily dismissed. In 5 Exhibit 99.1 November 2001, the Venezuela and Espirito Santo actions were dismissed, and Venezuela has appealed. The State of Rio de Janeiro of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., District Court, Angelina County, Texas, filed July 12, 1999. The State of Goias of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed October 18, 1999. The State of Sao Paulo of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., Civil District Court, Orleans Parish, Louisiana, filed February 9, 2000. The State of Mato Grosso do Sul, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed July 19, 2000. The Russian Federation v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed on August 25, 2000. The Republic of Honduras v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed October 5, 2000. The State of Tocantins, Brazil v. The Brooke Group Ltd. Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed October 24, 2000. The State of Piaui, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed December 13, 2000. The Republic of Tajikistan v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed January 22, 2001. Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001. The Republic of Belize v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed April 5, 2001. City of Belford Roxo, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. City of Belo Horizonte, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. City of Caripicuiba, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. City of Duque de Caxias, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. City of Joao Pessoa, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. City of Jundiai, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade 6 Exhibit 99.1 County, Florida, filed May 8, 2001. City of Mage, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. City of Nilopolis-RJ, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. City of Nova Iguacu, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. City of Rio de Janiero, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. City of Sao Bernardo de Campo, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. State of Para, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. State of Parana, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. State of Rondonia, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001. State of Pernambuco, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed December 28, 2001. Junta de Andalucia v. Philip Morris Spain, et al., Court of First Instance, Madrid, Spain, filed February 21, 2002. Union Cases Eastern States Health and Welfare Fund, et al. v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed July 28, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiffs have appealed the dismissal. Operating Engineers Local 12 Health and Welfare Trust Fund, et al. v. American Tobacco, Inc., et al., Superior Court, San Diego County, California, filed September 17, 1997. In March 2000, the court ruled that plaintiffs are not permitted to use California's unfair business practices statute to seek monetary damages for their claims. In April 2000, the plaintiffs voluntarily dismissed the remaining claims with prejudice and appealed certain trial court rulings to the state court of appeals. In October 2001, the California Court of Appeals affirmed the trial court's ruling. Plaintiffs appealed to the California Supreme Court, which has granted review but deferred further action pending disposition of related issues in another case. Puerto Rican ILGWU Health & Welfare Fund, et al. v. Philip Morris Incorporated, et al., Supreme Court, County of New York, New York, filed September 17, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiffs have appealed the dismissal. IBEW Local 25 Health and Benefit Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. 7 Exhibit 99.1 IBEW Local 363 Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 138, 138A and 138B International Union of Operating Engineers Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 840, International Brotherhood of Teamsters Health and Insurance Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Long Island Regional Council of Carpenters Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Day Care Council - Local 205 D.C. 1707 Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 1199 Home Care Industry Benefit Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 1199 National Benefit Fund for Health and Human Services Employees v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Bergeron, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed September 29, 1999. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases then pending in federal courts in New York and Pennsylvania (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) In July 2001, the court stayed this case pending resolution of the appeal in Blue Cross and Blue Shield of New Jersey, Inc. et al. v. Philip Morris Incorporated, et al., discussed below. In June 2002, the court denied plaintiffs' motion for class certification and defendants' motion to dismiss, and also severed this case from Simon II. In August 2002, the court entered the parties' stipulation of dismissal with prejudice. Native American Cases Sisseton-Wahpeton Sioux Tribe v. Philip Morris Incorporated, et al., Tribal Court of the Sisseton-Wahpeton Sioux Tribe, filed May 8, 1998. On December 1, 1999, the appellate court granted the parties' petitions for interlocutory appeal from the trial court's order that granted in part and denied in part defendants' motion to dismiss the complaint. The trial and appellate courts subsequently stayed proceedings in this case until there was a ruling on defendants' dismissal motion in Acoma Pueblo, et al. v. American Tobacco Company Co., et al. (discussed below). In June 2002, the trial court stayed its proceedings pending a decision by the appellate court. Acoma Pueblo, et al. v. American Tobacco Co., et al., United States District Court, New Mexico, filed June 16, 1999. In July 2001, the court granted defendants' motion to dismiss the case without prejudice. In September 2001, plaintiff moved for reconsideration of the court's order, which was denied in November 2001. Navajo Nation v. Philip Morris Incorporated, et al., District Court, Window Rock, Arizona, filed August 11, 1999. In January 2002, the court granted in part defendants' motion to dismiss the case and dismissed all of plaintiff's claims, except one, and plaintiff has moved for reconsideration. 8 Exhibit 99.1 The Alabama Coushatta Tribe of Texas v. American Tobacco Co., et al., United States District Court, Eastern District, Texas, filed August 30, 2000. In July 2002, the United States Court of Appeals for the Fifth Circuit affirmed the trial court's August-2001 ruling that dismisses the case, and plaintiff has petitioned for rehearing. Insurer and Self-Insurer Cases Group Health Plan, et al. v. Philip Morris Incorporated, et al., United States District Court, Minnesota, filed March 11, 1998. In January 2002, the court granted defendants' motion for summary judgment dismissing the case, and plaintiffs have appealed. In April 2002, plaintiff-appellants moved to certify certain questions of law to the Minnesota Supreme Court. Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed April 29, 1998. In September 2000, the court severed the claims of one plaintiff, Empire Blue Cross and Blue Shield ("Empire"), from those of the other plaintiffs. Trial of Empire's claims commenced March 2001, and in June 2001, the jury returned a verdict in favor of Empire on two of its claims and awarded Empire up to approximately $17.8 million in compensatory damages, including $6.8 million against PM Inc., and no punitive damages. In July 2001, the court stayed the remaining Blue Cross plans' cases pending the outcome of Empire's appeal, and denied plaintiff's motion to treble the damage award. In October 2001, the court denied defendants' post-trial motions challenging the verdict, and in November 2001, entered judgment. In February 2002, the court awarded plaintiff approximately $38 million for attorneys' fees. PM Inc. has appealed. Betriebskrankenkasse Aktiv, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed September 28, 2000. In February 2002, upon the stipulation of the parties, the case was dismissed without prejudice subject to plaintiffs being able to refile the case in the event the Blue Cross and Blue Shield case discussed above is ultimately resolved in favor of plaintiffs in that case. Taxpayer Cases Temple, et al. v. The State of Tennessee, et al., United States District Court, Middle District, Tennessee, filed September 11, 2000. Plaintiffs' complaint seeks class certification of those individuals who are Medicaid/TennCare recipients who have allegedly suffered from smoking-related injuries. Plaintiffs claim that the MSA funds belong to individuals under Tennessee's "made wide" doctrine and they further seek a declaration that the MSA is unconstitutional. Plaintiffs' motion for a preliminary injunction seeking to enjoin the State of Tennessee from receiving the MSA payments and asking that the MSA proceeds be paid into the court was denied in March 2002. Also in March 2002, the court granted the defendants' motion to stay the action pending resolution of an appeal before the United States Court of Appeals for the Sixth Circuit addressing an issue similar to one raised by the defendants in this case. Defendants' motion to dismiss for failure to state a claim is pending. Other Cases Perry, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, Tennessee, filed September 30, 1996. In April 2001, the court granted defendants' motion to dismiss the case, and plaintiffs have appealed. Mason, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed December 23, 1997. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases then pending in federal courts in New York and Pennsylvania. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) In July 2002, the court denied plaintiffs' motion for class certification, and granted defendants' motion to dismiss the case. Plaintiffs have appealed. 9 Exhibit 99.1 A.O. Fox Memorial Hospital, et al. v. The American Tobacco Company, et al., Supreme Court, Nassau County, New York, filed March 30, 2000. In December 2001, the court dismissed the case for failure to state a claim. Plaintiffs have appealed. CERTAIN OTHER TOBACCO-RELATED ACTIONS The following lists certain other tobacco-related litigation pending against the Company and/or various subsidiaries and others as of August 1, 2002, and describes certain developments since May 10, 2002. Lights/Ultra Lights Cases Gesser (formerly Cummis), et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Middlesex County, New Jersey, filed July 9, 1998. In May 2002, plaintiffs informed the court that they are withdrawing their class action claims. Aspinall, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Suffolk County, Massachusetts, filed November 24, 1998. In October 2001, the court granted plaintiffs' motion for class certification. McClure, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Circuit Court, Davidson County, Tennessee, filed January 19, 1999. Marrone, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Court of Common Pleas, Medina County, Ohio, filed November 8, 1999. Miles, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Madison County, Illinois, filed February 10, 2000. Plaintiffs' motion for class certification was granted in February 2001. Trial is scheduled for January 2003. Craft (formerly Ratliff), et al. v. Philip Morris Companies Inc., Circuit Court, City of St. Louis, Missouri, filed February 15, 2000. Hines, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida, filed February 23, 2001. In February 2002, the court granted plaintiffs' motion for class certification. Philipps, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, , Ohio, filed May 1, 2001. Moore, et al. v. Philip Morris Incorporated, et al., United States District Court, Northern District, West Virginia, filed August 10, 2001. Fischer, et al. v. Philip Morris Companies Inc., et al., Superior Court, Alameda County, Oakland, California, filed October 31, 2001. Curtis, et al. v. Philip Morris Companies Inc., et al., Fourth Judicial District Court, Hennepin County, Minnesota, filed November 28, 2001. Tremblay, et al. v. Philip Morris Incorporated, United States District Court, New Hampshire, filed March 29, 2002. The case has been consolidated with Peters v. Philip Morris Incorporated. Peters v. Philip Morris Incorporated, United States District Court, New Hampshire, filed April 22, 2002. This 10 Exhibit 99.1 case has been consolidated with Tremblay, et al. v. Philip Morris Incorporated. Pearson v. Philip Morris Incorporated, et al., Circuit Court, Multomah County, Oregon, filed July 2, 2002. Cigarette Contraband Cases Department of Amazonas, et al. v. Philip Morris Companies Inc., et al., United States District Court, Eastern District, New York, filed May 19, 2000. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim, and plaintiff has appealed. The Republic of Ecuador v. Philip Morris Incorporated, et al., United States District Court, Southern District, Florida, filed June 5, 2000. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim, and plaintiff has appealed. The Republic of Belize v. Philip Morris Companies Inc., et al., United States District Court, Southern District, Florida, filed May 8, 2001. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim, and plaintiff has appealed. The Republic of Honduras v. Philip Morris Companies Inc., et al., United States District Court, Southern District, Florida, filed May 8, 2001. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim, and plaintiff has appealed. The European Community, et al. v. RJR Nabisco, Inc., et al., United States District Court, Eastern District, New York, filed August 6, 2001. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim, and plaintiff has appealed. Asbestos Contribution Cases Fibreboard Corporation, et al. v. The American Tobacco Company, et al., Superior Court, Alameda County, California, filed December 11, 1997. Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al., Supreme Court, New York County, New York, filed December 19, 1997. Raymark Industries, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed January 30, 1998. In September 2000, a putative class action was filed in the United States District Court for the Eastern District of New York which purports to consolidate punitive damages claims in this case with certain other cases then pending in federal courts in New York and Pennsylvania. (See Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), discussed below.) In May 2002, the parties filed a stipulation of dismissal with prejudice of entire suit, thereby concluding the case. Owens Corning v. R.J. Reynolds Tobacco Company, et al., Circuit Court, Fayette County, Mississippi, filed August 30, 1998. In July 2001, the court granted defendants' motion for summary judgment dismissing the claims of the asbestos company plaintiff, and plaintiff has appealed. UNR Asbestos-Disease Claims Trust v. Brown & Williamson Tobacco Corporation, et al., Supreme Court, New York County, New York, filed March 15, 1999. Combustion Engineering, Inc., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served). Gasket Holdings, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served). Kaiser Aluminum & Chemical Corporation, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000. T&N, Ltd., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served). W.R. Grace & Co. Conn., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed 11 Exhibit 99.1 April 24, 2001 (not yet served). Retail Leaders Case R.J. Reynolds Tobacco Company, et al. v. Philip Morris Incorporated, United States District Court, Middle District, North Carolina, filed March 12, 1999. In May 2002, the court granted PM Inc.'s motion for summary judgment and dismissed all of the claims with prejudice, and plaintiffs have appealed. Vending Machine Case Lewis d/b/a B&H Vendors v. Philip Morris Incorporated, United States District Court, Middle District, Tennessee, filed February 3, 1999. Tobacco Price Cases The following are putative class actions filed by tobacco wholesalers/distributors and by smokers, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws. Buffalo Tobacco Products, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed February 8, 2000. In June 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District, Georgia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.) DelSeronne, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Wayne County, Michigan, filed February 8, 2000. In June 2002, plaintiffs' motion for class certification was denied. Plaintiffs' motion for reconsideration and defendants' motion for summary judgment are pending. Greer, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco, California, filed February 9, 2000. Lennon v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed February 9, 2000. In October 2001, the court granted defendants' motion to dismiss, and plaintiff has appealed. Munoz, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco County, California, filed February 9, 2000. Smith, et al. v. Philip Morris Companies Inc., et al., District Court, Seward County, Kansas, filed February 9, 2000. In November 2001, the court granted plaintiffs' motion for class certification. Trial is scheduled for September 2003. Gray, M.D., et al. v. Philip Morris Companies Inc., et al., Superior Court, Pima County, Arizona, filed February 11, 2000. In March 2001, the trial court dismissed the case, and plaintiffs have appealed. In May 2002, the Arizona Court of Appeals overturned the trial court's ruling, and defendants appealed. Brownstein, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Broward County, Florida, filed February 14, 2000. Defendants' motion to dismiss is pending. Morse v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 14, 2000. Ulan v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 17, 2000. Williamson Oil Company, Inc. v. Philip Morris Companies, et al., United States District Court, Northern District, Georgia, filed February 18, 2000. In June 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case from United States District Court, District of Columbia. (See In Re: Cigarette 12 Exhibit 99.1 Antitrust Litigation, MDL No. 1342, discussed below.) Shafer v. Philip Morris Companies Inc., et al., District Court, Morton County, North Dakota, filed February 16, 2000. Sullivan v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 22, 2000. Teitler v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 22, 2000. Peirona v. Philip Morris Companies Inc., et al., Superior Court, San Francisco County, California, filed February 28, 2000. Cusatis v. Philip Morris Companies Inc., et al., Circuit Court, Milwaukee County, Wisconsin, filed February 28, 2000. Sand v. Philip Morris Companies Inc., et al., Superior Court, Los Angeles County, California, filed February 28, 2000. Amsterdam Tobacco Corp., et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed March 6, 2000. In June 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case from United States District Court, District of Columbia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.) Nierman v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 6, 2000. In October 2001, the court granted defendants' motion to dismiss, and plaintiffs have appealed. Sylvester v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 8, 2000. In October 2001, the court granted defendants' motion to dismiss, and plaintiffs have appealed. I. Goldschlack v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed March 9, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.) Suwanee Swifty Stores, Inc., D.I.P. v. Philip Morris Companies Inc., United States District Court, Northern District, Georgia, filed March 14, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.) Holiday Markets, Inc., et al. v. Philip Morris Companies Inc., United States District Court, Northern District, Georgia, filed March 17, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.) Taylor, et al. v. Philip Morris Companies Inc., et al., Superior Court, Cumberland County, Maine, filed March 24, 2000. Romero, et al. v. Philip Morris Companies Inc., et al., First Judicial District Court, Rio Arriba County, New Mexico, filed April 10, 2000. Plaintiffs' motion for class certification is pending. Belch, et al. v. Philip Morris Companies Inc., et al., Superior Court, Alameda County, California, filed April 11, 2000. 13 Exhibit 99.1 Belmonte, et al. v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed April 11, 2000. Aguayo, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed April 11, 2000. Swanson, et al. (formerly Vetter, et al.) v. Philip Morris Companies Inc., et al., District Court, Hughes County, South Dakota, filed April 18, 2000. Ludke, et al. v. Philip Morris Companies Inc., et al., District Court, Hennepin County, Minnesota, filed April 20, 2000. In November 2001, the court denied plaintiffs' motion for class certification. Kissel, et al. (formerly Quickle, et al.) v. Philip Morris Companies Inc., et al., First Judicial Circuit Court, Ohio County, West Virginia, filed May 2, 2000. Hartz Foods, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed May 10, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In Re: Cigarette Antitrust Litigation MDL No. 1342, discussed below.) Baker, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 15, 2000. Campe, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 15, 2000. Barnes v. Philip Morris Companies Inc., et al., Superior Court, District of Columbia, filed May 18, 2000. Defendants' motion to dismiss is pending. Lau, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 25, 2000. In Re: Cigarette Antitrust Litigation MDL No. 1342, Federal Multidistrict Litigation Panel, United States District Court, Northern District, Georgia, Atlanta Division, filed June 7, 2000. (Coordinated litigation of all federal cases.) In July 2002, the court granted defendants' motion for summary judgment dismissing the case in its entirety, and plaintiffs have appealed. Philips, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed June 9, 2000. Pooler/Unruh, et al. v. R.J. Reynolds, et al., Second Judicial District, Washoe County, Nevada, filed June 9, 2000. Saylor, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Washington County, Tennessee, filed August 15, 2001. Defendants' motion to dismiss the case and plaintiffs' motion for class certification are pending. Cases Under the California Business and Professions Code Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San Diego County, California, filed June 10, 1997. In April 2001, the court granted in part plaintiffs' motion for class certification and certified a class comprised of residents of California who smoked at least one of defendants' cigarettes between June 1993 and April 2001 and who were exposed to defendants' marketing and advertising activities in California. Certification was granted as to plaintiffs' claims that defendants violated California Business and Professions Code Sections 17200 and 17500 pursuant to which plaintiffs allege that class members are entitled to reimbursement of the costs of cigarettes purchased during the class period and injunctive relief barring activities allegedly in violation of the Business and Professions Code. Trial is scheduled for April 2003. Daniels, et al. v. Philip Morris Companies Inc., et al., Superior Court, San Diego County, California, filed April 14 Exhibit 99.1 2, 1998. In November 2000, the court granted the plaintiffs' motion for class certification on behalf of minor California residents who smoked at least one cigarette between April 1994 and December 1999. Certification was granted as to plaintiffs' claims that defendants violated California Business and Professions Code Section 17200 pursuant to which plaintiffs allege that class members are entitled to reimbursements of the costs of cigarettes purchased during the class period and injunctive relief barring activities allegedly in violation of the Business and Professions Code. Trial is scheduled for October 2002. Tobacco Growers' Case DeLoach, et al. v. Philip Morris Incorporated, et al., United States District Court, Middle District, North Carolina, filed February 16, 2000. In April 2002, the court granted plaintiffs' motion for class certification. Defendants' petition for interlocutory review of the class certification order was denied in June 2002. MSA-Related Cases The following are cases in which plaintiffs have challenged the validity of the Master Settlement Agreement described in Note 8. Contingencies. Forces Action Project, LLC, et al. v. The State of California, et al., United States District Court, Northern District, California, filed January 23, 1999. In August 2001, the United States Court of Appeals for the Ninth Circuit affirmed the district court's dismissal of plaintiffs' claims based on lack of standing, and reversed the district court's denial of plaintiffs' motion for leave to file an amended complaint. In January 2002, the district court denied plaintiffs' new motion to amend the complaint, and plaintiffs have appealed. A.D. Bedell Company, Inc. v. Philip Morris Incorporated, et al., Supreme Court, Cattaraugus County, New York, filed October 18, 1999. In November 1999, the court denied a motion to dismiss the complaint and denied a motion to vacate the temporary restraining order enjoining Philip Morris from refusing to sell products to plaintiff. Defendants filed an appeal from the court's denial of their motion to dismiss and motion to vacate. In May 2000, the appellate court granted in part and denied in part defendants' motion to dismiss the case. The stay which was previously pending resolution of A.D. Bedell Wholesale Co. v. Philip Morris Incorporated, et al., expired upon the denial of certiorari in that case. PTI, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, California, filed August 13, 1999. In May 2000, the court dismissed plaintiffs' claims. Star Scientific Inc. v. Mark E. Earley, United States District Court, Eastern District, Virginia, filed December 15, 2000. Plaintiff, a cigarette manufacturer, filed a suit against the Commonwealth of Virginia challenging the constitutionality of the MSA and the legislation enacted to enforce it. The Company was not named as a defendant in the suit. In March 2001, the district court entered a final order dismissing the case on the grounds that plaintiff lacked standing to assert the constitutional challenges to the MSA and that the challenge of the qualifying statute failed to state a claim upon which relief can be granted, and plaintiff has appealed. In January 2002, the United States Court of Appeals for the Fourth Circuit affirmed the district court's decision rejecting plaintiff's claims. Mariana, et al. v. William, et al., United States District Court, Middle District, Pennsylvania, filed October 31, 2001. Plaintiffs, seeking to enjoin the Commonwealth of Pennsylvania's receipt of funds pursuant to the MSA, allege that enforcement of the MSA is unconstitutional and violates antitrust laws. Neel, et al. v. Strong, et al., Circuit Court, St. Louis County, Missouri, filed January 8, 2002. Plaintiffs, two Missouri residents and taxpayers, seek to enjoin the payment by PM Inc. and other tobacco companies of attorneys' fees to counsel who represented the State of Missouri in its health care cost recovery suit against the tobacco industry, and allege that the Missouri fee payment agreement violates certain provisions of the Missouri Constitution. In June 2002, a judge in a New York State trial court, on his own motion, issued an order to show cause regarding the attorneys' fees arbitration award to private counsel in connection with the New York Attorney General's health care cost recovery action. While the order to show cause principally focuses on the propriety of the amount of fees awarded, it also raises the questions of whether the court can and should revisit its prior approval of the MSA. 15 Exhibit 99.1 Consolidated Putative Punitive Damages Cases Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), United States District Court, Eastern District, New York, filed September 6, 2000. In November 2000, the court indicated that it intends to certify a class in this action which purports to consolidate punitive damages claims in the following ten actions then pending in the federal courts in New York and Pennsylvania. In July 2002, plaintiffs filed an amended consolidated class action complaint and a motion for class certification. The complaint seeks certification of punitive damages class of persons residing in the United States who smoke or smoked defendants' cigarettes, and who have been diagnosed by a physician with an enumerated disease from April 1993 through the date notice of the certification of this class is disseminated. CERTAIN OTHER ACTIONS The following lists certain other actions pending against subsidiaries of the Company and others as of August 1, 2002. National Cheese Exchange Cases Consolidated Action: (Servais, et al. v. Kraft Foods, Inc. and the National Cheese Exchange, Inc., Circuit Court, Dane County, Wisconsin, filed May 5, 1997; Dodson, et al. v. Kraft Foods, Inc., et al., Circuit Court, Dane County, Wisconsin, filed July 1, 1997; Noll, et al. v. Kraft Foods, Inc., et al., Circuit Court, Dane County, Wisconsin, filed July 11, 1997). Knevelboard Dairies, et al. v. Kraft Foods, Inc., et al., United States District Court, Central District, California, filed April 14, 1998. In April 2002, Kraft's motion for summary judgment dismissing the case was granted. Plaintiffs have not pursued an appeal and the case has been dismissed. Environmental Matters In May 2001, the Attorney General for the State of Ohio notified Kraft Foods North America that it may be subject to an enforcement action for alleged violations of the state's water pollution control law at its production facility in Farmdale, Ohio. The Ohio Attorney General has alleged that this facility has exceeded its water permit effluent limits and violated its reporting requirements. The State has offered to attempt to negotiate a settlement of this matter, and Kraft Foods North America has accepted the offer to do so. The State has not yet identified the relief it may seek in this matter. 16 EX-99 7 ex99-2.txt EXHIBIT 99-2 Exhibit 99.2 TRIAL SCHEDULE FOR CERTAIN CASES Set forth below is a listing of smoking and health class actions and consolidated individual cases, as well as the health care cost recovery, Lights/Ultra Lights and Tobacco Price cases currently scheduled for trial through 2003 against PM Inc. and, in some cases, the Company. Trial dates, however, are subject to change.
Case (Jurisdiction) Type of Action Trial Date - ---------------------------------------------- -------------------------------- ---------------- Daniels, et al. v. Smoking and Health Class Action October 18, 2002 Philip Morris Companies Inc., et al. (California) Miles, et al. v. Philip Morris Companies Inc., Lights/Ultra Lights Class Action January 21, 2003 et al (Illinois) Brown, et al. v. The American Smoking and Health Class Action April 1, 2003 Tobacco Company, Inc., et al (California) In Re: Tobacco Litigation Consolidated Individual June 2003 (Individual Personal Injury cases) Smoking and Health Cases (West Virginia) The United States of America v. Health Care Cost Recovery July 15, 2003 Philip Morris Incorporated et al. (District of Columbia) Smith, et al. v. Philip Morris Tobacco Price Case September 2003 Companies Inc., et al. (Kansas)
1 Exhibit 99.2 Below is a schedule setting forth by month the number of individual smoking and health cases, including cases brought by current and former flight attendants claiming personal injuries allegedly related to ETS, against PM Inc. and, in some cases, the Company, that are currently scheduled for trial through the end of the year 2003. 2002 2003 - ------------- ------------- August (3) January (3) September (3) February (4) October (5) March (1) November (7) May (3) December (3) June (2) July (1) August (2) September (1) October (2) 2 -----END PRIVACY-ENHANCED MESSAGE-----