-----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, BLPty9y1pBxvsMF4p/T+j+NqgmizJTDbWwrl59IoysUsHzunhzilzjigQGlzUB7c jwO+Ms6chMbpWGF7mshsQw== /in/edgar/work/0001005477-00-007784/0001005477-00-007784.txt : 20001115 0001005477-00-007784.hdr.sgml : 20001115 ACCESSION NUMBER: 0001005477-00-007784 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILIP MORRIS COMPANIES INC CENTRAL INDEX KEY: 0000764180 STANDARD INDUSTRIAL CLASSIFICATION: [2000 ] IRS NUMBER: 133260245 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08940 FILM NUMBER: 762667 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 0001.txt QUARTERLY REPORT 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 September 30, 2000 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 October 31, 2000, there were 2,223,534,382 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 September 30, 2000 and December 31, 1999 3 - 4 Condensed Consolidated Statements of Earnings for the Nine Months Ended September 30, 2000 and 1999 5 Three Months Ended September 30, 2000 and 1999 6 Condensed Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 1999 and the Nine Months Ended September 30, 2000 7 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 8 - 9 Notes to Condensed Consolidated Financial Statements 10 - 29 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 30 - 53 PART II - OTHER INFORMATION Item 1. Legal Proceedings. 54 Item 6. Exhibits and Reports on Form 8-K. 54 Signature 55 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in millions of dollars) (Unaudited) September 30, December 31, 2000 1999 ------------- ------------ ASSETS Consumer products Cash and cash equivalents $ 4,779 $ 5,100 Receivables (less allowances of $145 and $164) 4,549 4,313 Inventories: Leaf tobacco 3,732 4,294 Other raw materials 1,693 1,794 Finished product 2,675 2,940 ------- ------- 8,100 9,028 Other current assets 2,171 2,454 ------- ------- Total current assets 19,599 20,895 Property, plant and equipment, at cost 21,753 21,599 Less accumulated depreciation 9,501 9,328 ------- ------- 12,252 12,271 Goodwill and other intangible assets (less accumulated amortization of $6,142 and $5,840) 16,381 16,879 Other assets 3,910 3,625 ------- ------- Total consumer products assets 52,142 53,670 Financial services Finance assets, net 7,972 7,527 Other assets 165 184 ------- ------- Total financial services assets 8,137 7,711 ------- ------- TOTAL ASSETS $60,279 $61,381 ======= ======= 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) September 30, December 31, 2000 1999 ------------- ------------ LIABILITIES Consumer products Short-term borrowings $ 200 $ 641 Current portion of long-term debt 1,741 1,601 Accounts payable 2,703 3,351 Accrued marketing 2,809 2,756 Accrued taxes, except income taxes 1,480 1,519 Accrued settlement charges 4,102 2,320 Other accrued liabilities 2,961 3,577 Income taxes 1,318 1,124 Dividends payable 1,192 1,128 -------- -------- Total current liabilities 18,506 18,017 Long-term debt 9,327 11,280 Deferred income taxes 1,423 1,214 Accrued postretirement health care costs 2,697 2,606 Other liabilities 6,375 6,853 -------- -------- Total consumer products liabilities 38,328 39,970 Financial services Short-term borrowings 795 Long-term debt 890 946 Deferred income taxes 4,666 4,466 Other liabilities 698 694 -------- -------- Total financial services liabilities 7,049 6,106 -------- -------- Total liabilities 45,377 46,076 Contingencies (Note 5) STOCKHOLDERS' EQUITY Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) 935 935 Earnings reinvested in the business 32,617 29,556 Accumulated other comprehensive losses (including currency translation of $2,945 and $2,056) (2,997) (2,108) -------- -------- 30,555 28,383 Less cost of repurchased stock (575,507,791 and 467,441,576 shares) (15,653) (13,078) -------- -------- Total stockholders' equity 14,902 15,305 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,279 $ 61,381 ======== ======== 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 Nine Months Ended September 30, ------------------------- 2000 1999 ------- ------- Operating revenues $60,942 $59,185 Cost of sales 22,091 22,198 Excise taxes on products 13,172 12,992 ------- ------- Gross profit 25,679 23,995 Marketing, administration and research costs 14,043 13,307 Amortization of goodwill 442 434 ------- ------- Operating income 11,194 10,254 Interest and other debt expense, net 536 627 ------- ------- Earnings before income taxes 10,658 9,627 Provision for income taxes 4,159 3,809 ------- ------- Net earnings $ 6,499 $ 5,818 ======= ======= Per share data: Basic earnings per share $ 2.86 $ 2.42 ======= ======= Diluted earnings per share $ 2.85 $ 2.41 ======= ======= Dividends declared $ 1.49 $ 1.36 ======= ======= 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 September 30, -------------------------- 2000 1999 ------- ------- Operating revenues $20,058 $19,878 Cost of sales 7,271 7,451 Excise taxes on products 4,301 4,386 ------- ------- Gross profit 8,486 8,041 Marketing, administration and research costs 4,373 4,383 Amortization of goodwill 149 142 ------- ------- Operating income 3,964 3,516 Interest and other debt expense, net 158 199 ------- ------- Earnings before income taxes 3,806 3,317 Provision for income taxes 1,487 1,316 ------- ------- Net earnings $ 2,319 $ 2,001 ======= ======= Per share data: Basic earnings per share $ 1.04 $ 0.84 ======= ======= Diluted earnings per share $ 1.03 $ 0.84 ======= ======= Dividends declared $ 0.53 $ 0.48 ======= ======= 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, 1999 and the Nine Months Ended September 30, 2000 (in millions of dollars, except per share data) (Unaudited)
Accumulated Other Comprehensive Losses -------------------------------- Earnings Total Reinvested Currency Cost of Stock- Common in the Translation Repurchased holders' Stock Business Adjustments Other Total Stock Equity -------- ---------- ----------- ---------- -------- ----------- -------- Balances, January 1, 1999 $ 935 $ 26,261 $ (1,081) $ (25) $ (1,106) $ (9,893) $ 16,197 Comprehensive earnings: Net earnings 7,675 7,675 Other comprehensive losses, net of income taxes: Currency translation adjustments (975) (975) (975) Additional minimum pension liability (27) (27) (27) -------- Total other comprehensive losses (1,002) -------- Total comprehensive earnings 6,673 -------- Exercise of stock options and issuance of other stock awards 13 115 128 Cash dividends declared ($1.84 per share) (4,393) (4,393) Stock repurchased (3,300) (3,300) -------- -------- -------- -------- -------- -------- -------- Balances, December 31, 1999 935 29,556 (2,056) (52) (2,108) (13,078) 15,305 Comprehensive earnings: Net earnings 6,499 6,499 Other comprehensive losses, net of income taxes: Currency translation adjustments (889) (889) (889) -------- Total other comprehensive losses (889) -------- Total comprehensive earnings 5,610 -------- Exercise of stock options and issuance of other stock awards (58) 146 88 Cash dividends declared ($1.49 per share) (3,380) (3,380) Stock repurchased (2,721) (2,721) -------- -------- -------- -------- -------- -------- -------- Balances, September 30, 2000 $ 935 $ 32,617 $ (2,945) $ (52) $ (2,997) $(15,653) $ 14,902 ======== ======== ======== ======== ======== ======== ========
Total comprehensive earnings, which represents net earnings partially offset by currency translation adjustments, were $1,884 million and $1,855 million, respectively, for the quarters ended September 30, 2000 and 1999, and $5,069 million for the first nine months of 1999. 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 Nine Months Ended September 30, ------------------------- 2000 1999 ------- ------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net earnings - Consumer products $ 6,377 $ 5,714 - Financial services 122 104 ------- ------- Net earnings 6,499 5,818 Adjustments to reconcile net earnings to operating cash flows: Consumer products Depreciation and amortization 1,279 1,254 Deferred income tax provision (benefit) 530 (51) Gains on sales of businesses (174) (20) Cash effects of changes, net of the effects from acquired and divested companies: Receivables, net (425) (280) Inventories 616 189 Accounts payable (565) (943) Income taxes 246 332 Accrued liabilities and other current assets 1,217 2,831 Other (345) (74) Financial services Deferred income tax provision 200 151 Other 37 37 ------- ------- Net cash provided by operating activities 9,115 9,244 ------- ------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES Consumer products Capital expenditures (1,118) (1,151) Purchases of businesses, net of acquired cash (391) (434) Proceeds from sales of businesses 302 48 Other (4) (240) Financial services Investments in finance assets (581) (490) Proceeds from finance assets 106 54 ------- ------- Net cash used in investing activities (1,686) (2,213) ------- ------- 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 Nine Months Ended September 30, ------------------------- 2000 1999 ------- ------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Consumer products Net (repayment) issuance of short-term borrowings $ (470) $ 60 Long-term debt proceeds 87 1,300 Long-term debt repaid (1,679) (1,384) Financial services Net issuance of short-term borrowings 795 Long-term debt proceeds 500 Long-term debt repaid (200) Repurchase of common stock (2,710) (2,213) Dividends paid (3,316) (3,195) Issuance of common stock 37 108 Other (127) (110) ------- ------- Net cash used in financing activities (7,383) (5,134) ------- ------- Effect of exchange rate changes on cash and cash equivalents (367) (102) ------- ------- Cash and cash equivalents: (Decrease) increase (321) 1,795 Balance at beginning of period 5,100 4,081 ------- ------- Balance at end of period $ 4,779 $ 5,876 ======= ======= See notes to condensed consolidated financial statements. -9- Note 1. Accounting Policies: The interim condensed consolidated financial statements of Philip Morris Companies Inc. (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. For interim reporting purposes, certain expenses are charged to results of operations as a percentage of sales. Operating 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 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, 1999 (the "1999 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. Note 2. Acquisitions and Divestitures: In June 2000, the Company entered into definitive agreements to acquire all of the outstanding shares of Nabisco Holdings Corp. ("Nabisco") for $55 per share in cash. The transaction reflects an aggregate cost of approximately $19.2 billion, which includes the assumption of approximately $4.0 billion in net debt. The acquisition will be financed initially through a combination of available cash balances and short-term debt. The transaction, which has been approved by the shareholders of Nabisco Group Holdings and by the European Commission, remains under review by United States anti-trust authorities. The parties are working to close the transaction by year-end. The acquisition will be accounted for as a purchase. Subsequent to the acquisition, the Company's wholly owned subsidiary, Kraft Foods, Inc. ("Kraft") plans to undertake an initial public offering ("IPO") of less than 20% of the combined food company. The IPO proceeds will be used to retire a portion of the debt incurred as a result of the acquisition of Nabisco. During the first nine months of 2000, the Company sold several small international and domestic food businesses. The aggregate proceeds received in these transactions were $302 million and the Company recorded pre-tax gains of $174 million. In addition, in October 2000, Miller Brewing Company announced that it reached an agreement in principle with Molson Canada and with Foster's Brewing Group Limited to strengthen its commitment behind the Foster's brand in the United States, as well as an agreement in principle to sell its rights to Molson trademarks in the United States. The transactions are expected to close in the fourth quarter. -10- Note 3. Earnings Per Share: Basic and diluted earnings per share ("EPS") were calculated using the following: For the Nine Months Ended September 30, ------------------------- 2000 1999 ------ ------ (in millions) Net earnings $6,499 $5,818 ====== ====== Weighted average shares for basic EPS 2,276 2,406 Plus incremental shares from conversions: Restricted stock and stock rights 3 1 Stock options 5 10 ------ ------ Weighted average shares for diluted EPS 2,284 2,417 ====== ====== For the Three Months Ended September 30, -------------------------- 2000 1999 ------ ------ (in millions) Net earnings $2,319 $2,001 ====== ====== Weighted average shares for basic EPS 2,240 2,386 Plus incremental shares from conversions: Restricted stock and stock rights 4 2 Stock options 9 8 ------ ------ Weighted average shares for diluted EPS 2,253 2,396 ====== ====== Options on shares of common stock were excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive, as follows: 2000 1999 ------ ------ (in millions) For the nine months ended September 30, 87 25 For the three months ended September 30, 69 58 Note 4. Segment Reporting: The Company's products include cigarettes, food (consisting principally of coffee, cheese, chocolate confections, processed meat products and various packaged grocery products) and beer. A subsidiary of the Company, Philip Morris Capital Corporation, invests in leveraged and direct finance leases, other tax-oriented financing transactions and third-party financings. These products and services -11- 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 reportable segments excludes general corporate expenses, minority interest and amortization of goodwill. Interest and other debt expense, net (consumer products) and provision for income taxes are centrally 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. Reportable segment data were as follows: For the Nine Months Ended September 30, ------------------------- 2000 1999 -------- -------- Operating revenues: (in millions) Domestic tobacco $ 16,987 $ 14,352 International tobacco 20,552 21,419 North American food 13,534 13,193 International food 6,115 6,601 Beer 3,449 3,361 Financial services 305 259 -------- -------- Total operating revenues $ 60,942 $ 59,185 ======== ======== Operating companies income: Domestic tobacco $ 3,849 $ 3,436 International tobacco 4,180 3,922 North American food 2,690 2,404 International food 951 785 Beer 491 454 Financial services 193 168 -------- -------- Total operating companies income 12,354 11,169 Amortization of goodwill (442) (434) General corporate expenses (626) (386) Minority interest (92) (95) -------- -------- Total operating income 11,194 10,254 Interest and other debt expense, net (536) (627) -------- -------- Total earnings before income taxes $ 10,658 $ 9,627 ======== ======== -12- For the Three Months Ended September 30, -------------------------- 2000 1999 -------- -------- Operating revenues: (in millions) Domestic tobacco $ 5,835 $ 5,157 International tobacco 6,753 7,153 North American food 4,276 4,171 International food 1,939 2,155 Beer 1,149 1,153 Financial services 106 89 -------- -------- Total operating revenues $ 20,058 $ 19,878 ======== ======== Operating companies income: Domestic tobacco $ 1,459 $ 1,367 International tobacco 1,439 1,239 North American food 827 773 International food 416 264 Beer 145 140 Financial services 66 58 -------- -------- Total operating companies income 4,352 3,841 Amortization of goodwill (149) (142) General corporate expenses (207) (151) Minority interest (32) (32) -------- -------- Total operating income 3,964 3,516 Interest and other debt expense, net (158) (199) -------- -------- Total earnings before income taxes $ 3,806 $ 3,317 ======== ======== General corporate expenses of $626 million for the first nine months of 2000 and $207 million for the third quarter of 2000 increased $240 million (62.2%) and $56 million (37.1%), respectively, over the comparable periods of 1999. These increases were due primarily to increased spending for the Company's corporate image campaign. During the third quarter of 2000, Kraft Foods International, Inc., Kraft's international food subsidiary, sold a French confectionery business for proceeds of $251 million and an estimated pre-tax gain of $139 million. This gain, which is subject to adjustment, is included in the operating results of the international food segment. During the first quarter of 1999, Philip Morris Incorporated ("PM Inc."), the Company's domestic tobacco subsidiary, announced plans to phase out cigarette production capacity at its Louisville, Kentucky manufacturing plant by August 2000 (the "Louisville Closure"). The Louisville Closure, which occurred in stages, has been completed. As a result, PM Inc. recorded pre-tax charges for the first nine months and the third quarter of 1999 of $183 million and $8 million, respectively. These charges, which are in marketing, administration and research costs in the respective consolidated statements of earnings, included enhanced severance, pension and postretirement benefits for approximately 1,500 hourly and salaried employees. Severance benefits, which were either paid in a lump sum or as income protection payments over a period of time, commenced upon termination of employment. Payments of enhanced pension and postretirement benefits are being made over the remaining lives of the former employees in accordance with the terms of the related benefit plans. All operating costs of the manufacturing plant, including increased depreciation, were charged to expense as incurred during the closing period. -13- During the first quarter of 1999, Kraft announced that it was offering voluntary retirement incentive or separation programs to certain eligible hourly and salaried employees in the United States (the "Kraft Separation Programs"). Employees electing to terminate employment under the terms of the Kraft Separation Programs were entitled to enhanced retirement or severance benefits. Approximately 1,100 hourly and salaried employees accepted the benefits offered by these programs and elected to retire or terminate. As a result, Kraft recorded a pre-tax charge of $157 million for the first nine months of 1999. This charge was included in marketing, administration and research costs in the consolidated statement of earnings for the North American food segment. Payments of pension and postretirement benefits are made in accordance with the terms of the applicable benefit plans. Severance benefits, which are paid over a period of time, commenced upon dates of termination that ranged from April 1999 to March 2000. Salary and related benefit costs of employees prior to the retirement or termination date were expensed as incurred. During the third quarter of 1999, a subsidiary of the Company announced the closure of a cigarette factory and the corresponding reduction of cigarette production capacity in Brazil. Prior to the factory closure, existing employees were offered voluntary dismissal benefits. These benefits were accepted by half of the approximately 1,000 employees at the facility. During the third quarter of 1999, the factory was closed and employment of the remaining employees was terminated. For the first nine months and third quarter of 1999, a pre-tax charge of $136 million was recorded in marketing, administration and research costs in the consolidated statement of earnings of the international tobacco segment to write down the tobacco machinery and equipment no longer in use and to recognize the cost of severance benefits. Payments of severance benefits to former employees were in accordance with the local Brazilian regulations. Note 5. 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, and their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Overview of Tobacco-Related Litigation Types and Number of Cases Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases primarily alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, including cases brought pursuant to a 1997 settlement agreement involving claims by flight attendants alleging injury from exposure to environmental tobacco smoke ("ETS") in aircraft cabins, (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, including suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking and suits by foreign governments seeking to recover damages for taxes lost as a result of the allegedly illegal importation of cigarettes into their jurisdictions. Damages claimed in some of the smoking and health class actions, health care cost recovery cases and other tobacco-related litigation range into the billions of dollars. In July 2000, a jury in a Florida smoking and health class action returned a punitive damages award of approximately $74 billion against PM Inc. (See discussion of the Engle case below.) Plaintiffs' theories of recovery and the defenses raised in the smoking and health and health care cost recovery cases are discussed below. Exhibit 99.1 hereto lists the smoking and health class actions, health care cost recovery cases and certain other actions pending as of, November 1, 2000, and discusses certain developments in such cases since August 10, 2000. As of November 1, 2000, 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 cases, the Company, compared with approximately 400 such cases on November 1, 1999, and approximately 450 such cases on November 1, 1998. Approximately 1,200 of these cases are pending before a single West Virginia state court in a consolidated proceeding. Approximately 1,100 of the West Virginia cases were filed during the third quarter of 2000. An estimated 20 of -14- the individual cases involve allegations of various personal injuries allegedly related to exposure to ETS. In addition, approximately 3,120 additional individual cases are pending in Florida by current and former flight attendants claiming personal injuries allegedly related to ETS. The flight attendants allege that they are members of an ETS smoking and health class action which was settled in 1997. The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages. The deadline for class members to file such suits was September 7, 2000. As of November 1, 2000, there were an estimated 37 smoking and health putative class actions pending in the United States against PM Inc. and, in some cases, the Company (including eight that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 50 such cases on November 1, 1999, and approximately 65 such cases on November 1, 1998. Some of these actions purport to constitute statewide class actions and were filed after May 1996 when the United States Court of Appeals for the Fifth Circuit, in the Castano case, reversed a federal district court's certification of a purported nationwide class action on behalf of persons who were allegedly "addicted" to tobacco products. As of November 1, 2000, there were approximately 55 health care cost recovery actions pending in the United States (excluding the cases covered by the 1998 Master Settlement Agreement discussed below), compared with approximately 80 health care cost recovery cases pending on November 1, 1999, and 140 cases on November 1, 1998. There are also a number of tobacco-related actions pending outside the United States against PMI and its affiliates and subsidiaries, including an estimated 68 smoking and health cases brought on behalf of individuals (Argentina (48), Australia (1), Brazil (9), Canada (1), Germany (3), Hong Kong (1), Ireland (1), Israel (1), Japan (1), the Philippines (1), and Poland (1)), compared with approximately 45 such cases on November 1, 1999. In addition, there are 8 smoking and health putative class actions pending outside the United States (Australia (1), Brazil (3), Canada (3), and Israel (1)), compared with nine on November 1, 1999. In addition, during the past two years, health care cost recovery actions have been brought in Israel, the Marshall Islands, British Columbia, Canada and France (by a local agency of the French social security health insurance system) and, in the United States, by Bolivia, Ecuador, Guatemala (dismissed, as discussed below), Honduras, Nicaragua (dismissed, as discussed below), Province of Ontario, Canada (dismissed, as discussed below), Panama, the Russian Federation, Thailand (voluntarily dismissed), Ukraine (dismissed, as discussed below), Venezuela, and the Brazilian States of Espirito Santo, Goias, Mato Grosso do Sul, Rio de Janeiro, Sao Paulo, and Tocantins. Federal Government's Lawsuit In September 1999, the U.S. government filed a lawsuit in the U.S. District Court for the District of Columbia against various cigarette manufacturers and others, including the Company and PM Inc., asserting claims under three federal statutes, the Medical Care Recovery Act ("MCRA"), the Medicare Secondary Payer ("MSP") provisions of the Social Security Act, and the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The lawsuit seeks to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants' fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans' health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleges that such costs total more than $20 billion annually. It also seeks various types of equitable and declaratory relief, including disgorgement, an -15- injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal government's future costs of providing health care resulting from defendants' alleged past tortious and wrongful conduct. The Company and PM Inc. moved to dismiss this lawsuit on numerous grounds, including that the statutes invoked by the government do not provide a basis for the relief sought. In September 2000, the trial court dismissed the government's MCRA and MSP claims, but permitted discovery to proceed on the government's claims for equitable relief under RICO. In October 2000, the government moved for reconsideration of the trial court's order to the extent that it dismissed the MCRA claims for health care costs paid pursuant to government health benefit programs other than Medicare and the Federal Employees Health Benefits Act. A hearing on the motion has not been scheduled. Trial is scheduled for July 2003, although trial dates are subject to change. The Company and PM Inc. believe that they have a number of valid defenses to the lawsuit and will continue to vigorously defend it. Recent Industry Trial Results There have been several jury verdicts in tobacco-related litigation during the past three years. In July, 2000, the jury in the Engle smoking and health class action in Florida, returned a verdict assessing punitive damages totaling approximately $145 billion against all defendants in the case, including approximately $74 billion against PM Inc. (see "Engle Trial," below, for a more detailed discussion of this verdict and certain other developments in this case). In October 2000, a jury in Florida awarded the plaintiff in an individual smoking and health case $200,000 in compensatory damages and no punitive damages. Neither the Company nor its affiliates were parties to that action. In July 2000, a jury in Mississippi returned a verdict in favor of another cigarette manufacturer in an individual smoking and health case. In June 2000, a jury in New York returned a verdict in favor of all defendants including, PM Inc., in another individual smoking and health case. In March 2000, a jury in California awarded a former smoker with lung cancer $1.72 million in compensatory damages against PM Inc. and another cigarette manufacturer and $10 million in punitive damages against PM Inc. as well as an additional $10 million against the other defendant. The verdicts in all of these cases are being challenged in post trial motions or are on appeal. In July 1999, a Louisiana jury returned a verdict in favor of defendants in an individual smoking and health case against other cigarette manufacturers. In June 1999, a Mississippi jury returned a verdict in favor of defendants, including PM Inc., in an action brought on behalf of an individual who died allegedly as a result of exposure to ETS. In May 1999, a Missouri jury returned a verdict in favor of defendant in an individual smoking and health case against another cigarette manufacturer. Also in May 1999, a Tennessee jury returned a verdict in favor of defendants, including PM Inc., in two of three individual smoking and health cases consolidated for trial. In the third case (not involving PM Inc.), the jury found liability against defendants and apportioned fault equally between plaintiff and defendants. Under Tennessee's system of modified comparative fault, because the jury found plaintiff's fault equal to that of defendants, recovery was not permitted. -16- In March 1999, an Oregon jury awarded the estate of a deceased smoker $800,000 in actual damages, $21,500 in medical expenses and $79.5 million in punitive damages against PM Inc. In February 1999, a California jury awarded a former smoker $1.5 million in compensatory damages and $50 million in punitive damages against PM Inc. The punitive damage awards in the Oregon and California actions have been reduced to $32 million and $25 million, respectively. PM Inc. is appealing the verdicts and the damage awards in these cases. In March 1999, a jury returned a verdict in favor of defendants, including PM Inc., in a union health care cost recovery action brought on behalf of approximately 114 employer-employee trust funds in Ohio. In December 1999, a French court, in an action brought on behalf of a deceased smoker, found that another cigarette manufacturer had a duty to warn him about risks associated with smoking prior to 1976, when the French government required warning labels on cigarette packs, and failed to do so. The court did not determine causation or liability, which shall be considered in future proceedings. Neither the Company nor its affiliates are parties to this action. Engle Trial As discussed below, verdicts have been returned and judgment has been entered against PM Inc. and other cigarette manufacturers and 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 -17- 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. The jury also found that defendants' conduct "rose to a level that would permit a potential award or entitlement to punitive damages." During phase two of the trial, the claims of three of the named plaintiffs were adjudicated in a consolidated trial before the same jury that returned the verdict in phase one. In April 2000, the jury determined liability against the defendants and awarded $12.7 million in compensatory damages to the three named plaintiffs. In July 2000, the same jury returned a verdict assessing punitive damages on a lump sum basis for the entire class totaling approximately $145 billion against the various defendants in the case, including approximately $74 billion severally against PM Inc. PM Inc. believes that the punitive damages award was determined improperly and that it should ultimately be set aside on any one of numerous grounds. Included among these grounds are the following: under applicable law (i) defendants are entitled to have liability and damages for each plaintiff tried by the same jury, an impossibility due to the jury's dismissal; (ii) punitive damages cannot be assessed before the jury determines entitlement to and the amount of compensatory damages for all class members; (iii) punitive damages must bear a reasonable relationship to compensatory damages, a determination that cannot be made before compensatory damages are assessed for all class members; and (iv) punitive damages can "punish" but cannot "destroy" the defendant. In March 2000, at the request of the Florida legislature, the Attorney General of Florida issued an advisory legal opinion stating that "Florida law is clear that compensatory damages must be determined prior to an award of punitive damages" in cases such as Engle. As noted above, compensatory damages for all but three members of the class members 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, the Engle trial judge scheduled a hearing on numerous pending phase one and two motions, including defendants' challenges of various rulings made by the judge and the jury's verdicts on -18- compensatory and punitive damages. Prior to the commencement of the hearing, defendants removed the case to federal district court following the intervention application of a union health fund that raised federal issues in the case. Plaintiffs and the health fund filed motions to remand the case to state court, and on November 3, 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 promptly 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 at this time by the trial court is unconstitutional and violates Florida law. On November 7, 2000, PM Inc. 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 dollar bond to stay execution of the judgment with respect to the $74 billion in punitive damages that has been awarded against it. The bond was posted pursuant to legislation that was enacted in Florida in May 2000 that limits the size of the bond that must be posted in order to stay execution of a judgment for punitive damages in a certified class action to no more than $100 million regardless of the amount of punitive damages ("bond cap legislation"). Plaintiffs have indicated that they believe the bond cap legislation is unconstitutional and it is possible that they may seek to challenge the $100 million bond. If the bond were found to be invalid, it would be commercially impossible for PM Inc. to post a bond in the full amount of the judgment and, absent appellate relief, PM Inc. would not be able to stay any attempted execution of the judgment in Florida. PM Inc. and the Company will take all appropriate steps to seek to prevent this worst case scenario from occurring and believe these efforts should be successful. In other developments, in August 1999, the trial judge denied a motion filed by PM Inc. and other defendants to disqualify the judge. The motion asserted, among other things, that the trial judge was required to disqualify himself because he is a former smoker who has a serious medical condition of a type that the plaintiffs claim, and the jury has found, is caused by smoking, making him financially interested in the result of the case and, under plaintiffs' theory of the case, a member of the plaintiff class. The Third District Court of Appeal denied defendants' petition to disqualify the trial judge. In January 2000, defendants filed a petition for a writ of certiorari to the United States Supreme Court requesting that it review the issue of the trial judge's disqualification and in May 2000 the writ of certiorari was denied. PM Inc. and the Company remain of the view that the Engle case should not have been certified as a class action. The certification is inconsistent with the overwhelming majority of federal and state court decisions that have held that mass smoking and health claims are inappropriate for class treatment. As indicated above, PM Inc. has filed an appeal challenging the class certification and the compensatory and punitive damage awards, as well as numerous other reversible errors that it believes occurred during the trial to date. -19- Pending and Upcoming Trials A trial is underway in New York in an individual case which PM Inc. is a defendant. Jury selection in an asbestos contribution action, in which PM Inc. is a defendant, is scheduled to begin on November 27, 2000 in New York. Trial in a smoking and health class action, in which PM Inc. is a defendant, is scheduled to begin in December 2000 in West Virginia; plaintiffs in this action seek the creation of a medical monitoring fund for members of the purported class. As set forth in Exhibit 99.3, additional cases against PM Inc. and, in some cases, the Company as well, are scheduled for trial through the end of 2001, including four health care cost recovery actions; -two asbestos contribution cases; three purported smoking and health class actions; and approximately 46 other individual smoking and health cases, including a consolidated trial of individual smoking and health cases scheduled to begin in June 2001 in West Virginia. As of November 1, 2000, nine cases involving flight attendants' claims for damages from ETS were scheduled for trial between January and May 2001. Cases against other tobacco companies are also scheduled for trial through the end of 2001. Trial dates, however, are subject to change. Litigation Settlements In November 1998, PM Inc. and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the "MSA") with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM Inc. and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the "State Settlement Agreements") and an ETS smoking and health class action brought on behalf of airline flight attendants. The State Settlement Agreements and certain ancillary agreements are filed as exhibits to various of the Company's reports filed with the Securities and Exchange Commission, and such agreements and the ETS settlement are discussed in detail therein. The 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: 2000, $9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional amounts as follows: 2000, $416 million; and 2001 through 2003, $250 million each year. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its share of domestic cigarette shipments in the year preceding that in which the -20- payment is due. Accordingly, PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped. The State Settlement Agreements also include provisions, 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 set forth in Exhibit 99.2, the MSA has been initially approved by trial courts in all settling jurisdictions. If a jurisdiction does not obtain "final judicial approval" (i.e., trial court approval and expiration of the time for review or appeal of such approval) of the MSA by December 31, 2001, then, unless the settling defendants and the relevant jurisdiction agree otherwise, the agreement will be terminated with respect to such jurisdiction. As of November 1, 2000, the MSA has received final judicial approval in 50 jurisdictions. 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 2000, $280 million; 2001, $400 million; 2002 through 2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM Inc. records its portion of these payments as part of cost of sales as product is shipped. The State Settlement Agreements have materially adversely affected the volumes of PM Inc. and the Company; the Company believes that they may materially adversely affect the business, volume, results of operations, cash flows or financial position of PM Inc. and the Company in future periods. The degree of the adverse impact will depend, among other things, on the rates of decline in United States cigarette sales in the premium and discount segments, PM Inc.'s share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements. Manufacturers representing almost all domestic shipments in 1998 have agreed to become subject to the terms of the MSA. Certain litigation, described in Exhibit 99.1, has arisen challenging the validity of the MSA and alleging violation of the antitrust laws. A description of the smoking and health litigation, health care cost recovery litigation and certain other proceedings pending against the Company and/or its subsidiaries and affiliates follows. -21- Smoking and Health Litigation Plaintiffs' allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state RICO statutes. In certain of these cases, plaintiffs claim that cigarette smoking exacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act. In May 1996, the United States Court of Appeals for the Fifth Circuit held in the Castano case that a class consisting of all "addicted" smokers nationwide did not meet the standards and requirements of the federal rules governing class actions. Since this class decertification, lawyers for plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise "addiction" claims similar to those raised in the Castano case and, in many cases, claims of physical injury as well. As of November 1, 2000, smoking and health putative class actions were pending in Alabama, Florida, Hawaii, Illinois, Indiana, Iowa, Louisiana, Massachusetts, Michigan, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, South Carolina, Tennessee, Texas, Utah and West Virginia, as well as in Australia, Brazil, Canada and Israel. Class certification has been denied or reversed by courts in 24 smoking and health class actions involving PM Inc. in Arkansas, California (2), the District of Columbia, Illinois, Kansas, Louisiana, Maryland, Michigan, Minnesota, New Jersey (6), New York (2), Ohio, Oklahoma, Pennsylvania, Puerto Rico, Texas, and Wisconsin, while classes remain certified in two cases in Florida and Louisiana, and a West Virginia court has recently certified a class in a smoking and health class action in which the plaintiffs are seeking the creation of a medical monitoring fund for members of the purported class. Some of the decisions denying the plaintiffs' motions for class certification are on appeal. In May 1999, the United States Supreme Court declined to review the decision of the United States Court of Appeals for the Third Circuit affirming a lower court's decertification of a class. As mentioned in Overview of Tobacco-Related Litigation, above, one ETS smoking and health class action was settled in 1997. Health Care Cost Recovery Litigation In certain of the pending proceedings, domestic and foreign governmental entities and non-governmental plaintiffs, including union health and welfare funds ("unions"), native American tribes, insurers and self-insurers such as Blue Cross and Blue Shield Plans, hospitals, taxpayers and others, are seeking reimbursement of health care cost expenditures -22- allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well. Certain of these cases purport to be brought on behalf of a class of plaintiffs. Other relief sought by some but not all plaintiffs includes punitive damages, treble/multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, disclosure of nicotine yields, and payment of attorney and expert witness fees. The claims asserted in these health care cost recovery actions include the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health care costs allegedly attributable to smoking, the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state RICO statutes. Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit and statute of limitations. In addition, defendants argue that they should be entitled to "set off" any alleged damages to the extent the plaintiff benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payer of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by "standing in the shoes" of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party. Excluding the cases covered by the MSA, as of November 1, 2000, there were approximately 55 health care cost recovery cases pending in the United States against PM Inc. and, in some cases, the Company, of which approximately 20 were filed by union trust funds. As discussed above under "Federal Government's Lawsuit," the U.S. government filed a health care cost recovery action in September 1999 against various cigarette manufacturers and others, including the Company and PM Inc., asserting claims under three federal statutes. Health care cost recovery actions have also been brought in Israel, the Marshall Islands, British Columbia, Canada and France and, in the United States, by Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, Province of Ontario, Canada, Panama, Russian Federation, Thailand (voluntarily dismissed), Ukraine, Venezuela and the Brazilian States of Espirito Santo, Goias, Mato Grosso do Sul, Rio de Janeiro, Sao Paulo and Tocantins. The actions brought by Bolivia, Ecuador, Guatemala, Nicaragua, Ontario, Panama, Russian Federation, Ukraine, Venezuela and the Brazilian States of Goias, and Espirito Santo and Mato Grosso do Sol were consolidated for pre-trial purposes and transferred to the United States District Court for the District of Columbia. As described below, the court has dismissed the claims of Guatemala, Nicaragua, the Province of Ontario and Ukraine. The court remanded the Venezuela, and Ecuador, Espirito Santo and Goias cases to state court in Florida. -23- Other entities have stated that they are considering filing health care cost recovery actions. Seven federal Circuit Courts of Appeals, the Second, Third, Fifth, Seventh, Eighth, Ninth and Eleventh Circuits, relying primarily on grounds that plaintiffs' claims were too remote, have affirmed dismissals of, or reversed trial courts that had refused to dismiss, such actions. In addition, in January 2000, the United States Supreme Court refused to consider plaintiffs' appeals from the cases decided by the Court of Appeals for the Second, Third and Ninth Circuits. Although there have been some decisions to the contrary, to date, most lower courts that have decided motions in these cases have dismissed all or most of the claims against the industry. In December 1999, in the first ruling on a motion to dismiss a health care cost recovery case brought in the United States by a foreign governmental plaintiff, the federal district court for the District of Columbia dismissed a lawsuit filed by Guatemala, ruling that the claimed injuries were too remote. Subsequently, in March 2000, the court also dismissed the claims of Nicaragua and Ukraine. Guatemala, Nicaragua and Ukraine each have appealed these decisions to the United States Court of Appeals for the District of Columbia Circuit. In August 2000, the federal district court for the District of Columbia dismissed the claims of the Province of Ontario, and the Province has appealed. In March 1999, in the only union case to go to trial thus far, the jury returned a verdict in favor of defendants on all counts. Plaintiffs' motion for a new trial was denied. In December 1999, the federal district court in the District of Columbia denied defendants' motion to dismiss a suit filed by union and welfare funds seeking reimbursement of health care expenditures allegedly caused by tobacco products. Defendants are appealing this decision. In June 2000, the federal district court in Rhode Island dismissed a suit filed by a union, finding that the plaintiffs' claims are too remote to permit recovery. Certain Other Tobacco-Related Litigation Asbestos Contribution Cases: As of November 1, 2000, 13 suits had been filed by former asbestos manufacturers, asbestos manufacturers' personal injury settlement trusts and an insurance company against domestic tobacco manufacturers, including PM Inc. and others. Nine of these cases are pending. These cases seek, among other things, contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages. The aggregate amounts claimed in these cases range into the billions of dollars. Trials in two of these cases are scheduled to begin in New York in November 2000 and April 2001. Lights/Ultra Lights Cases: As of November 1, 2000, there were eleven putative class actions pending against PM Inc. and the Company, in Arizona, Florida, Illinois, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania and Tennessee, -24- on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. These cases allege, in connection with the use of the term "Lights" and/or "Ultra Lights," among other things, deceptive and unfair trade practices and unjust enrichment, and seek injunctive and equitable relief, including restitution. Trial in one purported class action is scheduled for November 2001. Retail Leaders Case: Three domestic tobacco manufacturers have filed suit against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that became available to retailers in October 1998. The complaint alleges that this retail merchandising program is exclusionary, creates an unreasonable restraint of trade and constitutes unlawful monopolization. In addition to an injunction, plaintiffs seek unspecified treble damages, attorneys' fees, costs and interest. In June 1999, the court issued a preliminary injunction enjoining PM Inc. from prohibiting retail outlets that participate in the program at one of the levels from installing competitive permanent signage in any section of the "industry fixture" that displays or holds packages of cigarettes manufactured by a firm other than PM Inc., or requiring those outlets to allocate a percentage of cigarette-related permanent signage to PM Inc. greater than PM Inc.'s market share. The court also enjoined PM Inc. from prohibiting retail outlets participating in the program from advertising or conducting promotional programs of cigarette manufacturers other than PM Inc. The preliminary injunction does not affect any other aspect of the Retail Leaders program. Vending Machine Case: Plaintiffs, who began their case as a purported nationwide class of cigarette vending machine operators, allege that PM Inc. has violated the Robinson-Patman Act in connection with its promotional and merchandising programs available to retail stores and not available to cigarette vending machine operators. Plaintiffs request actual damages, treble damages, injunctive relief, attorneys' fees and costs, and other unspecified relief. In June 1999, the court denied plaintiffs' motion for a preliminary injunction. Plaintiffs have withdrawn their request for class action status. Trial on the claims of ten plaintiffs which was set for trial in November 2000, has been continued without a new trial date being set, and the court is scheduled to hear PM Inc.'s motion for summary judgment on those claims in November 2000. The claims of remaining plaintiffs have been stayed pending disposition of the ten claims previously scheduled for trial. Cases Under the California Business and Professions Code: In July 1998, two suits were filed in California courts alleging that domestic cigarette manufacturers, including PM Inc. and others, have violated a California statute known as "Proposition 65" by not informing the public of the alleged risks of ETS to non-smokers. Plaintiffs also allege violations of California's Business and Professions Code regarding unfair and fraudulent business practices. Plaintiffs seek statutory penalties, injunctions barring the sale of cigarettes or requiring issuance of appropriate warnings, restitution, disgorgement of profits and other relief. Defendants' motion for summary judgment was granted in part, and plaintiffs' "Proposition 65" claims were dismissed. In August 2000, the parties to one of the cases entered into a settlement agreement, which was expressly conditioned upon a finding by the California Attorney General that the settlement is in the public interest. The Attorney General made that finding in October 2000. The parties to the remaining action entered into a separate settlement agreement in October 2000. The two settlement agreements, which together require PM Inc. to pay approximately $245,000 to the plaintiffs, collectively resolve all claims that were, or could have been, -25- brought in these two actions. The court is scheduled to rule on November 20, 2000 on defendants' motion seeking approval of both settlements and entry of a final judgment in both cases. Tobacco Price Cases: As of November 1, 2000, there were approximately 39 putative class actions against PM Inc. and other domestic tobacco manufacturers alleging that, through the MSA and other activities, the manufacturers conspired to fix cigarette prices in violation of antitrust laws. These cases are listed in Exhibit 99.1. Tobacco Growers' Case: In February 2000, a lawsuit was filed on behalf of a purported class of tobacco growers and quota-holders. An amended complaint was filed in May 2000, and a second amended complaint was filed in August 2000. The second amended complaint alleges that cigarette manufacturers, including PM Inc., violated antitrust laws by bid-rigging at tobacco auctions and by conspiring to undermine the tobacco quota and price support system administered by the federal government. In October 2000, defendants filed motions to dismiss the second amended complaint and to transfer the case to federal court. In October, plaintiffs filed a motion for class certification. Cigarette Importation Cases: As of November 3, 2000, Ecuador, the European Community, and various Departments of Colombia have filed suits in the United States against the Company and certain of its subsidiaries, including PM Inc. and PMI, and other cigarette manufacturers and their affiliates alleging that defendants illegally imported cigarettes into the plaintiff jurisdictions in an effort to evade taxes. The claims asserted in these cases include negligence, negligent misrepresentation, unjust enrichment, violations of RICO and its state-law equivalents and conspiracy. Plaintiffs in these cases seek actual damages, treble damages and undisclosed injunctive or equitable relief. -26- Consolidated Putative Punitive Damages Cases: As further described in Exhibit 99.1, in September 2000, a putative class action was filed in the federal district court in the Eastern District of New York which purports to consolidate punitive damages claims in ten tobacco-related actions currently pending in the federal district courts in the Eastern Districts of New York and Pennsylvania. The court hearing this case has indicated that, in its view, it appears likely that plaintiffs will be able to demonstrate a basis for the certification of an opt out compensatory damages class and a non-opt out punitive damages class. Certain Other Actions National Cheese Exchange Cases: Since 1996, seven putative class actions have been filed 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 treble damages. Two of the actions were voluntarily dismissed by plaintiffs after class certification was denied. Two other actions were dismissed in 1998 after Kraft's motions to dismiss were granted, and plaintiffs appealed those dismissals. In one of those cases, in February 2000 the court reversed the trial court's decision to dismiss the case. The remaining three cases were consolidated in state court in Wisconsin, and in November 1999, the court granted Kraft's motion for summary judgment. Plaintiffs have appealed. -27- Italian Tax Matters: One hundred eighty-eight tax assessments alleging the nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1995 and income taxes for the years 1987 to 1995) have been served upon certain affiliates of the Company. The aggregate amount of alleged unpaid taxes assessed to date is the Italian lira equivalent of $1.9 billion. In addition, the Italian lira equivalent of $2.8 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 174 of the assessments. The decisions to overturn 126 assessments have been appealed by the tax authorities to the regional appellate court in Milan. To date, the regional appellate court has rejected 41 of the appeals filed by the tax authorities. The tax authorities have appealed 31 of the 41 decisions of the regional appellate court to the Italian Supreme Court. The remaining 10 decisions are expected to be appealed as well. In a separate proceeding in Naples, in October 1997, a 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. Further investigation is being conducted following which a decision will be made as to whether there should be a trial on these charges. The Company, its affiliates and the officers and directors who are subject to the proceedings believe they have complied with applicable Italian tax laws and are vigorously contesting the pending assessments and proceedings. ---------------------- It is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries. Litigation is subject to many uncertainties. Unfavorable verdicts awarding compensatory and punitive damages have been returned in the Engle smoking and health class action trial and judgment has been entered against PM Inc. It is possible that additional cases could be decided unfavorably and that there could be further adverse developments in the Engle case. Three individual smoking and health cases in which PM Inc. is a defendant have been decided unfavorably at the trial court level and are in the process of being appealed. An unfavorable outcome or settlement of a pending smoking and health or health care cost recovery case could encourage the commencement of additional similar litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending litigation. The present legislative and litigation environment is substantially uncertain, and it is possible that the Company's business, volume, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal or state tobacco legislation. The Company and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the -28- respective cases, that it has a number of valid defenses to all litigation pending against it, as well as valid bases for appeal of adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, the Company and its subsidiaries may enter into discussions in an attempt to settle particular cases if they believe it is in the best interests of the Company's stockholders to do so. Note 6. Recently Issued Accounting Pronouncements: During 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which had an initial adoption date by the Company of January 1, 2000. During 1999, the FASB postponed the adoption date of SFAS No. 133 until January 1, 2001. SFAS No. 133 requires that all derivative financial instruments be recorded on the consolidated balance sheets at their fair value. Changes in the fair value of derivatives will be recorded each period in earnings or other comprehensive earnings, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in other comprehensive earnings will be reclassified as earnings in the periods in which earnings are affected by the hedged item. Since the impact of SFAS No. 133 is dependent on future market rates and outstanding derivative positions at January 1, 2001, the Company cannot yet determine the impact that adoption or subsequent application of SFAS No. 133 will have on its financial position or results of operations. During 2000, a number of accounting and financial reporting pronouncements relating to the recognition, measurement and classification of revenues, various sales incentives and shipping and handling costs were issued. These pronouncements will be effective for the fourth quarter of 2000. The Company has determined that adoption or subsequent application of these pronouncements will not have a material effect on its financial position or results of operations. Upon adoption, prior period amounts will be reclassified to conform with the new pronouncements. -29- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Operating Results For the Nine Months Ended September 30, Operating Revenues -------------------------- (in millions) 2000 1999 -------- -------- Domestic tobacco $ 16,987 $ 14,352 International tobacco 20,552 21,419 North American food 13,534 13,193 International food 6,115 6,601 Beer 3,449 3,361 Financial services 305 259 -------- -------- Operating revenues $ 60,942 $ 59,185 ======== ======== Operating Income -------------------------- (in millions) 2000 1999 -------- -------- Domestic tobacco $ 3,849 $ 3,436 International tobacco 4,180 3,922 North American food 2,690 2,404 International food 951 785 Beer 491 454 Financial services 193 168 -------- -------- Operating companies income 12,354 11,169 Amortization of goodwill (442) (434) General corporate expenses (626) (386) Minority interest (92) (95) -------- -------- Operating income $ 11,194 $ 10,254 ======== ======== -30- For the Three Months Ended September 30, Operating Revenues -------------------------- (in millions) 2000 1999 -------- -------- Domestic tobacco $ 5,835 $ 5,157 International tobacco 6,753 7,153 North American food 4,276 4,171 International food 1,939 2,155 Beer 1,149 1,153 Financial services 106 89 -------- -------- Operating revenues $ 20,058 $ 19,878 ======== ======== For the Three Months Ended September 30, (continued) Operating Income -------------------------- (in millions) 2000 1999 -------- -------- Domestic tobacco $ 1,459 $ 1,367 International tobacco 1,439 1,239 North American food 827 773 International food 416 264 Beer 145 140 Financial services 66 58 -------- -------- Operating companies income 4,352 3,841 Amortization of goodwill (149) (142) General corporate expenses (207) (151) Minority interest (32) (32) -------- -------- Operating income $ 3,964 $ 3,516 ======== ======== Results of Operations for the Nine Months Ended September 30, 2000 Operating revenues for the first nine months of 2000 increased $1.8 billion (3.0%) over 1999, due primarily to an increase in revenues from the Company's domestic tobacco operations. Despite this increase, the operating revenue comparison for the first nine months was adversely affected by approximately $225 million of incremental sales made during the fourth quarter of 1999, as the Company's customers planned for potential business failures related to the Century Date Change ("CDC"). The incremental CDC sales would have normally been made during the first quarter of 2000. Including the incremental CDC revenues in the first quarter of 2000, and excluding the revenues of several international food businesses divested since the beginning of 1999, operating revenues for the first nine months of 2000 increased $2.1 billion (3.6%) over the first nine months of 1999. Operating income for the first nine months of 2000 increased $940 million (9.2%) over the comparable 1999 period. The operating income comparison was affected by the following unusual items: -31- o Sale of French Confectionery Business - In August 2000, the Company sold a French confectionery business ("French Confectionery Sale") for proceeds of $251 million and an estimated pre-tax gain of $139 million. The pre-tax gain, which is subject to adjustment, is included in the international food segment's marketing, administration and research costs in the consolidated statements of earnings. o Louisville Factory Closure - During the first quarter of 1999, Philip Morris Incorporated ("PM Inc.") announced plans to phase out cigarette production capacity at its Louisville, Kentucky manufacturing plant by August 2000 (the "Louisville Closure"). The closure of this facility, which occurred in stages, has been completed. In connection with the closure, PM Inc. recorded pre-tax charges for the first nine months of 1999 of $183 million. These charges, which are in the domestic tobacco segment's marketing, administration and research costs in the consolidated statements of earnings, included enhanced severance, pension and postretirement benefits for approximately 1,500 hourly and salaried employees. Severance benefits, which were either paid in a lump sum or as income protection payments over a period of time, commenced upon termination of employment. Payments of enhanced pension and postretirement benefits are being made over the remaining lives of the former employees in accordance with the terms of the related benefit plans. All operating costs of the manufacturing plant, including increased depreciation, were charged to expense as incurred during the closing period. o Kraft Separation Programs - During the first quarter of 1999, Kraft Foods, Inc. ("Kraft") announced that it was offering voluntary retirement incentive or separation programs to certain eligible hourly and salaried employees in the United States (the "Kraft Separation Programs"). Employees electing to terminate employment under the terms of these programs were entitled to enhanced retirement or severance benefits. Approximately 1,100 hourly and salaried employees accepted the benefits offered by these programs and elected to retire or terminate. As a result, Kraft recorded a pre-tax charge of $157 million for the first nine months of 1999. This charge was included in marketing, administration and research costs in the consolidated statements of earnings for the North American food segment. Payments of pension and postretirement benefits are made in accordance with the terms of the applicable benefit plans. Severance benefits, which are paid over a period of time, commenced upon dates of termination that ranged from April 1999 to March 2000. Salary and related benefit costs of employees prior to the retirement or termination date were expensed as incurred. o Brazil Factory Closure - During the third quarter of 1999, a subsidiary of the Company announced the closure of a cigarette factory and the corresponding reduction of cigarette production capacity in Brazil (the "Brazil Factory Closure"). Prior to the factory closure, existing employees were offered voluntary dismissal benefits. These benefits were accepted by half of the approximately 1,000 employees at the facility. During the third quarter of 1999, the factory was closed and employment of the remaining employees was terminated. For the first nine months of 1999, a pre-tax charge of $136 million was recorded in marketing, administration and research costs in the consolidated statements of earnings of the international tobacco segment to write down the tobacco machinery and equipment no longer in use and to recognize the cost of enhanced severance benefits. Payments of severance benefits to former employees were in accordance with the local Brazilian regulations. -32- The operating income comparison was adversely affected by approximately $100 million of operating income from the previously mentioned incremental CDC sales. Including the incremental CDC income and excluding the pre-tax gain on the French Confectionery Sale and the pre-tax charges for the Louisville Closure, the Kraft Separation Programs and the Brazil Factory Closure, as well as the results from operations divested since the beginning of 1999, operating income for the first nine months of 2000 increased $431 million (4.0%) over the first nine months of 1999, due primarily to higher operating results from all segments, partially offset by higher general corporate expenses. The $240 million increase in general corporate expenses over the first nine months of 1999 is due primarily to higher spending on the Company's corporate image campaign. Operating companies income, which is defined as operating income before general corporate expenses, minority interest and amortization of goodwill, increased $1.2 billion (10.6%) over the first nine months of 1999, due primarily to higher operating results from all segments and the previously discussed 2000 pre-tax gain on the French Confectionery Sale, 1999 pre-tax charges for the Louisville Closure, the Kraft Separation Programs and the Brazil Factory Closure, partially offset by the incremental CDC income. Including the impact of the incremental CDC income and excluding the 2000 pre-tax gain and 1999 pre-tax charges, as well as the results from operations divested since the beginning of 1999, operating companies income increased $676 million (5.8%). Currency movements have decreased operating revenues by $1.9 billion ($1.0 billion, after excluding the impact of currency movements on excise taxes), and operating companies income by $276 million from the first nine months of 1999. Declines in operating revenues and operating companies income arising from the strength of the U.S. dollar against the Euro and certain Central and Eastern European currencies have been partially offset by the weakness of the U.S. dollar against the Japanese yen. Although the Company cannot predict future movements in currency rates, strengthening of the dollar, primarily against the Euro, if sustained during the remainder of 2000, could continue to have an unfavorable impact on operating revenues and operating companies income comparisons with 1999. Interest and other debt expense, net, decreased $91 million (14.5%) in the first nine months of 2000 from the comparable 1999 period. This decrease was due primarily to lower average debt outstanding during the first nine months of 2000. Diluted and basic EPS, which were $2.85 and $2.86, respectively, for the first nine months of 2000, increased by 18.3% and 18.2%, respectively, over the first nine months of 1999. Net earnings of $6.5 billion for the first nine months of 2000 increased $681 million (11.7%) over the comparable period of 1999. These results include the charges for the Louisville Closure, the Kraft Separation Programs and the Brazil Factory Closure, the gain on the French Confectionery Sale, and exclude the incremental CDC income. After adjusting for the effects of these unusual items, net earnings increased 6.0% to $6.5 billion, diluted EPS increased 12.3% to $2.84 and basic EPS increased 12.2% to $2.85. Results of Operations for the Three Months Ended September 30, 2000 Operating revenues for the third quarter of 2000 increased $180 million (0.9%) over the comparable 1999 period, due primarily to an increase in revenues from the Company's domestic tobacco operations. Excluding the revenues of several international food businesses divested since the beginning of 1999, underlying operating revenues for the third quarter of 2000 increased $219 million (1.1%) over the third quarter of 1999. -33- Operating income for the third quarter of 2000 increased $448 million (12.7%) over the comparable 1999 period. Third quarter 2000 operating income includes a pre-tax gain of $139 million related to the French Confectionery Sale. Third quarter 1999 operating income includes pre-tax charges of $136 million related to the Brazil Factory Closure and $8 million related to the Louisville Closure. Excluding the pre-tax gain and pre-tax charges, as well as the results from operations divested since the beginning of 1999, operating income for 2000 increased $168 million (4.6%) from the third quarter of 1999 due primarily to higher operating results from all segments, partially offset by higher general corporate expenses. On a reported basis, operating companies income, which is defined as operating income before general corporate expenses, minority interest and amortization of goodwill, increased $511 million (13.3%) from the third quarter of 1999. Excluding the previously mentioned pre-tax gain and pre-tax charges, as well as the results of divested operations, operating companies income increased $231 million (5.8%) from the third quarter of 1999. Currency movements have decreased operating revenues by $630 million ($335 million, after excluding the impact of currency movements on excise taxes), and operating companies income by $102 million from the third quarter of 1999. Declines in operating revenues and operating companies income arising from the strength of the U.S. dollar against the Euro and certain Central and Eastern European currencies have been partially offset by the weakness of the U.S. dollar against the Japanese yen. Although the Company cannot predict future movements in currency rates, strengthening of the dollar, primarily against the Euro, if sustained during the remainder of 2000, could continue to have an unfavorable impact on operating revenues and operating companies income comparisons with 1999. Interest and other debt expense, net, decreased $41 million (20.6%) in the third quarter of 2000 from the comparable 1999 period. This decrease was due primarily to lower average debt outstanding during the third quarter of 2000. Diluted and basic EPS, which were $1.03 and $1.04, respectively, for the third quarter of 2000, increased by 22.6% and 23.8%, respectively, over the third quarter of 1999. Net earnings of $2.3 billion for the third quarter of 2000 increased $318 million (15.9%) over the comparable 1999 period. These results reflect the charges for the Brazil Factory Closure and Louisville Closure and the gain on the French Confectionery Sale. After adjusting for the effect of these unusual items, net earnings increased 6.8% to $2.2 billion, diluted EPS increased 13.8% to $0.99 and basic EPS increased 13.6% to $1.00. Year 2000 To date, the Company and its subsidiaries have experienced no material disruptions to their business operations as a result of the CDC. External information technology specialists have stated that CDC-related miscalculations or systems failures could occur throughout the year 2000 and into 2001. The experience of the Company and its subsidiaries thus far suggests that no material disruptions to their business operations are likely to occur. However, the Company and its subsidiaries will continue to monitor the transition to year 2000 as part of their regular management processes and will respond promptly to any problems that occur. The Company's increases in year-end inventories and trade receivables caused by preemptive contingency plans resulted in incremental cash outflows during 1999 of approximately $300 million. -34- The cash outflows reversed in the first quarter of 2000. In addition, certain operating subsidiaries of the Company had increased shipments in the fourth quarter of 1999, because customers purchased additional product in anticipation of potential CDC-related disruptions, resulting in incremental operating revenues and operating companies income in 1999 of approximately $225 million and $100 million, respectively. Accordingly, there were reductions of corresponding amounts in operating revenues and operating companies income in the first quarter of 2000. Euro On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency--the Euro. At that time, the Euro began trading on currency exchanges and could be used in financial transactions. Beginning in January 2002, new Euro-denominated currency (bills and coins) will be issued, and legacy currencies will be withdrawn from circulation. The Company's operating subsidiaries affected by the Euro conversion have established and, where required, implemented plans to address the systems and business issues raised by the Euro currency conversion. These issues include, among others: (1) the need to adapt computer and other business systems and equipment to accommodate Euro-denominated transactions; and (2) the competitive impact of cross-border price transparency, which may make it more difficult for businesses to charge different prices for the same products on a country-by- country basis, particularly once the Euro currency is issued in 2002. The Euro conversion has not had, and the Company currently anticipates that it will not have, a material adverse impact on its financial condition or results of operations. -35- 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 recent jury verdicts against PM Inc., including the $74 billion punitive damages verdict in the Engle smoking and health class action case discussed in Note 5. Contingencies; the civil lawsuit filed by the U.S. federal government against various cigarette manufacturers and others as discussed in Note 5; legislation or other governmental action seeking to ascribe to the industry responsibility and liability for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke ("ETS"); price increases in the United States related to the settlement of certain tobacco litigation; actual and proposed excise tax increases; an increase in diversion into the United States market of products intended for sale outside the United States; foreign and United States governmental investigations into illegal cigarette imports; actual and proposed requirements regarding disclosure of cigarette ingredients and other proprietary information; governmental and private bans and restrictions on smoking; actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States; actual and proposed restrictions affecting tobacco manufacturing, marketing, advertising and sales outside the United States; actual and proposed legislation in Congress and the State of New York to require the establishment of fire-safety standards for cigarettes; the diminishing social acceptance of smoking and increased pressure from anti-smoking groups and unfavorable press reports; and other tobacco legislation that may be considered by the Congress, the states and other jurisdictions inside and outside the United States. Excise Taxes: Cigarettes are subject to substantial federal, state and local excise taxes in the United States and to similar taxes in most foreign markets. The United States federal excise tax on cigarettes is currently $0.34 per pack of 20 cigarettes and is scheduled to increase to $0.39 per pack on January 1, 2002. In general, excise taxes and other taxes on cigarettes have been increasing. These taxes vary considerably and, when combined with sales taxes and the current federal excise tax, may be as high as $1.87 per pack in a given locality in the United States. Congress has been considering significant increases in the federal excise tax or other payments from tobacco manufacturers, and increases in excise and other cigarette-related taxes have been proposed at the state and local levels and in many jurisdictions outside the United States. In the opinion of PM Inc. and PMI, increases in excise and similar taxes have had an adverse impact on sales of cigarettes. Any future increases, the extent of which cannot be predicted, could result in volume declines for the cigarette industry, including PM Inc. and PMI, and might cause sales to shift from the premium segment to the discount segment. Federal Trade Commission ("FTC"): In September 1997, the FTC issued a request for public comments on its proposed revision of its "tar" and nicotine test methodology and reporting procedures established by a 1970 voluntary agreement among domestic cigarette manufacturers. In February 1998, PM Inc. and three other domestic cigarette manufacturers filed comments on the proposed revisions. In November 1998, the FTC wrote to the Department of Health and Human Services requesting its -36- assistance in developing specific recommendations on the future of the FTC's program for testing the "tar," nicotine and carbon monoxide content of cigarettes. Food and Drug Administration ("FDA") Regulations: In August 1996, the FDA promulgated regulations asserting jurisdiction over cigarettes as "drugs" or "medical devices" under the provisions of the Food, Drug and Cosmetic Act ("FDCA"). The regulations, which included severe restrictions on the distribution, marketing and advertising of cigarettes, and would have required the industry to comply with a wide range of labeling, reporting, record-keeping, manufacturing and other requirements, were declared invalid by the United States Supreme Court in March 2000. The Company has stated that while it continues to oppose FDA regulation over cigarettes as "drugs" or "medical devices" under the provisions of FDCA, it would be prepared to support new legislation that would provide for reasonable regulation at the federal level of cigarettes as cigarettes. Currently, there are several bills pending in Congress that if enacted, would give the FDA authority to regulate tobacco products. The bills take a variety of approaches to the issue of the FDA's proposed regulation of tobacco products ranging from codification of the original FDA regulations under the "drug" and "medical device" provisions of the FDCA to the creation of provisions that would apply uniquely to tobacco products. All of the pending legislation could result in substantial Federal regulation of the design, manufacture and marketing of cigarettes. The ultimate outcome of the pending bills cannot be predicted. Ingredient Disclosure Laws: The Commonwealth of Massachusetts has enacted legislation to require cigarette manufacturers to report yearly the flavorings and other ingredients used in each brand style of cigarettes sold in the Commonwealth, and on a qualified, by-brand basis to provide "nicotine-yield ratings" for their products based on standards established by the Commonwealth. Cigarette manufacturers sued to have the statute declared unconstitutional, arguing that it could result in the public disclosure of valuable proprietary information. In September 2000, the federal district court granted the plaintiffs' motion for summary judgment and permanently enjoined the defendants from requiring cigarette manufacturers to disclose brand specific information on ingredients in their products. Defendants have appealed the district court's ruling. The ultimate outcome of this lawsuit cannot be predicted. Similar legislation has been enacted or proposed in other states. Some jurisdictions outside the United States have also enacted or proposed some form of ingredient disclosure legislation or regulation. Health Effects of Smoking and Exposure to ETS: Reports with respect to the health risks of cigarette smoking have been publicized for many years, and the sale, promotion and use of cigarettes continue to be subject to increasing governmental regulation. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports linking cigarette smoking with a broad range of health hazards, including various types of cancer, coronary heart disease and chronic lung disease, and recommending various governmental measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994 reports focus upon the addictive nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, the economic and regulatory -37- aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particularly the addictive nature of cigarette smoking in adolescence. Studies with respect to the health risks of ETS to nonsmokers (including lung cancer, respiratory and coronary illnesses, and other conditions) have also received significant publicity. In 1986, the Surgeon General of the United States and the National Academy of Sciences reported that nonsmokers were at increased risk of lung cancer and respiratory illness due to ETS. In 1993, the United States Environmental Protection Agency (the "EPA") issued a report relating to certain health effects of ETS. The report included a risk assessment relating to the association between ETS and lung cancer in nonsmokers, and a determination by the EPA to classify ETS as a "Group A" carcinogen. In July 1998, a federal district court vacated those sections of the report relating to lung cancer, finding that the EPA may have reached different conclusions had it complied with certain relevant statutory requirements. The federal government has appealed the court's ruling. The ultimate outcome of this litigation cannot be predicted. In 1999, PM Inc. and PMI established Web sites that included, among other things, views of public authorities on smoking, disease causation in smokers and addiction. 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 potential smokers to rely on the messages of public health authorities in making all smoking-related decisions. The sites further PM Inc.'s and PMI's efforts to implement the Company's commitment to take steps to ensure that there will be a single, consistent public health message on disease causation in smokers, and smoking and addiction. Other Legislative Initiatives: In recent years, various members of Congress have introduced legislation, some of which has been the subject of hearings or floor debate, that would subject cigarettes to various regulations under the Department of Health and Human Services or regulation under the Consumer Products Safety Act, establish anti-smoking educational campaigns or anti-smoking programs, or provide additional funding for governmental anti-smoking activities, further restrict the advertising of cigarettes, including requiring additional warnings on packages and in advertising, 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. -38- Legislative initiatives adverse to the tobacco industry have also been considered in a number of jurisdictions outside the United States. 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 one hundred and eighty days after the standards are promulgated. It is not possible to predict the impact of this law on PM Inc. until the standards are issued. Similar legislation has been proposed in other states and localities and at the federal level. It is not possible to predict what, if any, additional foreign or domestic governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or to the tobacco industry generally. However, if any or all of the foregoing were to be implemented, the business, volume, results of operations, cash flows and financial position of PM Inc., PMI and the Company could be materially adversely affected. Tobacco-Related Litigation: There is substantial litigation pending related to tobacco products in the United States and certain foreign jurisdictions, including the Engle class action case in Florida in which PM Inc. is a defendant and a civil health care cost recovery action filed by the United States Department of Justice in September 1999 against domestic tobacco manufacturers and others, including the Company and PM Inc. (See Note 5. Contingencies, above, for a discussion of such litigation.) State Settlement Agreements: As discussed in Note 5. Contingencies, during 1997 and 1998, PM Inc. and other major domestic tobacco product manufacturers entered into agreements with states and various U.S. 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 Nine Months Ended September 30, ---------------------------------------------- Operating Operating Revenues Companies Income -------------------- -------------------- (in millions) 2000 1999 2000 1999 ------- ------- ------- ------- Domestic tobacco $16,987 $14,352 $ 3,849 $ 3,436 International tobacco 20,552 21,419 4,180 3,922 ------- ------- ------- ------- Total tobacco $37,539 $35,771 $ 8,029 $ 7,358 ======= ======= ======= ======= Domestic tobacco. During the first nine months of 2000, PM Inc.'s operating revenues increased $2.6 billion (18.4%) over the comparable 1999 period, due primarily to higher pricing ($2.2 billion, including amounts related to the January 1, 2000 federal excise tax increase) and higher volume ($406 million). -39- Operating companies income for the first nine months of 2000 increased $413 million (12.0%) over the comparable 1999 period, due primarily to price increases, net of cost increases ($909 million), higher volume ($317 million) and the 1999 pre-tax charges for the Louisville Closure ($183 million), partially offset by higher marketing, administration and research costs ($976 million, primarily marketing). Excluding the impact of the 1999 pre-tax charges for the Louisville Closure, PM Inc.'s operating companies income of $3,849 million for the first nine months of 2000 increased by 6.4% over the $3,619 million earned during the comparable 1999 period. Shipment volume for the domestic tobacco industry during the first nine months of 2000 increased to 317.0 billion units, a 0.7% increase over the first nine months of 1999. PM Inc.'s shipment volume for the first nine months of 2000 was 160.5 billion units, an increase of 3.0% over the comparable 1999 period. Shipment growth for the industry and PM Inc. during the first nine months of 2000 was largely driven by wholesalers' decisions to rebuild their inventory levels after the January 1, 2000 federal excise tax increase. In contrast, wholesalers decreased their inventory levels during 1999, as inventory held at the end of 1999 was subject to the federal excise tax increase through a "floor tax". PM Inc. estimates that after adjusting for this factor, industry shipment volume declined approximately 1.0% to 2.0% from the first nine months of 1999, while PM Inc.'s shipment volume was essentially flat. For the first nine months of 2000, PM Inc.'s shipment market share was 50.6%, an increase of 1.1 share points over the comparable period of 1999. Marlboro shipment volume increased 5.6 billion units (4.9%) over the first nine months of 1999 to 119.6 billion units for a 37.7% share of the total industry, an increase of 1.5 share points over the comparable period of 1999. Contributing to this growth were introductory shipments of Marlboro Milds, which were launched nationally at retail in May. Based on shipments, the premium segment accounted for approximately 73.6% of the domestic cigarette industry volume in the first nine months of 2000, an increase of 0.2 share points over the comparable period of 1999. In the premium segment, PM Inc.'s volume increased 3.2% during the first nine months of 2000, compared with a 1.0% increase for the industry, resulting in a premium segment share of 60.6%, an increase of 1.3 share points over the first nine months of 1999. In the discount segment, PM Inc.'s shipments increased 1.4% to 19.1 billion units in the first nine months of 2000, compared with an industry decrease of 0.1%, resulting in a discount segment share of 22.8%, an increase of 0.3 share points from the comparable period of 1999. Basic shipment volume for the first nine months of 2000 was up 7.7% to 16.4 billion units, for a 19.6% share of the discount segment, an increase of 1.5 share points from the comparable 1999 period. Basic shipment volume was influenced by the timing of promotional shipments year-over-year. According to consumer purchase data from Information Resources Inc./Capstone, PM Inc.'s share of cigarettes sold at retail grew 0.5 share points to 50.6% for the first nine months of 2000. The first nine months of 2000 retail share for Marlboro rose 1.0 share points to 37.2%. PM Inc. cannot predict future changes or rates of change in domestic tobacco industry volume, the relative sizes of the premium and discount segments or in PM Inc.'s shipments, shipment market share or retail market share; however, it believes that PM Inc.'s shipments may be materially adversely affected by price increases related to tobacco litigation settlements and, if enacted, by increased excise taxes or other tobacco legislation discussed under "Tobacco-- Business Environment" above. -40- In July 2000, PM Inc. announced a price increase of $3.00 per thousand cigarettes on its domestic premium and discount brands. This followed price increases of $6.50 per thousand in January 2000 and $9.00 per thousand in August 1999. 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. International tobacco. During the first nine months of 2000, international tobacco operating revenues, including excise taxes, decreased $867 million (4.0%) from the first nine months of 1999. Excluding excise taxes, operating revenues decreased $215 million (2.0%), due primarily to unfavorable currency movements ($534 million) and the previously discussed CDC revenues ($97 million), partially offset by price increases ($320 million) and favorable volume/mix ($67 million). Operating companies income for the first nine months of 2000 increased $258 million (6.6%) over the comparable 1999 period, due primarily to price increases and favorable costs ($457 million) and the 1999 pre-tax charge for the Brazil Factory Closure ($136 million), partially offset by unfavorable currency movements ($234 million), the shift of CDC income ($59 million) to the fourth quarter of 1999 and unfavorable volume/mix ($73 million). Adjusting for the shift in CDC income and excluding the 1999 impact of the pre-tax charge for the Brazil Factory Closure, operating companies income of $4,239 million for the first nine months of 2000 increased 4.5% over $4,058 million for the comparable period of 1999. PMI's volume for the first nine months of 2000 of 520.1 billion units decreased 4.5 billion units (0.8%) from the first nine months of 1999. Adjusting for the shift in CDC volume, (the basis of presentation for all following PMI volume disclosures), PMI's volume of 524.3 billion units for the first nine months of 2000 decreased 0.3 billion units from the comparable 1999 period, due primarily to lower volume in Central Europe, as well as by lower worldwide duty-free shipments, which were affected by the July 1999 cessation of intra-EU duty-free sales, partially offset by higher volume in Western and Eastern Europe, Asia and Japan. Volume advanced in a number of important markets, including Italy, France, Spain, the Benelux countries, Portugal, Greece, Russia, Ukraine, Kazakhstan, Saudi Arabia, Egypt, Japan, Indonesia, Thailand, Korea, Malaysia and Mexico. PMI recorded market share gains in many of its major markets. Volume and share in Germany was adversely affected by intense competition, the growth of trade brands and a reduction in the number of cigarettes per vending pack following a fourth quarter 1999 industry price increase. A lower total industry in Poland and trade purchasing patterns in the Czech Republic contributed to an overall volume decline in Central Europe. In Turkey, lower volume and share resulted from lower total industry volume following fourth quarter 1999 industry price increases. Volume was lower in Australia due to lower total industry volume and in Argentina due to the recessionary environment. International volume for Marlboro increased 0.7%, as higher volumes in Japan, Italy, France, Spain, Saudi Arabia, Russia, Ukraine, Thailand and Mexico were partially offset by lower volumes in Poland, Czech Republic and certain Eastern European markets and by lower worldwide duty-free shipments. For the Three Months Ended September 30, ---------------------------------------------- Operating Operating Revenues Companies Income -------------------- -------------------- (in millions) 2000 1999 2000 1999 ------- ------- ------- ------- Domestic tobacco $ 5,835 $ 5,157 $ 1,459 $ 1,367 International tobacco 6,753 7,153 1,439 1,239 ------- ------- ------- ------- Total tobacco $12,588 $12,310 $ 2,898 $ 2,606 ======= ======= ======= ======= -41- Domestic tobacco. During the third quarter of 2000, PM Inc.'s operating revenues increased $678 million (13.1%) over the comparable 1999 period, due primarily to higher pricing ($739 million, including amounts related to the January 1, 2000 federal excise tax increase) partially offset by lower volume ($67 million). Operating companies income for the third quarter of 2000 increased $92 million (6.7%) from the comparable 1999 period, due primarily to price increases, net of cost increases ($311 million), partially offset by lower volume ($52 million) and higher marketing, administration and research costs ($208 million, primarily marketing). Excluding the $8 million impact of the 1999 pre-tax charges for the Louisville Closure, PM Inc.'s operating companies income of $1,459 million for the third quarter of 2000 increased by 6.1% over the $1,375 million earned during the comparable 1999 period. Shipment volume for the domestic tobacco industry during the third quarter of 2000 declined to 107.3 billion units, a 3.5% decrease from the third quarter of 1999. PM Inc.'s shipment volume for the third quarter of 2000 was 54.0 billion units, a decrease of 1.3% from the comparable 1999 period. The decline in the third quarter 2000 shipment volume for the industry and PM Inc. can primarily be attributed to one less shipping day in the quarter. PM Inc. estimates that after adjusting for this factor, industry shipment volume declined approximately 1.0% to 2.0% from the third quarter of 1999, while PM Inc.'s shipment volume was essentially flat. For the third quarter of 2000, PM Inc.'s shipment market share was 50.4%, an increase of 1.1 share points over the comparable period of 1999. Marlboro shipment volume increased 634 million units (1.6%) over the third quarter of 1999 to 40.3 billion units for a 37.6% share of the total industry, an increase of 1.9 share points over the comparable period of 1999. Contributing to this increase were introductory shipments of Marlboro Milds, which were launched nationally at retail in May. Based on shipments, the premium segment accounted for approximately 73.5% of domestic cigarette industry volume in the third quarter of 2000, an increase of 0.4 share points over the comparable period of 1999. In the premium segment, PM Inc.'s third-quarter volume decreased 0.6%, compared with a 3.0% decrease for the industry, resulting in a premium segment share of 60.4%, an increase of 1.4 share points from the third quarter of 1999. In the discount segment, PM Inc.'s third quarter shipments decreased 5.9% to 6.4 billion units in 2000, compared with a 4.8% decrease in shipments for the industry, resulting in a discount segment share of 22.6%, a decrease of 0.3 share points from the comparable period of 1999. Basic third quarter shipment volume increased slightly to 5.7 billion units, for a 20.0% share of the discount segment, an increase of 1.0 share points from the comparable 1999 period. The increase in shipment volume and the growth in market share for Basic were each influenced by the timing of promotional shipments in the third quarters of 2000 and 1999. According to consumer purchase data from Information Resources Inc./Capstone, PM Inc.'s share of cigarettes sold at retail for the third quarter of 2000 was 50.2%, an increase of 0.3 share points over the third quarter of 1999. The third quarter 2000 retail share for Marlboro rose 0.9 share points over the comparable 1999 period to 36.8%. -42- PM Inc. cannot predict future changes or rates of change in domestic tobacco industry volume, the relative sizes of the premium and discount segments or in PM Inc.'s shipments, shipment market share or retail market share; however, it believes that PM Inc.'s shipments may be materially adversely affected by price increases related to tobacco litigation settlements and, if enacted, by increased excise taxes or other tobacco legislation discussed under "Tobacco--Business Environment" above. International tobacco. During the third quarter of 2000, international tobacco operating revenues, including excise taxes, decreased $400 million (5.6%) from the third quarter of 1999. Excluding excise taxes, operating revenues decreased $70 million (1.9%) from the third quarter of 1999, due primarily to unfavorable currency movements ($174 million), partially offset by price increases ($55 million) and favorable volume/mix ($45 million). Operating companies income for the third quarter of 2000 increased $200 million (16.1%) over the comparable 1999 period, due primarily to price increases and favorable costs ($108 million), the 1999 pre-tax charge for the Brazil Factory Closure ($136 million) and lower marketing, administration and research costs, partially offset by unfavorable currency movements ($87 million). PMI's volume of 176.4 billion units for the third quarter of 2000 increased 1.5 billion units (0.8%) over the third quarter of 1999. Improving economies in Asia and Eastern Europe, primarily Russia, as well as volume and share growth in the important markets of Italy, France and Spain in Western Europe contributed to this growth. These volume gains were partially offset by lower volume in Germany, Poland, Japan and Australia, as well as by lower worldwide duty-free shipments. Volume advanced in a number of important markets including Italy, France, Spain, Portugal, Greece, Russia, Ukraine, Kazakhstan, Saudi Arabia, Egypt, Indonesia, Thailand, Korea, Malaysia and Mexico. PMI recorded market share gains in many of its major markets. Volume and share in Germany continued to be adversely affected by intense competition, the growth of trade brands and a reduction in the number of cigarettes per vending pack following a fourth quarter 1999 industry price increase as well as higher trade purchases in September 1999 in advance of the price increase. In Poland, lower volume was due to a lower total industry and trade purchasing patterns related to tax driven price increases. Volume was lower in Japan due solely to the timing of shipments. Volume was lower in Australia due to a lower total industry and in Argentina due to the recessionary environment. International volume for Marlboro grew 2.8%, driven by growth in Japan, Italy, France, Spain, Saudi Arabia, Russia, Ukraine, Thailand, Hong Kong and Mexico, partly offset by lower volume in Germany, Poland and certain Eastern European markets and by lower worldwide duty-free shipments. Food Business Environment Kraft, the largest processor and marketer of retail packaged food in the United States, and its subsidiary, Kraft Foods International, Inc. ("KFI"), which markets coffee, confectionery and cheese and grocery products in Europe, Latin America and the Asia/Pacific region, 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. To confront these challenges, Kraft and KFI continue to take steps to build the value of premium brands with new product and marketing initiatives, to improve their food business portfolios and to reduce costs. -43- 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, particularly in dairy, coffee bean and cocoa. Dairy commodity costs in the United States on average have been below the levels seen during the first nine months of 1999. Coffee and cocoa bean prices were also lower than the first nine months of 1999. During the first quarter of 2000, Kraft completed its purchase of the outstanding common stock of Balance Bar Co., a maker of energy and nutrition snack products. In a separate transaction, Kraft also completed its acquisition of Boca Burger, Inc., a privately held manufacturer and marketer of soy-based meat alternatives. The total cost of these acquisitions was $358 million. Neither transaction is expected to have a material effect on 2000 operating revenues or operating companies income of Kraft or the Company. In June 2000, the Company entered into definitive agreements to acquire all of the outstanding shares of Nabisco Holdings Corp. ("Nabisco") for $55 per share in cash. The transaction reflects an aggregate cost of approximately $19.2 billion, which includes the assumption of approximately $4.0 billion in net debt. The acquisition will be financed initially through a combination of available cash balances and short-term debt. The transaction, which has been approved by the shareholders of Nabisco Group Holdings and by the European Commission, remains under review by United States anti-trust authorities. The parties are working to close the transaction by year-end. The acquisition will be accounted for as a purchase. Subsequent to the acquisition, Kraft plans to undertake an initial public offering ("IPO") of less than 20% of the combined food company. The IPO proceeds will be used to retire a portion of the debt incurred as a result of the acquisition of Nabisco. During 2000 and 1999, KFI and Kraft sold several small international and domestic food businesses. The aggregate proceeds received in these transactions were $302 million in 2000 and $48 million in 1999. The Company recorded pre-tax gains of $174 million in 2000 and $20 million in 1999. The operating results of businesses divested were not material to consolidated operating results in any of the periods presented. During the third quarter of 2000, Kraft recalled taco shells, supplied to Kraft under a manufacturing agreement with an unrelated food company, which were found to contain genetically modified corn not intended for human consumption. The costs related to the recall are not expected to be material to the operating results of the North American food segment or the Company. Kraft cannot predict the impact, if any, that negative publicity surrounding the recall will have on future sales of its Mexican dinner products. Operating Results For the Nine Months Ended September 30, ---------------------------------------------- Operating Operating Revenues Companies Income -------------------- -------------------- (in millions) 2000 1999 2000 1999 ------- ------- ------- ------- North American food $13,534 $13,193 $ 2,690 $ 2,404 International food 6,115 6,601 951 785 ------- ------- ------- ------- Total food $19,649 $19,794 $ 3,641 $ 3,189 ======= ======= ======= ======= -44- North American food. During the first nine months of 2000, operating revenues increased $341 million (2.6%) from the first nine months of 1999, due primarily to higher volume ($228 million), higher pricing ($81 million) and the impact of acquisitions ($113 million), partially offset by the shift in CDC revenues ($69 million) and unfavorable product mix ($40 million). Operating companies income for the first nine months of 2000 increased $286 million (11.9%) from the comparable period of 1999, primarily reflecting favorable margins ($355 million, driven by lower manufacturing and commodity-related costs), the 1999 pre-tax charge for the Kraft Separation Programs ($157 million), and higher volume ($156 million), partially offset by higher marketing, administration and research costs ($292 million, the majority of which related to higher marketing expenses), unfavorable product mix ($65 million) and the shift in CDC income ($26 million). Excluding the impact of the pre-tax charges for the Kraft Separation Programs and adjusting for the shift in CDC income, operating companies income of $2,716 million for the first nine months of 2000 increased 6.1% over $2,561 million in the first nine months of 1999. Volume for the first nine months of 2000 increased over the comparable 1999 period. Volume gains were achieved by beverages, from the strength of ready-to-drink beverages; processed meats, from lunch combinations and the first-quarter acquisition of Boca Burger; pizza, from new product introductions; coffee, from the continued success of Starbucks grocery coffee; cheese, from natural and cream cheese products; and desserts and snacks, due to shelf-stable puddings, frozen toppings, confectionery and the first-quarter acquisition of Balance Bar. Offsetting these volume gains were volume declines in enhancers, due to barbecue sauces and seasoned coatings; meals, due to dinners, rice and ethnic foods; and cereals, due primarily to a decline in the ready-to-eat cereal category. In Canada, volume was up slightly due to gains in the retail grocery business, driven by new products, mostly offset by a planned discontinuation of low-margin foodservice products. International food. Operating revenues for the first nine months of 2000 decreased $486 million (7.4%) from the first nine months of 1999, due primarily to unfavorable currency movements ($514 million), lower pricing ($31 million, due primarily to lower coffee prices) and the shift in CDC revenues ($28 million), partially offset by higher volume ($144 million). Operating companies income for the first nine months of 2000 increased $166 million (21.1%) from the first nine months of 1999, due primarily to the gain on the French Confectionery Sale ($139 million), higher volume ($88 million) and favorable margins ($53 million, primarily related to lower commodity costs), partially offset by unfavorable currency ($46 million), higher marketing, administration and research costs ($43 million) and the shift in CDC income. Excluding the gain on the French Confectionery Sale, the operating results of the international food businesses divested since the beginning of 1999, and adjusting for the shift in CDC revenues and income, operating revenues of $6,009 million in the first nine months of 2000 decreased 5.1% from $6,330 million in 1999, and operating companies income of $793 million for the first nine months of 2000 increased 6.4% over $745 million for the comparable 1999 period. Coffee volume for the first nine months of 2000 increased over the comparable period of 1999, with volume growth in Sweden, Austria, Italy, Switzerland, Poland, the Slovak Republic, Hungary, Lithuania and in the Away From Home business. In the Asia/Pacific region, volume grew in China. This volume growth was driven by new product launches and line extensions. In the roast and ground -45- category, KFI brands experienced share gains in France, while soluble coffee brands gained share in the United Kingdom. Confectionery volume for the first nine months of 2000 increased over the comparable period of 1999. The volume growth was driven primarily by increases in the Asia/Pacific region and most Western European markets. In China and Indonesia, higher chewy candy sales contributed to the volume growth. New product launches and line extensions also contributed to the confectionery volume growth. Volume for the first nine months of 2000 also increased in the cheese and grocery business, driven by cream cheese in Italy and Iberia; lunch combinations in the United Kingdom; new product introductions for powdered soft drinks in the Czech Republic, Bulgaria and Thailand; and cheese and powdered soft drinks in the Philippines. Also contributing to the volume gain were higher grocery shipments to the Caribbean; increased cheese sales in Puerto Rico; and higher ready-to-drink beverage volume in Mexico. Partially offsetting these increases was lower powdered soft drink volume in Argentina, due to continued intense price competition with carbonated beverages. For the Three Months Ended September 30, ---------------------------------------------- Operating Operating Revenues Companies Income -------------------- -------------------- (in millions) 2000 1999 2000 1999 ------- ------- ------- ------- North American food $4,276 $4,171 $ 827 $ 773 International food 1,939 2,155 416 264 ------ ------ ------ ------ Total food $6,215 $6,326 $1,243 $1,037 ====== ====== ====== ====== North American food. During the third quarter of 2000, operating revenues increased $105 million (2.5%) over the third quarter of 1999, due primarily to higher volume ($45 million) and the impact of acquisitions ($46 million). Operating companies income for the third quarter of 2000 increased $54 million (7.0%) over the third quarter of 1999, due primarily to favorable margins ($168 million, driven by lower manufacturing and commodity-related costs) and higher volume ($34 million), partially offset by higher marketing, administration and research costs ($112 million) and unfavorable mix ($28 million). Volume for the third quarter of 2000 increased over the comparable 1999 period. Volume gains were achieved by beverages, led by the continued success of ready-to-drink beverages; frozen pizza, aided by new product introductions; coffee, driven by the continued success of Starbucks grocery coffee; desserts and snacks, led by growth in confectionery and shelf-stable puddings, and the first-quarter acquisition of Balance Bar; processed meats, due to hot dogs, luncheon meats and lunch combinations and the first-quarter acquisition of Boca Burger; cheese, with gains in natural and cream cheese; and enhancers, where gains in mayonnaise and pourable salad dressings were essentially offset by a decline in barbecue sauce. Offsetting these volume increases were volume declines in cereals, due primarily to a decline in the ready-to-eat cereal category; and meals, due mainly to lower shipments of dinners, stuffing mix and rice. In Canada, overall volume was up, driven by new product introductions in frozen pizza, refrigerated ready-to-eat desserts and ready-to-drink beverages. -46- International food. Operating revenues for the third quarter of 2000 decreased $216 million (10.0%) from the third quarter of 1999, due primarily to unfavorable currency movements ($171 million) and the impact of divestitures ($39 million). Operating companies income for the third quarter of 2000 increased $152 million (57.6%) from the third quarter of 1999, due primarily to the gain on the French Confectionery Sale ($139 million), favorable margins, driven by lower commodity-related costs, and higher volume/mix. Excluding the gain on the French Confectionery Sale and the operating results of the international food businesses divested since the beginning of 1999, operating revenues of $1,906 million in the third quarter of 2000 decreased 8.5% from $2,083 million in 1999, and operating companies income of $265 million for the third quarter of 2000 increased 6.4% over $249 million for the comparable 1999 period. KFI's third quarter 2000 coffee volume was below the comparable period of 1999, due to the timing of promotions and increased price competition in several Western European markets, primarily Germany. In Central and Eastern Europe, double-digit coffee volume growth was driven by Poland, the Slovak Republic, Lithuania, Ukraine and Turkey. Confectionery volume for the third quarter of 2000 increased over the comparable period of 1999, with gains in all regions and double-digit growth in several developing markets. In Europe, volume increased in Germany, Iberia, Sweden, Denmark, Finland, Poland, the Czech and Slovak Republics, Hungary, Lithuania and Ukraine. In the Asia/Pacific region, double-digit volume growth was driven by the continued success of chewy candy in Indonesia and China. Share growth was registered for KFI's products in several markets, including pralines and countlines in Germany; chocolate tablets in France and Norway; and chocolate products in Sweden. Volume for the third quarter of 2000 also increased in the cheese and grocery business. Cream cheese volume grew, due to gains in Italy, Spain, Germany, Australia, the Nordic region and in the Middle East and Africa region. Cream cheese share also increased in several markets, including Italy, the United Kingdom, Sweden and Japan. In powdered beverages, volume growth was driven by double-digit gains in Southeast Asia, the recent introduction of a powdered soft drink in the Czech Republic and Thailand and the launch of a new powdered soft drink flavor in Turkey. Lunch combinations continued to grow in Europe, due to a recently launched line extension in the United Kingdom. In salty snacks, double-digit volume gains were driven by growth in the Nordic region and the acquisition of a snacks company in Ukraine last year. In Latin America, higher volume for the third quarter of 2000 was driven by ready-to-drink and powdered beverages in Mexico, cheese in Puerto Rico and dinners and gelatin in the Caribbean. Beer Business Environment During the first quarter of 1999, Miller Brewing Company ("Miller") purchased four trademarks from the Pabst Brewing Company ("Pabst") and the Stroh Brewery Company ("Stroh"). Miller also agreed to increase its contract manufacturing of Pabst products. Miller began brewing and shipping the newly acquired brands during the second quarter of 1999. In the third quarter of 1999, Miller assumed ownership of the former Pabst brewery in Tumwater, Washington as part of these agreements. -47- Miller's license agreement for the rights to brew and sell Lowenbrau in the United States expired on September 30, 1999. The expiration of this agreement did not have a material impact on Miller's operating revenues or operating companies income for the first nine months and third quarter of 2000 and is not expected to have a material impact on future operating revenues and operating companies income. During October 2000, Miller announced that it reached an agreement in principle with Molson Canada and with Foster's Brewing Group Limited to strengthen its commitment behind the Foster's brand in the United States, as well as an agreement in principle to sell its rights to Molson trademarks in the United States. The transactions are expected to close in the fourth quarter. Operating Results Nine Months Ended September 30 Miller's operating revenues for the first nine months of 2000 increased $88 million (2.6%) over the first nine months of 1999, due primarily to higher pricing ($158 million) and the previously mentioned acquired brands and contract manufacturing fees (aggregating $110 million), partially offset by lower volume ($180 million). Operating companies income for the first nine months of 2000 increased $37 million (8.1%) over the first nine months of 1999, due primarily to higher pricing ($127 million) and income from acquired brands and contract manufacturing, partially offset by lower volume ($106 million) and higher marketing, administration and research costs. Miller's domestic shipment volume of 33.0 million barrels for the first nine months of 2000 decreased 2.0% from the comparable 1999 period, reflecting higher pricing and Miller's continuing efforts to reduce distributor inventories. Excluding discontinued brands, total domestic shipment volume was down 1.0%. Domestic shipments of premium/near premium brands were above the comparable 1999 period, due primarily to the shipments of acquired brands. Domestic shipments of below-premium products decreased on lower shipments across most brands. Wholesalers' sales to retailers in the first nine months of 2000 decreased 1.6% from the comparable 1999 period. Excluding the acquired brands, wholesalers' sales to retailers in the first nine months of 2000 decreased 3.5% from the first nine months of 1999, reflecting lower retail sales of Miller Genuine Draft, Milwaukee's Best, Molson and Red Dog, as well as the discontinuance of Lowenbrau, partially offset by increased sales of Miller Lite. Three Months Ended September 30 Miller's operating revenues for the third quarter of 2000 decreased $4 million (0.3%) from the third quarter of 1999, due primarily to lower volume ($98 million), essentially offset by higher pricing ($91 million). Operating companies income for the third quarter of 2000 increased $5 million (3.6%) over the third quarter of 1999, due primarily to higher pricing essentially offset by lower volume. Miller's domestic shipment volume of 10.9 million barrels for the third quarter of 2000 decreased 4.8% from the comparable 1999 period, reflecting higher pricing and Miller's continuing efforts to reduce distributor inventories. Excluding discontinued brands, total domestic shipment volume was down 4.0%. Domestic shipments of premium/near-premium products decreased from the prior year due mainly to Miller Genuine Draft, Miller High Life and Icehouse, while below-premium products decreased on lower shipments across most brands. Wholesalers' sales to retailers in the third quarter of -48- 2000 decreased 6.3% from the comparable 1999 period, reflecting lower retail sales of Miller Genuine Draft, Milwaukee's Best, Miller Lite, Red Dog and Molson, as well as the discontinuance of Lowenbrau. Financial Services Philip Morris Capital Corporation's ("PMCC") financial services operating revenues and operating companies income for the first nine months of 2000 increased $46 million (17.8%) and $25 million (14.9%), respectively, over the comparable 1999 period. During the third quarter of 2000, operating revenues and operating companies income increased $17 million (19.1%) and $8 million (13.8%), respectively, over the third quarter of 1999. These increases were due primarily to new leasing and structured finance investments and gains realized on related portfolio management activities. Financial Review Net Cash Provided by Operating Activities During the first nine months of 2000, net cash provided by operating activities was $9.1 billion compared with $9.2 billion in the comparable 1999 period. Net Cash Used in Investing Activities During the first nine months of 2000, net cash used in investing activities was $1.7 billion, down from $2.2 billion in 1999. The decrease primarily reflects the proceeds received from the French Confectionery Sale. In June 2000, the Company announced that it entered into definitive agreements to acquire all of the outstanding shares of Nabisco. The pending transaction has an aggregate cost of approximately $19.2 billion, including the assumption of approximately $4.0 billion in net debt. The parties are working to close the transaction by year-end. Net Cash Used in Financing Activities During the first nine months of 2000, net cash of $7.4 billion was used in financing activities, as compared with $5.1 billion used in financing activities during the comparable 1999 period. This difference was primarily due to net debt repayments of $1.3 billion for the first nine months of 2000, compared with net proceeds from the issuance of debt ($276 million) in 1999. Higher stock repurchases and dividends paid during the first nine months of 2000 also contributed to the increase. The Company intends to finance the purchase price of the outstanding shares of Nabisco initially with available cash and short-term debt. Debt and Liquidity The Company's total debt (consumer products and financial services) was $13.0 billion and $14.5 billion at September 30, 2000 and December 31, 1999, respectively. Total consumer products debt was $11.3 billion and $13.5 billion at September 30, 2000 and December 31, 1999, respectively. At September 30, 2000 and December 31, 1999, the Company's ratio of consumer products debt to total -49- equity was 0.76 and 0.88, respectively. The ratio of total debt to total equity was 0.87 and 0.95 at September 30, 2000 and December 31, 1999, respectively. The Company and its subsidiaries maintain credit facilities with a number of lending institutions, amounting to approximately $19.1 billion, including a $9.0 billion, 364-day revolving credit facility, entered into in October 2000, obtained in connection with the pending acquisition of Nabisco. These credit facilities also include a revolving bank credit agreement for $8.0 billion, which may be used to support commercial paper borrowings by the Company and which is available for acquisitions and other general corporate purposes. This revolving bank agreement expires in October 2002 and enables the Company to reclassify short-term debt on a long-term basis. The Company may 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. The Company's credit ratings by Moody's at September 30, 2000 and December 31, 1999 were "P-1" in the commercial paper market and "A2" for long-term debt obligations. The Company's credit ratings by Standard & Poor's ("S&P") at September 30, 2000 and December 31, 1999 were "A-1" in the commercial paper market and "A" for long-term debt obligations. As discussed in Note 5, 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: 2000, $9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional amounts as follows: 2000, $416 million; and 2001 through 2003, $250 million each year. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its share of domestic cigarette shipments in the year preceding that in which the payment is due. Accordingly, PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped. 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 2000, $280 million; 2001, $400 million; 2002 through 2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM Inc. records its portion of these payments as part of cost of sales as product is shipped. 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. -50- Equity and Dividends During the first nine months of 2000 and 1999, the Company repurchased 113.3 million and 56.6 million shares, respectively, of its common stock at a cost of $2.7 billion and $2.2 billion, respectively. The repurchases were made under an existing $8 billion authority that expires in November 2001. At September 30, 2000, cumulative repurchases under the $8 billion authority totaled 217.7 million shares at an aggregate cost of $6.4 billion. Dividends paid in the first nine months of 2000 and 1999 were $3.3 billion and $3.2 billion, respectively. During the third quarter of 2000, the Company's Board of Directors approved a 10.4% increase in the current quarterly dividend rate to $0.53 per share. As a result, the present annualized dividend rate is $2.12 per share. Cash and Cash Equivalents Cash and cash equivalents were $4.8 billion at September 30, 2000 and $5.1 billion at December 31, 1999. Market Risk The Company is exposed to market risk, primarily related to foreign exchange, commodity prices and interest rates. These exposures are actively monitored by management. To manage the volatility relating to these exposures, the Company enters into a variety of derivative financial instruments. The Company's objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates, foreign currency rates and commodity prices. It is the Company's policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. Since the Company uses currency rate-sensitive and commodity price-sensitive instruments to hedge a certain portion of its existing and anticipated transactions, the Company expects that any loss in value for the hedge instruments generally would be offset by increases in the value of the underlying transactions. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. Foreign exchange rates. The Company is exposed to foreign exchange movements, primarily in European, Japanese and other Asian and Latin American currencies. Consequently, it enters into various contracts, which change in value as foreign exchange rates fluctuate, to preserve the value of commitments and anticipated transactions. The Company uses foreign currency option and forward contracts to hedge certain anticipated foreign currency cash flows. The Company also enters into short-term foreign currency swap contracts, primarily to hedge intercompany transactions denominated in foreign currencies. At September 30, 2000 and December 31, 1999, the Company had option and forward foreign exchange contracts, principally for the Japanese yen, British pound, Swiss franc and the Euro, with aggregate notional amounts of $4.5 billion and $3.8 billion, respectively, for both the purchase and/or sale of foreign currencies. The Company also seeks to protect its foreign currency net asset exposure, primarily the Swiss franc and the Euro, through the use of foreign-currency denominated debt or currency swap agreements. At -51- September 30, 2000 and December 31, 1999, the notional amounts of currency swap agreements aggregated $2.1 billion and $2.6 billion, respectively. Commodities. The Company is exposed to price risk related to anticipated purchases of certain commodities used as raw materials by the Company's food businesses. Accordingly, the Company enters into commodity future, forward and option contracts to manage fluctuations in prices of anticipated purchases, primarily cheese, coffee, cocoa, milk, sugar, wheat and corn. At September 30, 2000 and December 31, 1999, the Company had net long commodity positions of $406 million and $163 million, respectively. Unrealized gains/losses on net commodity positions were immaterial at September 30, 2000 and December 31, 1999. Interest rates. The Company manages its exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in its total debt portfolio. To manage this mix, the Company may enter into interest rate swap agreements, in which it exchanges the periodic payments, based on a notional amount and agreed-upon fixed and variable interest rates. At December 31, 1999, the Company had an interest rate swap agreement, which converted $800 million of fixed rate debt to variable rate debt, and which matured during the first quarter of 2000. Use of the above-mentioned derivative financial instruments has not had a material impact on the Company's financial position at September 30, 2000 and December 31, 1999, or the Company's results of operations for the three and nine months ended September 30, 2000 or the year ended December 31, 1999. New Accounting Standards During 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which had an initial adoption date by the Company of January 1, 2000. During 1999, the FASB postponed the adoption date of SFAS No. 133 until January 1, 2001. SFAS No. 133 requires that all derivative financial instruments be recorded on the consolidated balance sheets at their fair value. Changes in the fair value of derivatives will be recorded each period in earnings or other comprehensive earnings, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in other comprehensive earnings will be reclassified as earnings in the periods in which earnings are affected by the hedged item. Since the impact of SFAS No. 133 is dependent on future market rates and outstanding derivative positions at January 1, 2001, the Company cannot yet determine the impact that adoption or subsequent application of SFAS No. 133 will have on its financial position or results of operations. During 2000, a number of accounting and financial reporting pronouncements relating to the recognition, measurement and classification of revenues, various sales incentives and shipping and handling costs were issued. These pronouncements will be effective for the fourth quarter of 2000. The Company has determined that adoption or subsequent application of these pronouncements will not have a material effect on its financial position or results of operations. Upon adoption, prior period amounts will be reclassified to conform with the new pronouncements. -52- Contingencies See Note 5 to the Condensed Consolidated Financial Statements for a discussion of contingencies. 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. One can identify these forward-looking statements by use of words such as "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals" 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 concluded tobacco litigation settlements and excise tax increases on consumption rates. Each of the Company's consumer products subsidiaries is subject to intense competition, changes in consumer preferences, the effects of changing prices for its raw materials 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, and to improve productivity. In addition, PMI, KFI and Kraft are subject to the effects of foreign economies and the related shifts in consumer preferences, and currency movements. Developments in any of these areas, which are more fully described 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. -53- Part II - OTHER INFORMATION Item 1. Legal Proceedings. See Note 5. 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, 99.2 and 99.3 to this report. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 12 Statement regarding computation of ratios of earnings to fixed charges. 27 Financial Data Schedule. 99.1 Certain Pending Litigation Matters and Recent Developments. 99.2 Status of Master Settlement Agreement. 99.3 Trial Schedule for Certain Cases. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 2000. -54- 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/ LOUIS C. CAMILLERI Louis C. Camilleri, Senior Vice President and Chief Financial Officer November 13, 2000 EX-12 2 0002.txt COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES EXHIBIT 12 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges (in millions of dollars) -------------------
Nine Months Ended Three Months Ended September 30, 2000 September 30, 2000 ------------------ ------------------ Earnings before income taxes $ 10,658 $ 3,806 Add (Deduct): Equity in net earnings of less than 50% owned affiliates (179) (52) Dividends from less than 50% owned affiliates 69 13 Fixed charges 961 322 Interest capitalized, net of amortization 6 2 -------- -------- Earnings available for fixed charges $ 11,515 $ 4,091 ======== ======== Fixed charges: Interest incurred: Consumer products $ 761 $ 253 Financial services 83 30 -------- -------- 844 283 Portion of rent expense deemed to represent interest factor 117 39 -------- -------- Fixed charges $ 961 $ 322 ======== ======== Ratio of earnings to fixed charges 12.0 12.7 ======== ========
EXHIBIT 12 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges (in millions of dollars) ------------------
Years Ended December 31, -------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Earnings before income taxes and cumulative effect of accounting changes $ 12,695 $ 9,087 $ 10,611 $ 10,683 $ 9,347 Add (Deduct): Equity in net earnings of less than 50% owned affiliates (197) (195) (207) (227) (246) Dividends from less than 50% owned affiliates 56 70 138 160 202 Fixed charges 1,363 1,386 1,438 1,421 1,495 Interest capitalized, net of amortization (2) (5) (16) 13 2 -------- -------- -------- -------- -------- Earnings available for fixed charges $ 13,915 $ 10,343 $ 11,964 $ 12,050 $ 10,800 ======== ======== ======== ======== ======== Fixed charges: Interest incurred: Consumer products $ 1,118 $ 1,166 $ 1,224 $ 1,197 $ 1,281 Financial services 89 77 67 81 84 -------- -------- -------- -------- -------- 1,207 1,243 1,291 1,278 1,365 Portion of rent expense deemed to represent interest factor 156 143 147 143 130 -------- -------- -------- -------- -------- Fixed charges $ 1,363 $ 1,386 $ 1,438 $ 1,421 $ 1,495 ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 10.2 7.5 8.3 8.5 7.2 ======== ======== ======== ======== ========
EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 This schedule contains summary information extracted from Pages 3-5 of the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000 and is qualified in its entirety by reference to such financial statements. 1,000,000 9-MOS DEC-31-2000 SEP-30-2000 4,779 0 4,694 145 8,100 19,599 21,753 9,501 60,279 18,506 10,217 935 0 0 13,967 60,279 60,942 60,942 22,091 35,263 14,485 0 536 10,658 4,159 6,499 0 0 0 6,499 2.86 2.85
EX-99.1 4 0004.txt PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS Exhibit 99.1 CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS As described in Note 5. Contingencies ("Note 5") to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly 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 Philip Morris International, and their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. 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, including suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking and suits by foreign governments seeking to recover damages for taxes lost as a result of allegedly illegal importation of cigarettes into their jurisdictions. 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 August 10, 2000 are also described. SMOKING AND HEALTH LITIGATION The following lists 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 November 1, 2000, and describes certain developments in these cases since August 10, 2000. Consolidated Individual Smoking and Health Cases In Re Tobacco Litigation (Individual Personal Injury cases), Circuit Court of 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. A case management order has been issued which provides that 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 1,200 individual cases have been filed. 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 for June 2001. 1 Flight Attendant Litigation: Broin, et al. v. Philip Morris Companies Inc., et al., a class action brought by flight attendants claiming personal injuries allegedly relating to environmental tobacco smoke, was settled in 1997. The settlement agreement permitted members of the class to file individual suits by September 7, 2000 seeking compensatory damages for their alleged injuries, but prohibited them from seeking punitive damages. Approximately 3,120 of such suits were filed by the deadline. 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. The court further ruled that the trials of these suits are to address whether the plaintiffs' alleged injuries were caused by their exposure to environmental tobacco smoke and, if so, the amount of damages to be awarded. Defendants have filed notice of appeal of the court's ruling. As of November 1, 2000, nine such cases were scheduled for trial from January through May 2001. Domestic Class Actions Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Eleventh Judicial Court, Dade County, Florida, filed May 5, 1994. See Note 5, for a discussion of developments in this case. Norton, et al. v. RJR Nabisco Holdings Corporation, et al., Superior Court, Madison County, Indiana, filed May 3, 1996. Richardson, et al. v. Philip Morris Incorporated, et al., Circuit Court, Baltimore City, Maryland, filed May 24, 1996. The court granted plaintiffs' motion for class certification in February 1998 and defendants appealed. In May 2000, the Maryland Court of Appeals reversed the trial court's ruling and ordered the class decertified. Scott, et al. v. The American Tobacco Company, et al., District Court, Orleans Parish, Louisiana, filed May 24, 1996. Trial is scheduled for January 2001. Lyons, et al. v. The American Tobacco Company, et al., United States District Court, Southern District, Alabama, filed August 8, 1996. Perry/Champion, et al. v. American Tobacco Co., Inc., et al., Circuit Court, Coffee County, Manchester, Tennessee, filed September 6, 1996. Connor, et al. v. The American Tobacco Company, et al., Second Judicial District Court, Bernalillo County, New Mexico, filed October 10, 1996. In Re Tobacco Litigation (Medical Monitoring cases) (formerly McCune, et al. v. The American Tobacco Company, et al.), Circuit Court of Kanawha County, West Virginia, filed January 31, 1997. In October 2000, the court certified a class of plaintiffs seeking the creation of a medical monitoring fund. Trial is scheduled for December 2000. Muncy (formerly Ingle and formerly Woods), et al. v. Philip Morris Incorporated, et al., Circuit Court, McDowell County, West Virginia, filed February 4, 1997. 2 (Canter) (formerly Peterson), et al. v. The American Tobacco Company, et al., Circuit Court, First Circuit, Hawaii, filed February 6, 1997. Walls, et al. v. The American Tobacco Company, et al., United States District Court, Northern District, Oklahoma, filed February 6, 1997. In October 2000, the court denied plaintiff's motion for class certification, and subsequently the parties filed a stipulation of dismissal. Selcer, et al. v. R.J. Reynolds Tobacco Company, et al., United States District Court, Nevada, filed March 3, 1997. In September 2000, the Nevada Supreme Court heard argument on the questions of state law certified to it by the district court. Geiger, et al. v. The American Tobacco Company, et al., Supreme Court, Queens County, New York, filed April 30, 1997. In October 1999, plaintiffs appealed the trial court's denial of their class certification motion. Cole, et al. v. The Tobacco Institute, Inc., et al., United States District Court, Eastern District, Texarkana Division, Texas, filed May 5, 1997. In May 2000, the trial court granted defendants' motion for judgment on the pleadings. Plaintiffs filed a notice of appeal to the United States Court of Appeals for the Fifth Circuit. Anderson, et al. v. The American Tobacco Company, Inc., et al., United States District Court, Eastern District, Tennessee, filed May 23, 1997. Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San Diego County, California, filed June 10, 1997. In April 2000, the court denied plaintiffs' motion for class certification. The court has permitted plaintiffs to file a second motion for class certification. Fitz (formerly Brammer), et al. v. R.J. Reynolds Tobacco Company, et al., United States District Court, Southern District, Iowa, filed June 20, 1997. Guillory (formerly Denberg), et al. v. American Brands, Inc., et al., United States District Court, Northern District, Illinois, filed July 7, 1997. Bush, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, Texas, filed September 10, 1997. In August 2000, the parties submitted to the court a stipulation of dismissal without prejudice. Nwanze, et al. v. Philip Morris Companies Inc., et al., United States District Court, Southern District, New York, filed September 29, 1997. In June 2000, the court granted defendants' motion to dismiss the complaint for failure to state a claim. Plaintiffs have filed a notice of appeal to United States Court of Appeals for the Second Circuit. Badillo, et al. v. The American Tobacco Company, et al., United States District Court, Nevada, filed October 8, 1997. In September 2000, the Nevada Supreme Court heard arguments on the questions of state law certified to it by the district court. Young, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed November 12, 1997. 3 Aksamit, et al. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, South Carolina, filed November 20, 1997. Jackson, et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, Utah, filed February 13, 1998. Parsons, et al. v. A C & S, Inc., et al., Circuit Court, Kanawha County, West Virginia, filed February 27, 1998. Basik (formerly Mendys), et al. v. Lorillard Tobacco Company, et al., United States District Court, Northern District, Illinois, filed March 17, 1998. Daniels, et al. v. Philip Morris Companies Inc., et al., Superior Court, San Diego County, California, filed April 2, 1998. In April 2000, the court confirmed its earlier order denying plaintiffs' motion for class certification. In September 2000, the court agreed to reconsider its class certification ruling. Christensen, et al. v. Philip Morris Companies Inc., et al., United States District Court, Nevada, filed April 3, 1998. In September 2000, the Nevada Supreme Court heard arguments on the questions of state laws certified to it by the district court. Avallone, et al. v. The American Tobacco Company, Inc., et al., New Jersey Superior Court, Atlantic County Law Division, New Jersey, filed April 23, 1998. In April 2000, the appeals court dismissed plaintiffs' appeal from the trial court's denial of plaintiffs' motion for class certification. In September 2000, the New Jersey Supreme Court denied plaintiffs' motion for leave to appeal the denial of class certification. Cleary, et al. v. PM Inc., et al., Circuit Court, Cook County, Illinois, filed June 3, 1998. Creekmore, et al. v. Brown & Williamson, et al., Superior Court, Bucombe County, North Carolina, filed July 31, 1998. Jimenez, et al. v. Brown & Williamson Tobacco Corporation, et al., Second Judicial District Court, County of Bernalillo, New Mexico, filed August 20, 1998. Sweeney, et al. v. The American Tobacco Company, et al., Court of Common Pleas, Alleghany County, Pennsylvania, filed October 15, 1998. In November 2000, this case was dismissed without prejudice. Brown, et al. v. Philip Morris, Inc., et al., United States District Court, Eastern District, Pennsylvania, filed October 16, 1998. Plaintiffs allege that tobacco companies' "discriminatory targeting of menthol tobacco product sales to Black Americans" violates federal civil rights statutes. In September 1999, the court granted defendants' motion to dismiss the case. Plaintiffs have appealed to the United States Court of Appeals for the Third Circuit. 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 4 damages claims in this case with nine other pending tobacco-related cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) In November 2000, the court indicated that, in its view, this case is a viable class action, but denied plaintiffs' motion for class certification on the grounds of preserving court resources. The court further ruled that it appears likely that plaintiffs in Simon II will be able to demonstrate a basis for certification of an opt out compensatory damages class and a non-opt out punitive damages class. Julian, et al. v. Philip Morris Companies Inc., et al., Circuit Court for Montgomery County, Alabama, filed April 14, 1999. Force, et al. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, Southern District, Illinois, filed March 29, 2000. 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 damages claims in this case with nine other pending tobacco-related cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) Arnitz, et al. v. Philip Morris Incorporated, et al., Div. H, Circuit Court for the 13th Judicial Circuit, Hillsborough County, Florida, filed July 3, 2000. Lewis, et al. v. Philip Morris Companies, Inc., et al., United States District Court, Massachusetts, filed July 11, 2000. National Tobacco Consumers' Group Number 2 v. Philip Morris Incorporated, et al., United States District Court, Massachusetts, filed July 18, 2000. 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 nine other pending tobacco-related cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) Vandermeulen, et al. v. Philip Morris Companies, Inc., et al., United States District Court, Eastern District, Michigan, filed September 18, 2000. 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, et al. v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., 19th Lower Civil Court of the Central Courts of the Judiciary District of Sao Paulo, Brazil, filed July 25, 1995. Fortin, et al. v. Imperial Tobacco Ltd., et al., Quebec Superior Court, Canada, filed on or about September 11, 1998. 5 Conseil Quebecois sur le Tabac v. RJR-Macdonald Inc., et al., Quebec Superior Court, Canada, filed November 20, 1998. Associacao Cearense' de Defesa da Saude do Fumante e Ex-Fumante (ACEDESFE) v. Philip Morris Brazil, S.A., et al., Third Civil Court of the State of Ceara, Forteleza, Brazil, filed April 12, 1999. Tobacco Control Coalition Inc. v. Philip Morris Limited, et al., Federal Court of Australia, New South Wales District, filed September 22, 1999. Yabin Galidi, et al. v. Dubek Ltd., et al., Tel Aviv-Yaffo Region Court, Israel, filed (but not officially served) July 12, 1999. 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 November 1, 2000, and describes certain developments in these cases since August 1, 2000. As discussed in Note 5, 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. Exhibit 99.2 hereto sets forth the status of judicial approval of the MSA in each of the respective settling jurisdictions. 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. Dismissed were plaintiff's claims for intentional/negligent breach of special and general duty, performance of another's duty to the public, public nuisance and unjust enrichment/restitution. The counts remaining are for various violations of the Illinois Consumer Fraud Act, violations of the Illinois Antitrust Act, negligence per se and conspiracy. In February 2000, the court denied defendants' motion for summary judgment on the remaining claims. In October 2000, the court granted defendants' motion to dismiss all plaintiffs except Cook County. The court also directed that the Cook County board must authorize or ratify the filing of this suit by November 13, 2000 for it to be a proper exercise of the County's home-rule powers. City of St. Louis v. American Tobacco, et al., Circuit Court for the City of St. Louis, Missouri, filed November 23, 1998. County of St. Louis v. American Tobacco, et al., Circuit Court for the City of St. Louis, Missouri, filed December 3, 1998. This case is currently stayed. 6 Craig J. Wedde v. Valley Warehousing, Inc., et al., Circuit Court Fond Du Lac County, Wisconsin, filed April 7, 1999. County of Wayne v. Philip Morris Incorporated, et al., United States District Court, Eastern District, Michigan, filed December 7, 1999. In August 2000, following arguments on defendants' motion for judgment on the pleadings, the district court certified certain state law questions to the Michigan Supreme Court. The district court has stayed action in the case until defendants' motion is resolved. Ament, et al. v. Thompson, et al., Circuit Court, Dane County, Wisconsin, filed April 28, 2000. Lapean, et al. v. Thompson, et al., Circuit Court, Dane County, Wisconsin, filed April 28, 2000. Department of Justice Case The United States of America v. Philip Morris, Inc., et al., United States District Court, Washington, D.C., filed September 22, 1999. See Note 5, for a discussion of this case. International Cases Republic of the Marshall Islands v. The American Tobacco Company, et al., High Court, Republic of the Marshall Islands, filed October 20, 1997. In July 1999, the court denied defendants' motion to dismiss. Trial of this case is scheduled for April 2001. 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) described below). Kupat Holim Clalit v. Philip Morris, Inc., et al., Jerusalem District Court, Israel, filed September 28, 1998. Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed November 12, 1998. In February 2000, the court dismissed this action, finding the statute upon which British Columbia's claim was based was inconsistent with the Constitution of Canada. Subsequently, British Columbia has enacted new legislation and it is anticipated that the Province will soon file a new lawsuit based on the new statute. The Republic of Bolivia v. Philip Morris Companies, Inc., et al., United States District Court, District of Columbia files 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 In re Tobacco/Governmental Health Care Costs Litigation (MDL No. 1279) (the "MDL Proceeding") discussed below. 7 The Republic of Venezuela v. Philip Morris Companies Inc., et al., Eleventh Judicial Circuit, Dade County, Florida, filed January 27, 1999. This case was removed to federal court by defendants in February 1999 and subsequently transferred to the MDL Proceeding. The court hearing the MDL Proceeding remanded the case to Florida state court in June 2000. Defendants have filed a notice of appeal. 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 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 states: Ukraine, the Brazilian States of Espirito Santo, Goias and Mato Grosso do Sul, Panama, the Province of Ontario, Canada; Ecuador, and the Russian Federation. In December 1999, the district court dismissed the complaint filed by Guatemala; in March 2000, the court dismissed the complaints filed by Nicaragua and Ukraine; and in August 2000, the court dismissed the complaint filed by the Province of Ontario. Thailand's case was voluntarily dismissed. Guatemala, Nicaragua, Ukraine and the Province of Ontario have filed notices of appeal to the United States Court of Appeal for the District of Columbia Circuit. In July 2000, the district court remanded the Venezuela and Goias actions to Florida state court, and in July 2000, the court remanded the Ecuador and Espirito Santo actions to Florida state court. Defendants have filed notices of appeal to the United States Court of Appeals for the District of Columbia Circuit. At present, there are four cases pending in the MDL proceeding: Bolivia, Mato Grosso do Sul, Panama, and Russian Federation. 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. In September 1999, the United States District Court for the Eastern District of Texas remanded the case to the district court for Angelina County, Texas. An appeal is pending in the United States Court of Appeals for the Fifth Circuit. The State of Goias of the Federated Republic of Brazil v. Philip Morris Companies, Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed October 18, 1999. This case was removed to federal court by defendants in November 1999 and subsequently transferred to the MDL Proceeding. The court hearing the MDL Proceeding remanded the case to Florida state court in July 2000, and defendants have filed a notice of appeal. The Republic of Ecuador v. Philip Morris Companies, Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed January 21, 2000. In July 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court for the District of Columbia. In July 2000, the district court granted plaintiff's motion to remand the case to the circuit court of Dade County, Florida. Defendants have filed a notice of appeal. Her Majesty the Queen in Right of Ontario, Canada v. Imperial Tobacco, et al., United States District Court, District of Columbia, filed March 1, 2000. In April 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court for the District of Columbia and it was dismissed in August 2000. Plaintiffs have filed a notice of appeal. 8 The State of Sao Paulo of the Federal Republic of Brazil v. Philip Morris Companies, Inc., et al., Civil District Court, Parish of Orleans, Louisiana, filed February 9, 2000. The case was removed to the United States District Court, Eastern District, Louisiana. In May 2000, the case was remanded to Civil District Court, Parish of Orleans, Louisiana. Defendants have filed a notice of appeal. The State of Espirito Santo of the Federal Republic of Brazil v. Brooke Group, et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed March 20, 2000. This case was removed to federal court by defendants in April 2000 and subsequently transferred to the MDL Proceeding. The court hearing the MDL Proceeding remanded the case to Florida state court in July 2000, and defendants have filed a notice of appeal. Obra Social de Empleados de la Marina Mercante, et al. v. The American Tobacco Company, et al., Superior Court, Washington, D.C., filed March 8, 2000. The State of Mato Grosso do Sul, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed July 19, 2000. This case was removed to federal court by defendants in August 2000, and subsequently transferred to the MDL Proceeding described above. It is currently pending in the MDL Proceeding. The Russian Federation v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed on August 25, 2000. This case was removed to federal court by defendants in September 2000 and subsequently transferred to the MDL Proceeding. It is currently pending in the MDL Proceeding. The Republic of Honduras v. Philip Morris Companies, Inc., et al., United States District Court, Southern District of Florida, filed October 5, 2000. The State of Tocantins, Brazil v. The Brooke Group Ltd. Inc., et al., Eleventh Judicial Circuit, Dade County, Florida, filed October 24, 2000 (not yet served). Union Cases Central Laborers Welfare Fund, et al. v. Philip Morris, Inc., et al., Circuit Court, Third Judicial Circuit, Madison County, Illinois, filed May 30, 1997. Connecticut Pipe Trades Health Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Connecticut, filed July 1, 1997. Plaintiffs voluntarily dismissed the case in September 1998. In April 2000, they filed a motion to reinstate the case. In July 2000, the court reopened this case (now denominated Oberle et al. v. Philip Morris, Inc., et al.) and permitted plaintiffs to file an amended complaint. Rhode Island Laborers Health and Welfare Fund v. Philip Morris Incorporated, et al., United States District Court, Rhode Island, filed July 20, 1997. In June 2000, the district court granted defendants' motion for dismissal. Eastern States Health and Welfare Fund, et al. v. Philip Morris, Inc., et al., Supreme Court, New York County, State of New York, filed July 28, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiffs have appealed the dismissal. 9 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 case with prejudice and appealed certain trial court rulings to the state court of appeals. Puerto Rican ILGWU Health & Welfare Fund, et al. v. Philip Morris Inc., 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. United Food and Commercial Workers Unions and Employers Health and Welfare Fund v. Philip Morris, Inc., et al., United States District Court, Northern District, Alabama, filed November 13, 1997. In August 1999, the court granted defendants' motion to dismiss. In August 2000, the United States Court of Appeals for the Eleventh Circuit affirmed the district court's ruling. IBEW Local 25 Health and Benefit Fund v. Philip Morris, Inc., 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. IBEW Local 363 Welfare Fund v. Philip Morris, Inc., 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, Inc., 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, Inc., et al., Supreme Court, New York County, State of 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, Inc., 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, Inc., 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, Inc., 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, Inc., 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. 10 Operating Engineers Local 324 Health Care Fund, et al. v. Philip Morris, Inc., et al., Circuit Court, Wayne County, Michigan, filed December 30, 1997. Plaintiffs appealed the court's February 1999 decision to grant defendants' motion to dismiss to the Michigan Court of Appeals. Lyons, et al. v. Philip Morris Incorporated, et al., United States District Court, Minnesota, filed December 31, 1997. In April 1999, the court granted defendants' motion to dismiss the case. In September 2000, the United States Court of Appeals for the Eighth Circuit affirmed the district court's ruling. Steamfitters Local Union No. 614 Health & Welfare Fund, et al. v. Philip Morris, Inc., et al., Circuit Court, Thirteenth Judicial District, Tennessee, filed January 7, 1998. In January 1999, the trial court granted in part and denied in part defendants' motion to dismiss. Defendants filed an interlocutory appeal from the partial denial of their motion to dismiss. In September 2000, the Tennessee Court of Appeals, Western Division, held that plaintiffs' claims were too remote to permit recovery. The court remanded the case to the trial court with directions that defendants' motion to dismiss the complaint be granted. National Asbestos Workers Medical Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed February 27, 1998. The named plaintiffs in this case are four union trust funds. The district court denied plaintiffs' motion for class certification in September 2000. In October 2000, the plaintiffs petitioned the United States Court of Appeals for the Second Circuit for review of that order. The Second Circuit has not yet announced whether it will accept plaintiffs' petition for review. The district court has also ruled that plaintiffs may proceed to trial with the claims of only one union trust fund, which must be a New York based fund. Trial is scheduled for May 2001. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending tobacco-related cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) Service Employees International Union Health & Welfare Fund, et al. v. Philip Morris, Inc., et al., United States District Court, District of Columbia, filed March 19, 1998. In July 1999, the court denied without prejudice the motion of two health and welfare trust funds to intervene in this lawsuit. In December 1999, the court granted in part and denied in part defendants' motion to dismiss. In March 2000, the United States Court of Appeals for the District of Columbia Circuit granted the parties' petitions to appeal the District Court's partial denial of defendants' motion to dismiss. In April 2000, the District of Columbia Circuit consolidated the appeal with Guatemala v. The Tobacco Institute for purposes of oral argument. S.E.I.U. Local 74 Welfare Fund, et al. v. Philip Morris, Inc., et al., United States District Court, District of Columbia, filed June 22, 1998. In December 1999, the court granted in part and denied in part defendants' motion to dismiss. In March 2000, the United States Court of Appeals for the District of Columbia Circuit granted the parties' petitions to appeal the district court's partial denial of defendants' motion to dismiss. In April 2000, the District of Columbia Circuit consolidated the appeal with Guatemala v. The Tobacco Institute for purposes of oral argument. Holland, et al. v. Philip Morris, Inc., et al., United States District Court, District of Columbia, filed July 9, 1998. In December 1999, the court granted in part and denied in part defendants' motion to dismiss. In March 2000, the United States Court of Appeals for the District of Columbia Circuit granted the parties' petitions to appeal the district court's partial denial of defendants' motion to dismiss. In April 2000, the District of Columbia Circuit Appellate Court consolidated the appeal with Guatemala v. The Tobacco Institute for purposes of oral argument. 11 Sheet Metal Workers Trust Fund, et al. v. Philip Morris, Inc., et al., United States District Court, District of Columbia, filed August 31, 1999. In December 1999, the court granted in part and denied in part defendants' motion to dismiss. In March 2000, the United States Court of Appeals for the District of Columbia Circuit granted the parties' petitions to appeal the district court's partial denial of defendants' motion to dismiss. In April 2000, the District of Columbia Circuit consolidated the appeal with Guatemala v. The Tobacco Institute for purposes of oral argument. Oral argument on the consolidated cases is scheduled for February 2001. Bergeron, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed September 29, 1999. In June 2000, the court denied defendants' motion to dismiss the case. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending tobacco-related cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) Native American Cases Crow Creek Sioux Tribe v. The American Tobacco Company, et al., Tribal Court, Crow Creek Sioux Tribe, filed September 14, 1997. In January 2000, the court entered a stay of proceedings until July 2001. 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 court granted defendant's petition 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 have stayed proceedings until November 2000. Standing Rock Sioux Tribe v. American Tobacco Company, et al., Tribal Court of the Standing Rock Sioux Indian Reservation, North Dakota, filed May 8, 1998. In May 2000, the Standing Rock Sioux Supreme Court entered an order affirming the trial court's denial of defendants' motion to dismiss the complaint for lack of subject matter jurisdiction. In May 2000, the parties agreed to stay all proceedings in this action until November 2000. U Tu Utu Gwaitu Paiute Tribe, et al. v. Philip Morris Incorporated, et al., Superior Court, San Diego, California, filed October 30, 1998. In June 2000, the court denied defendants' motion to dismiss the complaint. Trial is scheduled for June 2001 Acoma Pueblo, et al. v. American Tobacco Co., et al., New Mexico, First Judicial District Court, Santa Fe County, New Mexico, filed June 16, 1999. In July 2000, the court entered a stay of proceedings until November 30, 2000. Navajo Nation v. Philip Morris Incorporated, et al., District Court, Window Rock, Arizona, filed August 12, 1999. The Alabama Coushatta Tribe of Texas v. Philip Morris Companies Inc., et al., United States District Court, Eastern District, Texas, filed August 30, 2000. 12 Insurer and Self-Insurer Cases Group Health Plan, et al. v. Philip Morris, Inc., et al., United States District Court, Minnesota, filed March 11, 1998. In April 1999, the court dismissed all claims except the state antitrust and conspiracy claims. In January 2000, the court granted in part defendants' motion to dismiss and certified issues regarding plaintiffs' consumer protection claims 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 August 1999, the court denied defendants' motion to dismiss the amended complaint. In October 1999, the United States Court of Appeals for the Second Circuit denied defendants' appeals and mandamus petition, which sought review of the district court's denial of defendants' motion to dismiss the amended complaint. In October 1999, five of the plaintiffs agreed to dismiss their claims without prejudice. In November 1999, defendants filed a petition for rehearing and a petition for rehearing en banc from the previous order in October declining to review defendants' petition for writ of mandamus. In December 1999, the Second Circuit denied the petition for rehearing and in April 2000 denied the defendants' petition for rehearing en banc. In September 2000, the court granted defendants' motion for partial summary judgment on plaintiffs' claims for pre-judgment interest, future damages, tax damages, Medicaid/Medicare damages and damages for violations of the Racketeering Influenced and Corrupt Organizations Act ("RICO") that occurred prior to the enactment of RICO. The court also determined that plaintiffs may not proceed on any alleged RICO predicate act other than mail and wire fraud and, on that basis, denied defendants' related motion for partial summary judgment as moot. The court severed the claims of one plaintiff from those of the remaining plan plaintiffs; trial on that plaintiff's subrogated RICO claims and direct New York law claims based on alleged fraud is scheduled for March 2001. The court also granted defendants' motion for summary judgment based on the statute of limitations and granted defendants' motion for summary judgment concerning plaintiffs' RICO claim based on an investment theory. The court denied defendants' partial summary judgment motion based on preemption as to the claim of wire and mail fraud RICO predicate violations, denied defendants' partial summary judgment motion on plaintiffs' subrogation claims, and denied defendants' motion for summary judgment for failure to offer individualized proof of subrogation claims. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending tobacco-related cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) Regence Blue Shield, et al. v. Philip Morris, Inc., et al., United States District Court, Western District, Washington, filed April 29, 1998. Plaintiffs have appealed the trial court's dismissal of their action to the United States Court of Appeals for the Ninth Circuit. Betriebskrankenkasse Aktiv, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed September 28, 2000. Taxpayer Cases Coyne, et al. v. The American Tobacco Company, et al., Court of Common Pleas, Cuyahoga County, Ohio, filed September 17, 1996. In July 1999, the United States Court of Appeals for the Sixth Circuit affirmed in part the ruling by the United States District Court for the Northern District of Ohio that plaintiffs lacked standing to pursue their federal claims. The Sixth Circuit was unable to determine whether any of the 13 plaintiffs' state law claims survived. As a result of the ruling the case was remanded to state court for additional proceedings. State of Tennessee, et al., ex. rel. Beckom, et al. v. The American Tobacco Company, et al., Chancery Court, Monroe County, Tennessee, filed May 8, 1997. In April 2000, the United States Court of Appeals for the Sixth Circuit affirmed in part the ruling by the United States District Court for the Eastern District of Tennessee that plaintiffs lacked standing to pursue their federal claims. The Sixth Circuit was unable to determine whether any of plaintiffs' state law claims survived. As a result of the ruling the case was remanded to state court for additional proceedings. Temple, et al. v. The State of Tennessee, et al., United States District Court, Middle District, Tennessee, filed February 7, 2000. Plaintiffs contend that defendant the State of Tennessee has no standing to recover the funds paid to it as compensation for the monies it has paid through its TennCare program for individuals allegedly injured by a smoking-related disease. Plaintiffs further seek a declaration that the MSA is unconstitutional. Plaintiffs' amended complaint also includes claims for class certification on behalf of Tennessee smokers. Other Cases Perry, et al. v. The American Tobacco Company, et al., Circuit Court, Coffee County, Tennessee, filed September 30, 1996. 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 nine other pending tobacco-related cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) Allegheny General Hospital, et al. v. Philip Morris, Inc., et al., United States District Court, Western District, Pennsylvania, filed December 10, 1998. In November 1999, the court granted defendants' motion to dismiss. In October 2000, the United States Court of Appeals for the Third Circuit affirmed the trial court's dismissal of the case. Association of Washington Public Hospital Districts, et al. v. Philip Morris Incorporated, United States District Court, Western District, Washington, filed March 17, 1999. In December 1999, the court granted defendants' motion to dismiss and plaintiffs have appealed. A.O. Fox Memorial Hospital et al. v. The American Tobacco Company, et al., Supreme Court, Nassau County, New York, filed March 30, 2000. County of McHenry, Randolph Hospital District, et al. v. Philip Morris, Inc., et al., Circuit Court, Cook County, Illinois, filed July 13, 2000. 14 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 November 1, 2000, and describes certain developments since August 1, 2000. Asbestos Contribution Cases Raymark Industries, Inc. v. R. J. Reynolds Tobacco Company, et al., Circuit Court, Fourth Judicial Circuit, Duval County, Florida, filed September 15, 1997. Raymark Industries, Inc. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, Northern District, Atlanta Division, Georgia, filed September 15, 1997. Fibreboard Corporation and Owens Corning 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. Robert A. Falise, et al. v. The American Tobacco Company, et al., United States District Court, Southern District, New York, filed December 31, 1997. In November 1999, the court granted defendant's motion to dismiss, finding no subject matter jurisdiction. Plaintiffs appealed this dismissal to the United States Court of Appeals for the Second Circuit, and defendants cross-appealed the trial court's denial of their motion to dismiss on the merits. Plaintiffs filed a new complaint in November 1999, alleging violations of RICO. In April 2000, defendants filed a petition for writ of mandamus with the Second Circuit seeking review of the trial court's denial of their motion for summary judgment. The petition was denied in October 2000. Jury selection in this trial is scheduled for November 2000. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending tobacco-related cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) H. K. Porter Company, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed December 31, 1997. In November 1999, defendants filed a petition for mandamus with the United States Court of Appeals for the Second Circuit, seeking review of the trial court's denial of defendants' motion to dismiss. The mandamus petition was denied in October 2000. Trial is scheduled for April 2001. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending tobacco-related cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) Raymark Industries, Inc. v. R. J. Reynolds Tobacco Company, et al., Circuit Court, Fourth Judicial Circuit, Duval County, Florida, filed December 31, 1997. Raymark Industries, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, Pennsylvania, 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 nine other pending tobacco-related cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) 15 Owens Corning v. R.J. Reynolds Tobacco Company, et al., United States District Court, Southern District of Mississippi, filed August 30, 1998. UNR Asbestos-Disease Claims Trust v. Brown & Williamson Tobacco Corporation, et al., Supreme Court, New York County, New York, filed March 15, 1999. Lights/Ultra Lights Cases Tirado, (formerly Hogue), et al. v. Philip Morris Companies Inc. and Philip Morris, Inc., Circuit Court for the 13th Judicial Circuit, Hillsborough County, Florida, filed June 30, 1998. Gesser (formerly Cummis), et al. v. Philip Morris Companies, Inc. and Philip Morris, Inc., Superior Court, Middlesex County, New Jersey, filed July 9, 1998. McNamara, et al. v. Philip Morris Companies, Inc. and Philip Morris, Inc., Court of Common Pleas, Montgomery County, Pennsylvania, filed July 16, 1998. Aspinall, et al. v. Philip Morris Companies, Inc. and Philip Morris Incorporated, Superior Court, Suffolk County, Massachusetts, filed November 24, 1998. McClure, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Circuit Court, Davidson County, Tennessee, filed January 19, 1999. Cocca, et al. v. Philip Morris Incorporated, Superior Court, Maricopa County, Arizona, filed May 13, 1999. Popa, et al. v. Philip Morris Companies Inc., et al., Court of Common Pleas, Stark County, Ohio, filed June 30, 1999. In November 2000, plaintiffs filed a notice of voluntary dismissal. Engle, et al. v. Philip Morris Companies, Inc. and Philip Morris Inc., Superior Court, Maricopa County, Arizona, filed July 16, 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. Trial is scheduled for November 2001. Dahlgren v. Philip Morris Companies Inc. and Philip Morris Inc., et al., United States District Court, District of Columbia, filed November 18, 1999. In August 2000, plaintiff voluntarily dismissed this action. Bauer, et al. v. Philip Morris Companies Inc., Circuit Court, City of St. Louis, Missouri, filed February 15, 2000. 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. 16 Vending Machine Case Lewis d/b/a B&H Vendors v. Philip Morris Inc., United States District Court, Middle District, Tennessee, filed February 3, 1999. California Business and Professions Code Cases The Company believes that these cases, which were based in part on "Proposition 65", are released in whole or in part by the MSA or that recovery in any such action should be subject to the offset provisions of the MSA. In January 2000, the trial court granted in part and denied in part defendants' motion for summary judgment in the "Proposition 65" cases and dismissed plaintiffs' "Proposition 65" claims. In August 2000 and October 2000, the parties to these cases entered into separate settlement agreements. The court is scheduled to rule on November 20, 2000 on defendants' motion for approval of both settlements and entry of a final judgment in both cases. The People of the State of California, et al. v. Philip Morris Incorporated, et al., Superior Court, Los Angeles County, California, filed July 14, 1998. The People of the State of California, et al. v. Brown & Williamson Tobacco Corporation, et al., Superior Court, San Francisco County, California, filed July 28, 1998. MSA-Related Cases The following are cases in which plaintiffs have challenged the validity of the Master Settlement Agreement described in Note 5. Contingencies. Hise, et al. v. Philip Morris Incorporated, et al., United District Court, Northern District, Oklahoma, filed December 15, 1998. Plaintiffs have appealed the trial court's dismissal of their action to the United States Court of Appeals for the Tenth Circuit. In February 2000, the Tenth Circuit affirmed summary judgment for defendants and in March 2000 it denied plaintiffs' petition for rehearing. In June 2000, plaintiffs attempted to file a writ of certiorari with the United States Supreme Court but subsequently withdrew their petition. In August 2000, plaintiffs filed a second petition for writ of certiorari with the United States Supreme Court that was denied in October 2000. 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 January 2000, the court granted defendants' motion to dismiss the complaint, and plaintiffs have appealed to the United States Court of Appeals for the Ninth Circuit. A.D. Bedell Wholesale Co. v. Philip Morris Incorporated, et al., United States District Court, Western District, Pennsylvania, filed April 12, 1999. In March 2000, the court granted in part defendants' motion to dismiss the complaint. Thereafter, plaintiffs and Philip Morris stipulated to a dismissal without prejudice of the claim that had not been dismissed by the court. In April 2000, plaintiffs filed a notice of appeal to the United States Court of Appeals for the Third Circuit from the court's decision granting in part defendants' motion to dismiss. 17 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. Defendant filed an appeal from the court's denial of the motion to dismiss and the motion to vacate. In May 2000, the appellate court granted in part and denied in part defendants' motion to dismiss the case. The case has been stayed pending resolution of A.D. Bedell Wholesale Co. v. Philip Morris Incorporated, et al., discussed above. Table Bluff Reservation (Wiyot Tribe), et al. v. Philip Morris, Incorporated, et al., No. C99-02621-NHP, United States District Court, Northern District, California, filed June 2, 1999. On November 12, 1999, the court dismissed the case and plaintiffs have appealed to the United States Court of Appeals for the Ninth Circuit. Turner Branch, et al. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, New Mexico, filed August 3, 1999. In August 2000, the court dismissed this case with prejudice at the request of the parties. 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 the plaintiffs' claims. State of New York, et al. v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, intervention motion filed August 19, 1999. The intervention motion was denied. The Appellate Division, First Department affirmed the trial court's ruling, and the time to seek further review has expired. Randall Gomer, et al. v. Philip Morris Companies Inc. et al., United States District Court, Montgomery, Alabama, filed April 26, 2000. Plaintiffs are several Alabama Medicaid recipients who seek class certification contending that the allocation of the State's anticipated MSA funds is unconstitutional. In July 2000, the court granted defendants' motion to dismiss. Tobacco Price Cases Wholesalers and Other Direct Purchasers: 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, District of Columbia, filed February 8, 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 Pricing Litigation, MDL 1342 discussed below.) DelSeronne, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Wayne County, Michigan, filed February 8, 2000. Greer, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco, California, filed February 9, 2000. 18 Lennon v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed February 9, 2000. Munoz, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco, California, filed February 9, 2000. Smith, et al. v. Philip Morris Companies Inc., et al., District Court, Seward County, Kansas, filed February 9, 2000. Withers, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Jefferson County, Tennessee, filed February 9, 2000. Gray, M.D., et al. v. Philip Morris Companies Inc., et al., Superior Court, Pima County, Arizona, filed February 11, 2000. Brownstein, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Broward County, Florida, filed February 14, 2000. 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. 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, California, filed February 28, 2000. Nierman v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 6, 2000. Sylvester v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 8, 2000. 19 Goldschlack v. Philip Morris Companies Inc., et al., United States District Court, Eastern District, Pennsylvania, 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 Pricing Litigation, MDL 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 Pricing Litigation, MDL 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 Pricing Litigation, MDL 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. Belch, et al. v. Philip Morris Companies Inc. et al., Superior Court, Alameda County, California, filed on April 11, 2000. Belmonte, et al. v. R. J. Reynolds, et al., Alameda County Superior Court, California, filed April 11, 2000. Aguay, et al. v. R.J. Reynolds, et al., Alameda County Superior Court, 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. Marcus Distributors, Inc., et al. v. Philip Morris Companies Inc., et al., United States District Court, Southern District, Illinois, filed April 25, 2000. 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, District of Columbia, 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 Pricing Litigations MDL 1342 discussed below.) Anderson, et al. v. Philip Morris Companies Inc., et al., United States District Court, District of Minnesota, filed May 10, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to 20 the United States Court, Northern District of Georgia. (See In Re: Cigarette Pricing Litigation MDL 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. Lau, et al. v. R.J. Reynolds et al., Alameda County Superior Court, California, filed May 25, 2000. In Re: Cigarette Pricing Litigation MDL 1342, Federal Multidistrict Litigation Panel, United States District Court, Northern District, Georgia, Atlanta Division, filed June 7, 2000. Philips, et al. v. R.J. Reynolds, et al., Second Judicial District, Washoe County, Nevada, filed June 9, 2000. Unruh, et al. v. R.J. Reynolds, et al., Second Judicial District, Washoe County, Nevada, filed June 9, 2000. Tobacco Growers' Case DeLoach, et al. v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed February 16, 2000. This purported class action alleges that defendants violated antitrust laws by bid-rigging at tobacco auctions and by conspiring to undermine the tobacco quota and price support system administered by the federal government. In June 2000, plaintiffs voluntarily dismissed the Company and PMI from the case. The remaining defendants, including PM Inc., filed a motion to dismiss the case. In September 2000, the court granted plaintiffs' motion for leave to file a second amended complaint. In October 2000, defendants filed a motion to dismiss the second amended complaint. In October 2000, plaintiffs filed a motion for a class certification. Cigarette Importation Cases Department of Amazonas, et al. v. Philip Morris Companies, Inc., et al., United States District Court, Eastern District of New York, filed September 19, 2000. The Republic of Ecuador v. Philip Morris Incorporated, et al., Circuit Court, Eleventh Judicial Circuit, Miami-Dade County, Florida, filed June 5, 2000 (not served). The European Community v. RJR Nabisco, Inc., et al., United States District Court, Eastern District of New York, filed November 3, 2000. Consolidated Putative Punitive Damages Cases Simon, et al. v. Philip Morris Incorporated, et al., (Simon II), United States District Court for the Eastern District of New York, filed September 6, 2000. Plaintiffs' complaint requests class certification of a nationwide punitive damages class and seeks to consolidate the punitive damages claims in the following ten actions: Simon, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, Decie, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, Ebert, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, National Asbestos Workers Medical Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern Division, New York, Bergeron, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, 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, Mason, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, Robert A. Falise, et al. v. The American Tobacco Company, et al., United States District Court, Southern District, New York, H. K. Porter Company, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York and Raymark Industries, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, Pennsylvania. The complaint identifies seven purported subclasses comprised of: (a) all persons residing in the United States who, at any time from 1920 through the date of the class notice, smoked cigarettes manufactured by the defendants and who are suffering from various types of cancer or other diseases identified in the complaint; (b) the estates or personal representatives of all such smokers who are deceased and for whom any of the identified diseases were listed in medical records or death certificates as a cause of death; (c) all persons and entities described in clauses (a) and (b) above with pending civil actions who/which have not proceeded to final judgment on all claims and issues; (d) all persons residing in the United States who, at any time from 1920 through the date of class notice, have smoked cigarettes manufactured by the defendants but who are not as of the class notice suffering from or diagnosed with any of the diseases listed in the complaint; (e) all multi-employer health benefit plans established under the Labor Management Relations (Taft-Hartley) Act, that, as of the date of the complaint, have paid to detect, diagnose, or treat any of the diseases listed in the complaint to any of the persons described in clauses (a), (b) or (c) above or to prevent or curtail cigarette smoking; (f) all non-governmental entities located in the United States (third party payors) that have asserted claims on behalf of themselves or others with which they have contracted that as of the date of the complaint are pending in any trial or appellate court, to recover payments made for health care costs in detecting, diagnosing, treating and/or seeking to prevent smoking-related disease; and (g) all manufacturers, distributors and producers of asbestos or asbestos-containing products that as of the date of the complaint are or have in the past been subject to the supervision of a United States Bankruptcy Court or a United States District Court exercising bankruptcy jurisdiction, and successors to the liabilities of the asbestos manufacturers, distributors and producers. In November 2000, the court indicated that, in its view, it appears likely that plaintiffs will be able to demonstrate a basis for certification of an opt-out compensatory damages class and a non-opt out punitive damages class. 21 CERTAIN OTHER ACTIONS The following lists certain other actions pending against subsidiaries of the Company and others as of November 1, 2000. 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.) As discussed in Note 5. Contingencies, in October 1999 the Court granted Kraft's motion for summary judgment. Plaintiffs have appealed. Vincent, et al. v. Kraft Foods, Inc., Circuit Court, Cook County, Illinois, filed October 27, 1997. In February 2000, the appeals court reversed the trial court's dismissal. Knevelboard Dairies, et al. v. Kraft Foods, Inc., et al., United States District Court, Central District, California, filed April 14, 1998. Plaintiffs have appealed the court's dismissal of this action. Environmental Matters State of Missouri v. Kraft Foods, Inc., et al., Circuit Court, Missouri, filed March 14, 2000. In March 2000, the State of Missouri filed a civil enforcement action against Kraft and affiliated companies alleging that from 1995 through 1999 the defendants sent spent weiner casings to a farm site near Columbia, Missouri for reuse. The State claims that this practice violated the Missouri Solid Waste Law and the Missouri Clean Water Law and seeks civil penalties and the removal of the spent casings from the farm site and disposal in a permitted solid waste facility. Kraft filed a motion to dismiss the complaint. 22 EX-99.2 5 0005.txt STATUS OF THE MASTER SETTLEMENT AGREEMENT Exhibit 99.2 STATUS OF THE MASTER SETTLEMENT AGREEMENT The Master Settlement Agreement ("MSA") is subject to final judicial approval (i.e., trial court approval and the expiration of the time for review or appeal with respect to such approval) in each of the settling jurisdictions. If a settling jurisdiction does not obtain final judicial approval by December 31, 2001, the agreement will be terminated with respect to such state; the agreement, however, will remain in effect as to each settling jurisdiction in which final judicial approval is obtained. As noted in the chart below, the MSA has been approved by trial courts in all of the 52 settling jurisdictions and the Company believes that the time for review or appeal with respect to such approvals has expired in 50 of those jurisdictions. Interventions and/or challenges to the MSA (or appeals thereof) are pending in two jurisdictions. In addition, as described in Note 5. Contingencies, above, under the heading "Litigation Settlements," there are a number of other suits pending related to the MSA. INTERVENTION FINAL AND/OR JUDICIAL CHALLENGE JURISDICTION TRIAL COURT APPROVAL APPROVAL PENDING - -------------------------------------------------------------------------------- American Samoa X X Alabama X X Alaska X X Arizona X X Arkansas X X California X X Colorado X X Connecticut X X District of Columbia X X Delaware X X Georgia X X Guam X X Hawaii X X Idaho X X Illinois X X Indiana X X Iowa X X Kansas X X Kentucky X X Louisiana X X Maine X X Maryland X X Massachusetts X X Michigan X X Missouri X X Montana X X Nebraska X X Nevada X X New Hampshire X X New Jersey X X New Mexico X X New York X X - -------------------------------------------------------------------------------- INTERVENTION FINAL AND/OR JUDICIAL CHALLENGE JURISDICTION TRIAL COURT APPROVAL APPROVAL PENDING - -------------------------------------------------------------------------------- North Carolina X X North Dakota X X Northern Marianas X X Ohio X X Oklahoma X X Oregon X X Pennsylvania X X Puerto Rico X X Rhode Island X X South Carolina X X South Dakota X X Tennessee X X Utah X X Vermont X X Virgin Islands X X Virginia X X Washington X X West Virginia X X Wisconsin X X Wyoming X X EX-99.3 6 0006.txt TRIAL SCHEDULE FOR CERTAIN CASES Exhibit 99.3 TRIAL SCHEDULE FOR CERTAIN CASES Set forth below is a list of consolidated individual cases smoking and health class actions, health care cost recovery actions, and asbestos contribution actions currently scheduled for trial through 2001 against PM Inc. and, in some cases, the Company. Trial dates, however, are subject to change. Case (Jurisdiction) Type of Action Trial Date - ------------------- -------------- ---------- Robert A. Falise, et al. Asbestos Contribution Action November 27, 2000 v. The American Tobacco Company, et al. (New York) In Re Tobacco Litigation Medical Monitoring Smoking and December 4, 2000 (Medical Monitoring Cases) Health Class Action (West Virginia) Scott, et al. v. The American Smoking and Health Class Action January 15, 2001 Tobacco Company, et al. (Louisiana) Blue Cross and Blue Shield of Health Care Cost Recovery Action March 19, 2001 New Jersey, Inc., et al. v. Philip Morris, Incorporated, et al. (New York) H.K. Porter Company, Inc. v. The American Asbestos Contribution Action April 9, 2001 Tobacco Company, et al. (New York)
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Case (Jurisdiction) Type of Action Trial Date - ------------------- -------------- ---------- Republic of the Marshall Health Care Cost Recovery Action April 30, 2001 Islands v. American Tobacco Company, et al. (Marshall Islands) National Asbestos Workers Health Care Cost Recovery Action May 21, 2001 Medical Fund, et al. v. Philip Morris Incorporated, et al. (New York) U Tu Utu Gwaitu Health Care Cost Recovery Paiute Tribe Action June 2, 2001 (California) In Re Tobacco Litigation Consolidated Individual June 4, 2001 (Individual Personal Injury cases) Smoking and Health Cases (West Virginia) Force, et al. v. American Smoking and Health Class Action September 2001 Tobacco, et al. (Illinois)
Below is a schedule setting forth by month the number of individual smoking and health cases against PM Inc. and, in some cases, the Company that are currently scheduled for trial through the end of the year 2001. 2001 ---- January (2) February (4) March (4) April (3) May (3) July (3) August (1) September (6) October (2) November (2) -----END PRIVACY-ENHANCED MESSAGE-----