-----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, JuSYUjuhvvNog0DwpGRdcDVG1u8+Kol7J+1lYHUYCX5robQStTpiMS4gWGQZWsPI 8B46r09dijIAAjd3h14Nxw== 0001047469-99-010218.txt : 19990319 0001047469-99-010218.hdr.sgml : 19990319 ACCESSION NUMBER: 0001047469-99-010218 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILIP MORRIS COMPANIES INC CENTRAL INDEX KEY: 0000764180 STANDARD INDUSTRIAL CLASSIFICATION: FOOD & KINDRED PRODUCTS [2000] IRS NUMBER: 133260245 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08940 FILM NUMBER: 99567528 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-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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, N.Y. 10017 (Address of principal executive offices) (Zip Code)
------------------------ REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 917-663-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - -------------------------------------------------------- -------------------------------------------------------- Common Stock, $0.33 1/3 par value New York Stock Exchange
------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ ------------------------ The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on February 26, 1999, was approximately $95 billion. At such date, there were 2,425,864,366 shares of the registrant's Common Stock outstanding. ------------------------ DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's annual report to stockholders for the year ended December 31, 1998, are incorporated in Part I, Part II and Part IV hereof and made a part hereof. The registrant's definitive proxy statement for use in connection with its annual meeting of stockholders to be held on April 29, 1999, is incorporated in Part III hereof and made a part hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. DESCRIPTION OF BUSINESS. (A) GENERAL DEVELOPMENT OF BUSINESS GENERAL Philip Morris Companies Inc. is a holding company whose principal wholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris International Inc., Kraft Foods, Inc., and Miller Brewing Company, are engaged in the manufacture and sale of various consumer products. A wholly-owned subsidiary of the Company, Philip Morris Capital Corporation, engages in various financing and investment activities. As used herein, unless the context indicates otherwise, the term "Company" means Philip Morris Companies Inc. and its subsidiaries. The Company is the largest consumer packaged goods company in the world.* Philip Morris Incorporated ("PM Inc."), which conducts business under the trade name "Philip Morris U.S.A.," and its subsidiaries and affiliates are engaged in the manufacture and sale of cigarettes. PM Inc. is the largest cigarette company in the United States. Philip Morris International Inc. ("Philip Morris International" or "PMI") is a holding company whose subsidiaries and affiliates and their licensees are engaged primarily in the manufacture and sale of tobacco products (mainly cigarettes) internationally. A subsidiary of Philip Morris International is the leading United States exporter of cigarettes. MARLBORO, the principal cigarette brand of these companies, has been the world's largest-selling cigarette brand since 1972. Certain subsidiaries and affiliates of Philip Morris International manufacture and sell a wide variety of food products in Latin America. Kraft Foods, Inc. ("Kraft"), is the largest processor and marketer of retail packaged foods in the United States. A wide variety of cheese, processed meat products, coffee and grocery products are manufactured and marketed in the United States and Canada by Kraft. Subsidiaries and affiliates of Kraft Foods International, Inc. ("Kraft Foods International"), a subsidiary of Kraft, manufacture and market coffee, confectionery, cheese, grocery and processed meat products primarily in Europe and the Asia/ Pacific region. Miller Brewing Company ("Miller") is the second-largest brewing company in the United States. SOURCE OF FUNDS--DIVIDENDS Because the Company is a holding company, its principal source of funds is dividends from its subsidiaries. The Company's principal wholly-owned subsidiaries currently are not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock. (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS In 1998, the Company's significant industry segments were domestic tobacco, international tobacco, North American food, international food, beer and financial services. Operating revenues and operating companies income (together with a reconciliation to operating income) attributable to each such segment for each of the last three years (along with total assets for each of tobacco, food, beer and financial services at December 31, 1998, 1997 and 1996) are set forth in Note 12 to the Company's consolidated financial statements and are incorporated herein by reference to the Company's annual report to stockholders for the year ended December 31, 1998 (the "1998 Annual Report"). In 1998, operating companies income for domestic tobacco was approximately 13.1% of consolidated operating companies income, down from 25.7% in 1997 and 32.7% in 1996. Both the decrease from 1996 to 1997 and the decrease from 1997 to 1998 were due primarily to charges recorded in 1998 and 1997 in - ------------------------ * References to the Company's competitive ranking in its various businesses are based on sales data or, in the case of cigarettes and beer, shipments, unless otherwise indicated. 1 connection with tobacco litigation settlements discussed below in Item 3. LEGAL PROCEEDINGS. International tobacco contributed 44.4% of consolidated operating companies income in 1998, compared with 35.7% and 31.7%, respectively, in 1997 and 1996. North American food and international food contributed 27.0% and 9.9%, respectively, to consolidated operating companies income in 1998, compared with 22.4% and 10.3%, respectively, in 1997 and 20.5% and 10.1%, respectively, in 1996. Beer and financial services contributed 4.0% and 1.6%, respectively, to consolidated operating companies income in 1998, compared with 3.6% and 2.3%, respectively, in 1997, and 3.4% and 1.6%, respectively, in 1996. The higher contribution attributable to financial services in 1997 reflects a $103 million pre-tax gain on the sale of its real estate operations. (C) NARRATIVE DESCRIPTION OF BUSINESS TOBACCO PRODUCTS PM Inc. manufactures, markets and sells cigarettes in the United States. Subsidiaries and affiliates of Philip Morris International and their licensees manufacture, market and sell tobacco products outside the United States and export tobacco products from the United States. DOMESTIC TOBACCO PRODUCTS PM Inc. is the largest tobacco company in the United States, with total cigarette shipments in the United States of 227.6 billion units in 1998, a decrease of 3.2% from 1997. PM Inc. accounted for 49.4% of the cigarette industry's total shipments in the United States in 1998 (an increase of 0.7 share points from 1997). The industry's cigarette shipments in the United States decreased by 4.6% in 1998. The following table(+) sets forth the industry's cigarette shipments in the United States, PM Inc.'s shipments and its share of United States industry shipments:
YEARS ENDED PM INC. DECEMBER 31 INDUSTRY* PM INC. SHARE OF INDUSTRY - ---------------------------------------------------------- ----------- ----------- ------------------- (IN BILLIONS OF UNITS) (%) 1998...................................................... 460.8 227.6 49.4 1997...................................................... 482.9 235.2 48.7 1996...................................................... 483.2 230.8 47.8
PM Inc.'s major premium brands are MARLBORO, VIRGINIA SLIMS, BENSON & HEDGES, MERIT and PARLIAMENT. Its principal discount brands are BASIC and CAMBRIDGE. All of its brands are marketed to take into account differing preferences of adult smokers. MARLBORO is the largest-selling cigarette brand in the United States, with shipments of 162.5 billion units in 1998 (down 0.9% from 1997), equating to 35.3% of the United States market (up from 34.0% in 1997). In December 1998, PM Inc. paid $150 million for options to purchase the United States rights to manufacture and market three cigarette trademarks, L&M, Lark and Chesterfield, the international rights to which are already owned by Philip Morris International. The exercise of the options is subject to certain conditions. Including the $150 million paid in December, the total acquisition price for these trademarks will be $300 million. L&M, Lark and Chesterfield accounted for less than 0.2% of domestic cigarette industry volume in 1998. In February 1999, PM Inc. announced that it plans to phase out cigarette production at its Louisville, Kentucky manufacturing plant by December 2000. In 1998, the premium and discount segments accounted for approximately 73% and 27%, respectively, of domestic cigarette industry volume, versus 72.3% and 27.7%, respectively, in 1997. PM Inc.'s share of the premium segment was 58.4% in 1998, an increase of 0.8 share points over 1997. Shipments of premium - ------------------------ + Data presented in this table differ in some cases from data discussed above due to rounding differences. * Source: Management Science Associates. 2 cigarettes accounted for 86.4% of PM Inc.'s 1998 volume, up from 85.7% in 1997. In 1998, United States industry shipments within the discount segment declined 6.9% from 1997 levels; PM Inc.'s 1998 shipments within this category declined 8.1%, resulting in a share of 25.0% of the discount segment (down 0.3 share points from 1997). PM Inc. cannot predict future change or rates of change in domestic tobacco industry volume, the relative sizes of the premium and discount segments or in PM Inc.'s shipments, shipment market share or retail market share; however, it believes that PM Inc.'s shipments may be materially adversely affected by price increases related to the tobacco litigation settlements and, if enacted, by increased excise taxes or other tobacco legislation discussed below. INTERNATIONAL TOBACCO PRODUCTS Philip Morris International's total cigarette shipments grew 1.0% in 1998, to 716.9 billion units. Philip Morris International estimates that its share of the international cigarette market (excluding the United States) was 13.9% in 1998, up from 13.6% in 1997. Philip Morris International estimates that international cigarette industry shipments (excluding the United States) were approximately 5.2 trillion units in 1998, down slightly from 1997, due to the impact of regional economic crises. Philip Morris International unit shipments (including brands acquired through acquisitions) have grown at a compounded annual growth rate of 9.3% over the last five years, versus compounded annual industry growth of approximately 1.3% over the same period. Philip Morris International's leading international brands--MARLBORO, L&M, PHILIP MORRIS, BOND STREET, CHESTERFIELD, PARLIAMENT, LARK, MERIT and VIRGINIA SLIMS--collectively accounted for approximately 10.8% of the international cigarette market (excluding the United States) in 1998, up from 10.7% in 1997. Unit sales of Philip Morris International's principal brand, MARLBORO, increased 3.8% in 1998, to 330 billion units, representing more than 6% of the international cigarette market (excluding the United States). Philip Morris International has a cigarette market share of at least 15%, and in a number of instances substantially more than 15%, in more than 40 markets, including Argentina, Australia, Belgium, the Czech Republic, Finland, France, Germany, Hong Kong, Hungary, Italy, Japan, Mexico, the Netherlands, Poland, Portugal, Saudi Arabia, Singapore, Spain, Switzerland and Turkey. In 1998, Philip Morris International took a number of measures to invest in and expand its international manufacturing base. Philip Morris International acquired the assets of its former licensee in Indonesia, produced L&M and BOND STREET at a new manufacturing facility in Romania, and began construction of new manufacturing plants in St. Petersburg, Russia and in Almaty, Kazakhstan. DISTRIBUTION, COMPETITION AND RAW MATERIALS PM Inc. sells its tobacco products principally to wholesalers (including distributors), large retail organizations, including chain stores, and the armed services. Subsidiaries and affiliates of Philip Morris International and their licensees market cigarettes and other tobacco products worldwide, directly or through export sales organizations and other entities with which they have contractual arrangements. The market for tobacco products is highly competitive, characterized by brand recognition and loyalty, with product quality, price, marketing and packaging constituting the significant methods of competition. Promotional activities include, in certain instances and where permitted by law, allowances, the distribution of incentive items, price reductions and other discounts. The tobacco products of the Company's subsidiaries, affiliates and their licensees are advertised and promoted through various media, although television and radio advertising of cigarettes is prohibited in the United States and is prohibited or restricted in many other countries. In addition, as discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") on pages 21-35 of the Company's 1998 Annual Report, incorporated herein by reference, PM Inc. and other domestic tobacco manufacturers have agreed to other marketing restrictions in the United States as part of the settlements of state health care cost recovery actions. 3 PM Inc. and Philip Morris International's subsidiaries and affiliates and their licensees purchase domestic burley and flue-cured leaf tobaccos of various grades and types each year, primarily at domestic auction. In addition, oriental tobacco and certain other tobaccos are purchased outside the United States. The tobacco is then graded, cleaned, stemmed and redried prior to its storage for aging up to three years. Large quantities of leaf tobacco inventory are maintained to support cigarette manufacturing requirements. Tobacco is an agricultural commodity subject to United States government controls, including the tobacco price support (subject to Congressional review) and production adjustment programs administered by the United States Department of Agriculture (the "USDA"), either of which can substantially affect market prices. PM Inc. and Philip Morris International believe there is an adequate supply of tobacco in the world markets to satisfy their current production requirements. TAXES, LEGISLATION, REGULATION AND OTHER MATTERS REGARDING TOBACCO AND SMOKING The tobacco industry, both in the United States and abroad, has faced, and continues to face, a number of issues that may adversely affect the business, volume, results of operations, cash flows and financial position of PM Inc., Philip Morris International and the Company. These issues, some of which are more fully discussed below, include legislation or other governmental action seeking to ascribe to the industry responsibility and liability for the purported adverse health effects associated with both smoking and exposure to environmental tobacco smoke ("ETS"); increased smoking and health litigation; price increases in the United States related to the settlement of certain tobacco litigation; actual and proposed excise tax increases; the issuance of final regulations by the United States Food and Drug Administration (the "FDA") that, if upheld by the courts, would regulate cigarettes as "drugs" or "medical devices"; governmental and grand jury investigations; actual and proposed requirements regarding disclosure of cigarette ingredients and other proprietary information, as well as the testing and reporting of the yields of "tar," nicotine and other constituents found in cigarette smoke; governmental and private bans and restrictions on smoking; actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States; actual and proposed restrictions on tobacco manufacturing, marketing, advertising and sales (including two European Union directives that, if implemented, will (i) ban virtually all forms of tobacco advertising and sponsorship in the European Union other than at the retail point of sale, and (ii) abolish duty-free tobacco sales among member states of the European Union); proposed legislation to eliminate the U.S. tax deductibility of tobacco advertising and promotional costs; proposed legislation in the United States to require the establishment of ignition propensity performance standards for cigarettes; the diminishing social acceptance of smoking and increased pressure from anti-smoking groups and unfavorable press reports; and other tobacco legislation that may be considered by the Congress, the states and other countries. EXCISE TAXES--Cigarettes are subject to substantial federal and state excise taxes in the United States and to similar taxes in most foreign markets. The United States federal excise tax on cigarettes is currently $0.24 per pack of 20 cigarettes and is scheduled to increase to $0.34 per pack in the year 2000 and then to $0.39 per pack in 2002. In general, excise taxes and other taxes on cigarettes have been increasing. These taxes vary considerably and, when combined with sales taxes and the current federal excise tax, may be as high as $1.50 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 the Clinton Administration's fiscal year 2000 budget proposal includes an additional increase of $0.55 per pack in the federal excise tax. Increases in other cigarette-related taxes have been proposed at the state and local level and in many jurisdictions outside the United States. In the opinion of PM Inc. and Philip Morris International, increases in excise and similar taxes have had an adverse impact on sales of cigarettes. Any future increases, the extent of which cannot be predicted, could result in volume declines for the cigarette industry, including PM Inc. and Philip Morris International, and might cause sales to shift from the premium segment to the discount segment. FEDERAL TRADE COMMISSION ("FTC")--In September 1997, the FTC issued a request for public comments on its proposed revision of its "tar" and nicotine test methodology and reporting procedures 4 established by a 1970 voluntary agreement among domestic 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 assistance in developing specific recommendations on the future of the FTC's program for testing the "tar," nicotine and carbon monoxide content of cigarettes. FDA REGULATIONS--The FDA has promulgated regulations asserting jurisdiction over cigarettes as "drugs" or "medical devices" under the provisions of the Food, Drug and Cosmetic Act. These regulations include severe restrictions on the distribution, marketing and advertising of cigarettes, and would require the industry to comply with a wide range of labeling, reporting, recordkeeping, manufacturing and other requirements. The FDA's exercise of jurisdiction, if not reversed by judicial or legislative action, could lead to more expansive FDA-imposed restrictions on cigarette operations than those set forth in the regulations, and could materially adversely affect the business, volume, results of operations, cash flows and financial position of PM Inc. and the Company. In August 1998, the Fourth Circuit Court of Appeals ruled that the FDA does not have the authority to regulate tobacco products, and declared the FDA's regulations invalid and, in November 1998, that court denied the FDA's petition for rehearing. The FDA is now petitioning the U.S. Supreme Court to review the judgment of the Fourth Circuit Court of Appeals in this case. The ultimate outcome of this litigation cannot be predicted. INGREDIENT DISCLOSURE LAWS--The Commonwealth of Massachusetts has enacted legislation to require cigarette manufacturers to report yearly the flavorings and other ingredients used in each brand style of cigarettes sold in the Commonwealth, and on a qualified, by-brand basis to provide "nicotine-yield ratings" for their products based on standards to be established by the Commonwealth. Enforcement of the ingredient disclosure provisions of the statute could result in the public disclosure of valuable proprietary information. In December 1997, a federal district court in Boston granted the tobacco company plaintiffs a preliminary injunction and enjoined the Commonwealth from enforcing the ingredient disclosure provisions of the legislation. In November 1998, the First Circuit Court of Appeals affirmed this ruling. In addition, both parties' cross-motions for summary judgment are pending before the district court. The ultimate outcome of this lawsuit cannot be predicted. Similar legislation has been enacted or proposed in other states. Some jurisdictions outside the United States have also enacted or proposed some form of ingredient disclosure legislation or regulation. HEALTH EFFECTS OF SMOKING AND EXPOSURE TO ETS--Reports with respect to the alleged harmful physical effects of cigarette smoking have been publicized for many years, and the sale, promotion and use of cigarettes continue to be subject to increasing governmental regulation. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports linking cigarette smoking with a broad range of health hazards, including various types of cancer, coronary heart disease and chronic lung disease, and recommending various governmental measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994 reports focus upon the "addictive" nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, and the economic and regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particularly the "addictive" nature of cigarette smoking in adolescence. Studies with respect to the alleged health risks of ETS to nonsmokers (including lung cancer, respiratory and coronary illnesses, and other conditions) have also received significant publicity. In 1986, the Surgeon General of the United States and the National Academy of Sciences reported that nonsmokers were at increased risk of lung cancer and respiratory illness due to ETS. In 1993, the U.S. Environmental Protection Agency (the "EPA") issued a report relating to certain alleged health effects of ETS. The report included a risk assessment relating to the alleged association between ETS and lung cancer in nonsmokers, and a determination by the EPA to classify ETS as a "Group A" carcinogen. In July 1998, a federal district court vacated those sections of the report relating to lung cancer, finding that 5 the EPA may have reached different conclusions had it complied with certain relevant statutory requirements. The federal government has appealed the court's ruling. The ultimate outcome of this litigation cannot be predicted. In October 1997, at the request of the United States Senate Judiciary Committee, the Company provided the Committee with a document setting forth the Company's position on a number of issues. On the issues of the role played by cigarette smoking in the development of lung cancer and other diseases in smokers, and whether nicotine, as found in cigarette smoke, is "addictive," the Company stated that despite the differences that may exist between its views and those of the public health community, it would, in order to ensure that there will be a single, consistent public health message on these issues, refrain from debating the issues other than as necessary to defend itself and its opinions in the courts and other forums in which it is required to do so. The Company also stated that in relation to these issues, and the alleged health effects of exposure to ETS, the Company is prepared to defer to the judgment of public health authorities as to what health warning messages will best serve the public interest. OTHER LEGISLATIVE INITIATIVES--In recent years, various members of Congress have introduced legislation, some of which has been the subject of hearings or floor debate, that would subject cigarettes to various regulations under the Department of Health and Human Services or regulation under the Consumer Products Safety Act, establish anti-smoking educational campaigns or anti-smoking programs, or provide additional funding for governmental anti-smoking activities, further restrict the advertising of cigarettes, including requiring additional warnings on packages and in advertising, provide that the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act could not be used as a defense against liability under state statutory or common law, allow state and local governments to restrict the sale and distribution of cigarettes, and further restrict certain advertising of cigarettes and eliminate or reduce the tax deductibility of tobacco advertising. It is not possible to determine the outcome of the FDA regulatory initiative or the related litigation discussed above, or to predict what, if any, other foreign or domestic governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or to the tobacco industry generally. However, if any or all of the foregoing were to be implemented, the business, volume, results of operations, cash flows and financial position of PM Inc., Philip Morris International and the Company could be materially adversely affected. GOVERNMENTAL AND GRAND JURY INVESTIGATIONS--PM Inc. has received requests for information (including grand jury subpoenas) in connection with governmental investigations of the tobacco industry, and is cooperating with respect to such requests. Present and former employees of PM Inc. have testified or have been asked to testify in connection with certain of these matters. The investigations include four grand jury investigations being conducted by: the United States Attorney for the Eastern District of New York relating to The Council for Tobacco Research-U.S.A., Inc., a research organization of which PM Inc. was a sponsor; the United States Department of Justice in Washington, D.C., relating to issues raised in testimony provided by tobacco industry executives before Congress and other related matters; the United States Department of Justice Antitrust Division in the Eastern District of Pennsylvania relating to tobacco leaf purchases; and the United States Attorney for the Northern District of New York relating to alleged contraband transactions primarily in Canadian-brand tobacco products. Philip Morris International and its subsidiary, Philip Morris Duty Free Inc., have also received subpoenas in the last referenced investigation. While the outcomes of these investigations cannot be predicted, PM Inc., Philip Morris International and Philip Morris Duty Free Inc. believe they have acted lawfully. TOBACCO-RELATED LITIGATION AND SETTLEMENTS--See Item 3. LEGAL PROCEEDINGS. below for a discussion of the tobacco-related litigation pending against PM Inc., Philip Morris International and, in some cases, the Company and its other subsidiaries and related entities. As noted in the MD&A on pages 21-35 of the Company's 1998 Annual Report, PM Inc. and other major domestic tobacco product manufacturers have entered into agreements with states and various U.S. jurisdictions settling asserted and unasserted health care cost recovery and other claims. These settlement agreements, among other things, provide for 6 substantial annual payments, restrict advertising and marketing of tobacco products, require public disclosure of certain industry documents, impose requirements applicable to lobbying activities, and limit the industry's ability to challenge certain tobacco control and underage use laws. FOOD PRODUCTS Kraft and Kraft Foods International have taken a number of actions to improve their business portfolios and operating efficiencies. During 1998, Kraft Foods International sold four international food businesses. During 1997, Philip Morris International sold its Brazilian ice cream businesses, Kraft sold North American maple-flavored syrup businesses and Kraft Foods International sold a Scandinavian sugar confectionery business. During 1996, Kraft sold its bagel business, and Kraft Foods International sold margarine businesses in the U.K. and Italy. The sales of these and other smaller businesses have not had a material effect on the Company's results of operations. In the fourth quarter of 1997, the international food businesses recorded pre-tax realignment charges of $630 million, related primarily to the downsizing or closure of manufacturing and other facilities, as well as the discontinuance of certain low-margin product lines. Included in the charges were provisions for incremental postemployment benefits, primarily related to severance. During 1998, certain actions contemplated by the charges were undertaken, including the divestiture or closure of four businesses, the commencement of two manufacturing facilities closures and consolidation of certain sales force and headquarters functions, and began to make periodic postemployment payments to severed employees, the duration of such payments being dictated by the severed employees' salary grades, years of service and the customs of the respective countries in which actions were taken. Kraft Foods International anticipates that the majority of the remaining postemployment payments will be made by the end of the year 2000. NORTH AMERICA Kraft is the largest retail packaged food company in North America. Kraft's principal products include cheese and cheese products, processed meat and poultry products, coffee, ready-to-eat cereals, salad and other dressings, powdered and ready-to-drink beverages, frozen pizza, packaged and ready-to-eat desserts and snacks, packaged pasta dinners, lunch combinations, barbecue sauces, frozen toppings, confections and other cultured dairy and grocery products. Its principal brands include KRAFT, VELVEETA, CRACKER BARREL and POLLY-O cheese and cheese products; PHILADELPHIA cream cheese; CHEEZ WHIZ cheese sauce; OSCAR MAYER luncheon meats, hot dogs, bacon, ham and other meat products; LOUIS RICH luncheon meats, poultry franks, turkey bacon and other poultry products; LUNCHABLES lunch combinations; CLAUSSEN pickles; MAXWELL HOUSE, YUBAN, GEVALIA and NABOB coffees; GENERAL FOODS INTERNATIONAL COFFEES flavored coffees; POST ready-to-eat cereals; MIRACLE WHIP salad dressing; KRAFT spoonable and pourable salad dressings; KOOL-AID, TANG, CAPRI SUN, CRYSTAL LIGHT and COUNTRY TIME powdered and ready-to-drink beverages; TOMBSTONE and JACK'S frozen pizzas and DI GIORNO pastas, sauces, cheeses and frozen pizzas; JELL-O desserts; HANDI-SNACKS snack combinations and desserts; ALTOIDS confections; KRAFT Macaroni & Cheese dinners; KRAFT and BULL'S-EYE barbecue sauces; COOL WHIP whipped toppings; STOVE TOP stuffing mix; MINUTE rice; SHAKE 'N BAKE coatings; LIGHT N' LIVELY, BREYERS, KNUDSEN and BREAKSTONE'S cultured dairy products; and TACO BELL grocery products (acquired in 1996). During 1998, Kraft entered into a licensing agreement to manufacture, market and sell CALIFORNIA PIZZA KITCHEN frozen pizzas and a licensing agreement to market, sell and distribute STARBUCKS coffees to grocery customers. INTERNATIONAL Subsidiaries and affiliates of Kraft Foods International manufacture and market a wide variety of coffee, confectionery, cheese, grocery and processed meat products in Europe, with distribution to the Middle East and Africa. In the Asia/Pacific region, select grocery products are produced locally, and other Company branded products are sourced from Europe and the United States. In Latin America, subsidiaries and affiliates of Philip Morris International manufacture and market a wide variety of food products, including confectionery products, various powdered soft drinks, and other grocery products sold by Kraft. In 1998, approximately 83% of operating revenues for the international food businesses were derived from 7 sales made in Europe. International brands include JACOBS, GEVALIA, CARTE NOIRE, JACQUES VABRE, KAFFEE HAG, GRAND' MERE, KENCO, SAIMAZA and SPLENDID coffees; MILKA, SUCHARD, COTE D'OR, MARABOU, TOBLERONE, FREIA, TERRY'S, DAIM and CALLARD & BOWSER confectionery products; HOLLYWOOD chewing gum; DAIRYLEA, EL CASERIO and INVERNIZZI cheeses; MIRACOLI pasta dinners and sauces; VEGEMITE spread; ESTRELLA and MAARUD snacks; and SIMMENTHAL meats, as well as a variety of products sold by Kraft in the United States, including PHILADELPHIA cream cheese. In 1996, Philip Morris International acquired nearly all of the remaining voting shares of Industrias de Chocolate Lacta S.A., a Brazilian confectionery company. DISTRIBUTION, COMPETITION AND RAW MATERIALS Kraft's products in North America are generally sold to supermarket chains, wholesalers, club stores, mass merchandisers, distributors, convenience stores, individual stores and other retail food outlets. In general, the retail trade for food products is consolidating. Food products are distributed through distribution centers, satellite warehouses, company-operated and public cold-storage facilities, depots and other facilities. Selling efforts are supported by national and regional advertising on television and radio and in magazines and newspapers, as well as by sales promotions, product displays, trade incentives, informative material offered to customers and other promotional activities. Subsidiaries and affiliates of Kraft Foods International and Philip Morris International sell their food products primarily in the same manner and also engage the services of independent sales offices and agents. Advertising is tailored by product and country to reach targeted audiences. Kraft is subject to highly competitive conditions in all aspects of its business. Competitors include large national and international companies and numerous local and regional companies. Its food products also compete with generic products and private-label products of food retailers, wholesalers and cooperatives. Kraft competes primarily on the basis of product quality, service, marketing, advertising and price. Kraft is a major purchaser of milk, cheese, green coffee beans, cocoa, corn, wheat, poultry, pork, beef, vegetable oil, and sugar and other sweeteners. Kraft continuously monitors worldwide supply and cost trends of these commodities to enable it to take appropriate action to obtain ingredients needed for production. Kraft purchases all of its milk requirements and a substantial portion of its cheese requirements from independent sources, principally from cooperatives and individual producers. The prices for milk and other dairy product purchases are substantially influenced by government programs, as well as market supply and demand. During 1998, the cost of certain United States dairy commodities reached record high levels. These costs began to moderate early in 1999. The most significant cost item in coffee products is green coffee beans, which are purchased on world markets. Green coffee bean prices are affected by the quality and availability of supply, trade agreements among producing and consuming nations, the unilateral policies of the producing nations, changes in the value of the United States dollar in relation to certain other currencies and consumer demand for coffee products. Coffee bean prices declined during the last three quarters of 1998 after reaching a 20-year high in May 1997. A significant cost item in confectionery products is cocoa, which is purchased on world markets, and the price of which is affected by the quality and availability of supply and changes in the value of the British pound sterling relative to certain other currencies. The purchase price of poultry and meat cuts is the major factor in the cost of Kraft's processed meat products. Poultry and meat prices are cyclical and are affected by market supply and demand. Kraft is also a major user of packaging materials purchased from many suppliers. The prices paid for raw materials used in food products generally reflect external factors such as weather conditions, commodity market activities, currency fluctuations, and the effects of governmental agricultural programs. Although the prices of the principal raw materials can be expected to fluctuate as a result of government actions and/or market forces (which would directly affect the cost of products and 8 value of inventories), Kraft and Philip Morris International believe such raw materials to be in adequate supply and generally available from numerous sources. REGULATION Almost all of Kraft's United States food products (and packaging materials therefor) are subject to regulations administered by the FDA or, with respect to products containing meat and poultry, the USDA. Among other things, these agencies enforce statutory prohibitions against misbranded and adulterated foods, establish ingredients and/or manufacturing procedures for certain standard foods, establish standards of identity for food, determine the safety of food substances, and establish labeling standards and nutrition labeling requirements for food products. In addition, various states regulate the business of Kraft's United States operating units by licensing dairy plants, enforcing federal and state standards of identity for food, grading food products, inspecting plants, regulating certain trade practices in connection with the sale of dairy products and imposing their own labeling requirements on food products. Many of the food commodities on which Kraft's United States businesses rely are subject to governmental agricultural programs. These programs have substantial effects on prices and supplies and are subject to Congressional review. Almost all of the activities of the Company's food operations outside of the United States are subject to local and national regulations similar to those applicable to Kraft's United States businesses and, in some cases, international regulatory provisions (such as those of the European Union) relating to labeling, packaging, food content, pricing, marketing and advertising, and related areas. BEER PRODUCTS Miller's brands include MILLER LITE, MILLER LITE ICE, MILLER GENUINE DRAFT, MILLER GENUINE DRAFT LIGHT, MILLER BEER and ICEHOUSE in the premium segment; the MILLER HIGH LIFE family, including MILLER HIGH LIFE, MILLER HIGH LIFE LIGHT and MILLER HIGH LIFE ICE, and RED DOG in the near-premium segment; LOWENBRAU, in the above-premium segment, which is brewed and sold in the United States pursuant to a license agreement that is scheduled to expire on September 30, 1999; MEISTER BRAU, MILWAUKEE'S BEST and MAGNUM MALT LIQUOR in the below-premium segment; and SHARP'S non-alcohol brew. Miller's brands in the specialty segment are LEINENKUGEL, CELIS and SHIPYARD. Miller also owns a majority interest in Molson USA, LLC, one of the largest beer importers in the United States, whose brands include MOLSON and FOSTER'S. Other brands in the import segment include PRESIDENTE and SHANGHAI (available February 1999). Miller's total shipment volume (which excludes international shipments of Miller products by other brewers under license and contract brewing arrangements) of 42.7 million barrels for 1998 decreased 2.3% from 1997. Export shipments decreased 18.6%, with a planned, corresponding increase in licensee volume. Domestic shipments of 41.7 million barrels decreased 1.8% from 1997. Miller's estimated market share of the U.S. malt beverage industry (based on shipments) was 21% in 1998, down from 21.7% in 1997. Wholesalers' sales of Miller's products to retailers in 1998 decreased 1.3% from 1997. Domestic shipments of premium-priced brands in 1998 increased slightly to 81.6% of total domestic shipments. 9 The following table sets forth, based on shipments (including imports and exports), the U.S. industry's sales of beer and brewed non-alcohol beverages, as estimated by Miller; Miller's unit sales; and Miller's estimated share of industry sales:
YEARS ENDED MILLER'S DECEMBER 31 INDUSTRY MILLER SHARE OF INDUSTRY - ----------------------------------------------------------- --------- --------- ------------------- (IN THOUSANDS OF BARRELS) (%) 1998....................................................... 203,646 42,674 21.0 1997....................................................... 201,246 43,675 21.7 1996....................................................... 200,627 43,799 21.8
During 1997, Miller sold its 20% interest in Molson Breweries of Canada, and a minority ownership interest in Molson USA, LLC. During 1996, Miller initiated a number of actions intended to restore growth, streamline its organization and reduce costs, including a workforce reduction. In February 1999, Miller announced an agreement to acquire four trademarks from the Pabst Brewing Company and the Stroh Brewery Company, subject to regulatory review. Miller also agreed to increase its contract manufacturing of Pabst products, including brands that Pabst has agreed to acquire from Stroh in a separate agreement. Miller estimates that the acquisition and increased contract manufacturing could result in incremental 1999 operating companies income, depending upon the timing of regulatory review and the subsequent beginning of production. DISTRIBUTION, COMPETITION AND RAW MATERIALS Beer is distributed primarily through independent wholesalers. During 1998, the agreement by which Miller and its independent wholesalers conduct business was changed to better define wholesalers' responsibilities and to promote increased focus on Miller's brands. The United States malt beverage industry is highly competitive, with the principal methods of competition being product quality, price, distribution, marketing and advertising. Miller engages in a wide variety of advertising and sales promotion activities. Barley malt, hops, corn grits and water represent the principal ingredients used in manufacturing Miller's products, and are generally available in the market. The production process, which includes fermentation and aging periods, is conducted throughout the year. Containers (bottles, cans and kegs) for beer are purchased from various suppliers. REGULATION The malt beverage industry is highly regulated at both the state and federal levels. The Alcoholic Beverage Labeling Act of 1988 requires all alcoholic beverages manufactured for sale in the United States to include the following statement on containers: "GOVERNMENT WARNING: (1) According to the Surgeon General, women should not drink alcoholic beverages during pregnancy because of the risk of birth defects. (2) Consumption of alcoholic beverages impairs your ability to drive a car or operate machinery, and may cause health problems." The statute empowers the Bureau of Alcohol, Tobacco and Firearms to regulate the size and format of the warning. The federal excise tax is 32 cents per package of six 12-ounce containers. Excise taxes, sales taxes and other taxes affecting beer are also levied by various states, counties and municipalities. In the opinion of Miller, increases in excise taxes have had, and could continue to have, an adverse effect on shipments. Advertising of alcoholic beverages, including beer, has come under increased scrutiny by governmental agencies and others. Pursuant to a Congressional request in 1998, the FTC ordered Miller, along with seven other alcohol beverage manufacturers, to file a Special Report regarding the industry's self-regulating efforts related to alcohol advertising and underage consumption. Miller expects the FTC to report its findings to Congress during the first quarter of 1999. 10 In 1997, key changes were made to the Beer Institute's Advertising and Marketing Code, including the following: a revised introduction clarifying that the Code applies to advertising and marketing in cyberspace, including the Internet; an undertaking that the Beer Institute will make a list of brewer web sites available to all major Internet service providers so that the sites can be included in parental control software; and an obligation for brewers to include additional notices on their web sites reminding users of the legal purchase age. Consistent with the brewers' commitment to marketing their products only to persons of legal purchase age, the revised Code requires that television survey data purchased by brewers reflect the proportion of viewers in the sample survey who are over legal purchase age. The revised code also obligates brewers to review their advertising placements at least every six months to ensure that the majority of viewers of brewer-sponsored television programs are above the legal purchase age. FINANCIAL SERVICES Philip Morris Capital Corporation ("PMCC") invests in leveraged and direct finance leases, other tax-oriented financing transactions and third-party financial instruments. During 1997, PMCC sold its wholly-owned subsidiary, Mission Viejo Company, which was engaged in land planning, development and sales activities in Southern California and in the Denver, Colorado area. Total assets of PMCC were $6.5 billion at December 31, 1998, up from $5.9 billion at December 31, 1997, reflecting an increase in net finance assets. OTHER MATTERS CUSTOMERS None of the Company's business segments is dependent upon a single customer or a few customers, the loss of which would have a material adverse effect on the Company's results of operations. EMPLOYEES At December 31, 1998, the Company employed approximately 144,000 people worldwide. In February 1998, the Company announced voluntary early retirement and separation programs for salaried and hourly employees, primarily at PM Inc.'s manufacturing facilities in Richmond, Virginia and Louisville, Kentucky. Approximately 2,100 employees were affected by the programs, which were completed during 1998 at a cost of $337 million, of which $319 million was charged against domestic tobacco operating results and $18 million, reflecting actions concerning corporate headquarters' employees, was charged to general corporate expense. During January 1999, Kraft announced that it will take a pre-tax charge of approximately $150 million during 1999, primarily for voluntary retirement and separation programs for employees in the United States. As previously discussed, in February 1999, PM Inc. announced that it plans to phase out cigarette production at its Louisville, Kentucky manufacturing plant by December 2000. PM Inc. estimates that this will result in a pre-tax charge of approximately $200 million, principally for severance, in the first half of 1999, and will affect approximately 1,400 employees. TRADEMARKS Trademarks are of material importance to all three of the Company's consumer products businesses and are protected by registration or otherwise in the United States and most other markets where the related products are sold. ENVIRONMENTAL REGULATION The Company and its subsidiaries are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery 11 Act and the Comprehensive Environmental Response, Compensation and Liability Act, which imposes joint and several liability on each responsible party (commonly known as "Superfund"). In 1998, subsidiaries (or former subsidiaries) of the Company were involved in approximately 160 matters subjecting them to potential remediation costs under Superfund or otherwise. The Company and its subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations. Although it is not possible to predict precise levels of environmental-related expenditures, compliance with such laws and regulations, including the payment of any remediation costs and the making of such expenditures, has not had, and is not expected to have, a material adverse effect on the Company's results of operations, capital expenditures, financial position, earnings and competitive position. FORWARD-LOOKING AND CAUTIONARY STATEMENTS The Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to stockholders. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company; any such statement is qualified by reference to the following cautionary statements. The tobacco industry continues to be subject to health concerns relating to the use of tobacco products and exposure to ETS, legislation, including tax increases, governmental regulation, privately imposed smoking restrictions, governmental and grand jury investigations, litigation, and the effects of price increases related to concluded tobacco litigation settlements. Each of the Company's operating subsidiaries is subject to intense competition, changes in consumer preferences, the effects of changing prices for its raw materials, local economic conditions and the potential impact of the century date change (or "Year 2000") issue. In addition, Philip Morris International, Kraft Foods International and Kraft are subject to the effects of foreign economies, currency movements and the conversion to the Euro. Developments in any of these areas, which are more fully described elsewhere in Part I hereof and in the MD&A on pages 21-35 of the Company's 1998 Annual Report, each of which is incorporated into this section by reference, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. (D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The amounts of operating revenues and long-lived assets attributable to each of the Company's geographic segments and the amount of export sales from the United States for each of the last three fiscal years are set forth in Note 12 to the Company's consolidated financial statements, incorporated herein by reference to the Company's 1998 Annual Report. Subsidiaries of the Company export tobacco and tobacco-related products, coffee products, grocery products, cheese, processed meats and beer. In 1998, the value of all exports from the United States by these subsidiaries amounted to approximately $6 billion. ITEM 2. DESCRIPTION OF PROPERTY. TOBACCO PRODUCTS PM Inc. owns seven tobacco manufacturing and processing facilities--four in the Richmond, Virginia area, two in Louisville, Kentucky and one in Cabarrus County, North Carolina. As noted above, cigarette production at one of PM Inc.'s Louisville, Kentucky plants is scheduled to be phased out. Subsidiaries and affiliates of Philip Morris International own, lease or have an interest in 55 cigarette or component 12 manufacturing facilities in 30 countries outside the United States, including cigarette manufacturing facilities in Bergen Op Zoom, the Netherlands and in Berlin, Germany. FOOD PRODUCTS The Company's subsidiaries have 54 manufacturing and processing facilities and 261 distribution centers and depots throughout the United States, as well as 92 foreign manufacturing and processing facilities in 34 countries, and various distribution and other facilities outside the United States. All significant plants and properties used for production of food products are owned, although the majority of the domestic distribution centers and depots are leased. BEER Miller owns and operates eight breweries, located in Milwaukee, Wisconsin (two); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia; Irwindale, California; Trenton, Ohio; and Chippewa Falls, Wisconsin. Miller owns a majority interest in the Celis Brewery in Austin, Texas and the Shipyard Brewery in Portland, Maine. Miller also owns a hops-processing facility in Wisconsin and owns or leases warehouses in several locations. As part of the Pabst/Stroh transaction described above, Miller agreed to purchase a brewery in Tumwater, Washington. GENERAL The plants and properties owned and operated by the Company's subsidiaries are maintained in good condition and are believed to be suitable and adequate for present needs. During 1997, the Company's international food businesses recorded a pre-tax charge of $342 million, related primarily to the downsizing or closure of manufacturing and other facilities, as well as the discontinuance of certain low-margin product lines. Facility write-downs included in the charge totaled $209 million. ITEM 3. LEGAL PROCEEDINGS. Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc. and Philip Morris International, 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 three 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, and (iii) health care cost recovery cases brought by governmental and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking. Governmental plaintiffs have included local, state and certain foreign governmental entities. Non-governmental plaintiffs in these cases include union health and welfare trust funds ("unions"), Blue Cross/Blue Shield groups, health maintenance organizations ("HMOs"), hospitals, native American tribes, taxpayers and others. Damages claimed in some of the smoking and health class actions and health care cost recovery cases range into the billions of dollars. Plaintiffs' theories of recovery and the defenses raised in those cases are discussed below. 13 In recent years, there has been a substantial increase in the number of tobacco-related cases being filed. As of March 1, 1999, there were approximately 500 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM Inc. and, in some cases, the Company, compared with approximately 375 such cases on December 31, 1997, and approximately 185 such cases on December 31, 1996. Many of these cases are pending in Florida, West Virginia and New York. Eighteen of the individual cases involve allegations of various personal injuries allegedly related to exposure to ETS. In addition, as of March 1, 1999, there were approximately 65 smoking and health putative class actions pending in the United States against PM Inc. and, in some cases, the Company (including eight that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 50 such cases on December 31, 1997, and approximately 20 such cases on December 31, 1996. Most of these actions purport to constitute statewide class actions and were filed after May 1996 when the Fifth Circuit Court of Appeals, in the CASTANO case, reversed a federal district court's certification of a purported nationwide class action on behalf of persons who were allegedly "addicted" to tobacco products. During 1997 and 1998, PM Inc. and certain other United States tobacco product manufacturers entered into agreements settling the asserted and unasserted health care cost recovery and other claims of all 50 states and several commonwealths and territories of the United States. The settlements are in the process of being approved by the courts, and some of the settlements are being challenged by various third parties. As of March 1, 1999, there were approximately 95 health care cost recovery actions pending in the United States (excluding the cases covered by the settlements), compared with approximately 105 health care cost recovery cases pending on December 31, 1997, and 25 such cases on December 31, 1996. There are also a number of tobacco-related actions pending outside the United States against Philip Morris International and its affiliates and subsidiaries, including approximately 31 smoking and health cases initiated by one or more individuals (Argentina (21), Brazil (1), Canada (1), Ireland (1), Italy (1), Japan (1), the Philippines (1), Scotland (1), Spain (1) and Turkey (2)), and six smoking and health putative class actions (Brazil (2), Canada (3) and Nigeria (1)). In addition, health care cost recovery actions have been brought in Israel, the Marshall Islands and British Columbia, Canada, and, in the United States, by Bolivia, Guatemala, Panama, Nicaragua, Thailand and Venezuela. VERDICTS IN INDIVIDUAL CASES There have been a number of jury verdicts in individual smoking and health cases over the past three years. In February 1999, a California jury awarded $1.5 million in compensatory damages and $50.0 million in punitive damages against PM Inc. PM Inc. is appealing the verdict and the damage award. Prior to that, juries had returned verdicts for defendants in three individual smoking and health cases and in one individual ETS smoking and health case. In January 1999, a Florida court set aside a $1.0 million jury award in a smoking and health case against another United States cigarette manufacturer and ordered a new trial in the case. In June 1998, a Florida appeals court reversed a $750,000 jury verdict awarded in August 1996 against another United States cigarette manufacturer. Plaintiff is seeking an appeal of this ruling to the Florida Supreme Court. In Brazil, a court in 1997 awarded plaintiffs in a smoking and health case the Brazilian currency equivalent of $81,000, attorneys' fees and a monthly annuity for 35 years equal to two-thirds of the deceased smoker's last monthly salary. Neither the Company nor its affiliates were parties to that action. PENDING AND UPCOMING TRIALS As of March 1, 1999, trials against PM Inc. and, in one case, the Company were underway in the ENGLE smoking and health class action in Florida (discussed below), in a union health care cost recovery action in Ohio (discussed below) and in individual smoking and health cases in Oregon and Tennessee. 14 Additional cases are scheduled for trial during 1999, including one union health care cost recovery action in Washington (September), one smoking and health class action in Illinois (August), a "Proposition 65" case (discussed below) in California (June), and an "asbestos contribution" case (discussed below) in New York (November). Also, six individual smoking and health cases against PM Inc. and, in one case, the Company, are currently scheduled for trial during 1999. Trial dates, however, are subject to change. LITIGATION SETTLEMENTS In November 1998, PM Inc. and certain other United States tobacco product manufacturers entered into a Master Settlement Agreement (the "MSA") with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM Inc. and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the "State Settlement Agreements") and an ETS smoking and health class action brought on behalf of airline flight attendants. The State Settlement Agreements and certain ancillary agreements are filed as exhibits to various of the Company's reports filed with the Securities and Exchange Commission, and such agreements and the ETS settlement are discussed in detail therein. PM Inc. recorded pre-tax charges of $3.1 billion and $1.5 billion during 1998 and 1997, respectively, to accrue for its share of all fixed and determinable portions of its obligations under the tobacco settlements, as well as $300 million during 1998 for its unconditional obligation under an agreement in principle to contribute to a tobacco growers trust fund, discussed below. As of December 31, 1998, PM Inc. had accrued costs of its obligations under the settlements and to tobacco growers aggregating $1.4 billion, payable principally before the end of the year 2000. The settlement agreements require that the domestic tobacco industry make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement in principle with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 1999, $4.2 billion (of which $2.7 billion related to the MSA and has already been paid by the industry); 2000, $9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion; and thereafter, $9.4 billion. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional amounts as follows: 1999, $450 million; 2000, $416 million; and 2001 through 2002, $250 million. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of the future adjusted payments and legal fees, which is not currently estimable, will be based on its share of domestic cigarette shipments in the year preceding that in which the payment is made. The State Settlement Agreements also include provisions, more fully discussed in the MD&A, relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, lobbying activities and other provisions. As set forth in Exhibit 99.2, the MSA has been initially approved by trial courts in all settling jurisdictions. If a jurisdiction does not obtain "final judicial approval" (as defined in Exhibit 99.2) of the MSA by December 31, 2001, the agreement will be terminated with respect to such jurisdiction. As part of the MSA, the settling defendants committed to work cooperatively with the tobacco growers to address concerns about the potential adverse economic impact of the MSA on that community. To that end, in January 1999, the four major domestic tobacco product manufacturers, including PM Inc., agreed in principle to participate in the establishment of a $5.15 billion trust fund to be administered by the tobacco-growing states. It is currently contemplated that the trust will be funded by industry participants over 12 years, beginning in 1999. PM Inc. has agreed to pay $300 million into the trust in 1999, which amount has been charged to 1998 operating companies income. Subsequent annual industry payments are 15 to be adjusted for several factors, including inflation and United States cigarette consumption, and are to be allocated based on each manufacturer's market share. The Company believes that the State Settlement Agreements may materially adversely affect the business, volume, results of operations, cash flows or financial position of PM Inc. and the Company in future years. The degree of the adverse impact will depend, among other things, on the rates of decline in United States cigarette sales in the premium and discount segments, PM Inc.'s share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements. As of March 1, 1999, manufacturers representing almost all domestic shipments in 1998 had agreed to become subject to the terms of the MSA. Certain litigation has arisen out of the MSA. In December 1998, a putative class action was filed against PM Inc. and certain other domestic tobacco manufacturers on behalf of a class consisting of citizens of the United States who consume tobacco products manufactured by defendants. One count of the complaint alleges that defendants conspired to raise the prices of their tobacco products in order to pay the costs of the MSA in violation of the federal antitrust laws. The other two counts allege that the actions of defendants amount to an unconstitutional deprivation of property without due process of law and an unlawful burdening of interstate trade. The complaint seeks unspecified damages (to be trebled under the antitrust count), injunctive and declaratory relief, costs and attorneys' fees. In February 1999, a putative class action was filed on behalf of tobacco consumers in the United States against the States of California and Utah, other public entity defendants, certain domestic tobacco manufacturers, including PM Inc., and others, challenging the MSA. Plaintiffs are seeking, among other things, an order (i) prohibiting the states from collecting any monies under the MSA; (ii) restraining the domestic tobacco manufacturers from further collection of price increases related to the MSA and compelling them to reimburse to plaintiffs all monies paid by plaintiffs in the form of price increases related to the MSA; and (iii) declaring the MSA "unfair, discriminatory, unconstitutional and unenforceable." Also in February 1999, a putative class action was filed on behalf of Wisconsin Medicaid recipients against the State of Wisconsin and certain domestic tobacco manufacturers, including PM Inc., challenging the State of Wisconsin's authority to enter into the MSA and asking, among other things, that "any funds to be paid the state by the tobacco defendants pursuant to the master settlement agreement which exceed the amount of assistance granted to plaintiff and to similarly situated Medicaid recipients during the applicable statute of limitations period by the state prior to execution of the master settlement agreement must be paid to plaintiff and similarly situated Medicaid recipients and their estates." A description of the smoking and health litigation, health care cost recovery litigation and certain other proceedings pending against the Company and/or its subsidiaries and affiliates follows. SMOKING AND HEALTH LITIGATION Plaintiffs' allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal Racketeer Influenced and Corrupt Organization Act ("RICO") and state RICO statutes. In certain of these cases, plaintiffs claim that cigarette smoking exacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act. 16 In May 1996, the Fifth Circuit Court of Appeals held that a putative class consisting of all "addicted" smokers nationwide did not meet the standards and requirements of the federal rules governing class actions (CASTANO, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL.). Since this class decertification, lawyers for plaintiffs have filed numerous smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states and raise "addiction" claims similar to those raised in the CASTANO case and, in many cases, claims of physical injury as well. As of March 1, 1999, smoking and health class actions were pending in Alabama, Arkansas, California, the District of Columbia, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia and Wisconsin, as well as in Canada, Brazil and Nigeria. Class certification has been denied or reversed by courts in 13 smoking and health class actions involving PM Inc. in Louisiana, the District of Columbia, New York (2), Pennsylvania, Puerto Rico, New Jersey (5), Wisconsin and Kansas, while classes remain certified in three cases in Florida, Louisiana and Maryland. A number of these class certification decisions are on appeal. Class certification motions are pending in a number of the other putative smoking and health class actions. As mentioned above, one ETS smoking and health class action was settled in 1997. ENGLE TRIAL Trial in this Florida class action case began in July 1998. The presentation of the defense case began on March 1, 1999. Plaintiffs seek compensatory and punitive damages ranging into the billions of dollars, as well as equitable relief including, but not limited to, a medical fund for future health care costs, attorneys' fees and court costs. The class consists of all Florida residents and citizens, and their survivors, who claim to have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarettes that contain nicotine. The current trial plan calls for the case to be tried in three "Phases." The court has stated, however, that the trial plan may be modified further. Phase One, which is currently underway, involves evidence concerning certain "common" class issues relating to the plaintiff class's causes of action. Entitlement to punitive damages will be decided at the end of Phase One, but no amount will be set at that time. If plaintiffs prevail in Phase One, the first two stages of Phase Two will involve individual determination of specific causation and other individual issues regarding entitlement to compensatory damages for the class representatives. Stage three of Phase Two will involve an assessment of the amount of punitive damages, if any, that individual class representatives will be awarded. Stage four of Phase Two will involve the setting of a percentage or ratio of punitive damages for absent class members, assuming entitlement was found at the end of Phase One. Phase Three of the trial will be held before separate juries to address absent class members' claims, including issues of specific causation and other individual issues regarding entitlement to compensatory damages. 17 HEALTH CARE COST RECOVERY LITIGATION In certain of the pending proceedings, domestic and foreign governmental entities and non-governmental plaintiffs, including unions, Blue Cross/Blue Shield groups, HMOs, hospitals, native American tribes, taxpayers and others are seeking reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, for future expenditures and damages as well. Certain of these cases purport to be brought on behalf of a class of plaintiffs and, in some cases, the class has been certified by the court. In one health care cost recovery case, private citizens seek recovery of alleged tobacco-related health care expenditures incurred by the federal Medicare program. In others, Blue Cross subscribers seek reimbursement of allegedly increased medical insurance premiums caused by tobacco products. In the native American cases, claims are also asserted for alleged lost productivity of tribal government employees. Other relief sought by some but not all plaintiffs includes punitive damages, treble/multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, disclosure of nicotine yields, and payment of attorney and expert witness fees. The claims asserted in these health care cost recovery actions include the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health care costs allegedly attributable to smoking, the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state RICO statutes. Defenses raised include failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust injury, federal preemption, lack of proximate cause, remoteness of injury, lack of statutory authority to bring suit and statute of limitations. In addition, defendants argue that they should be entitled to "set-off" any alleged damages to the extent the plaintiff benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by "standing in the shoes" of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party. Excluding the cases covered by the State Settlement Agreements described above, as of March 1, 1999, there were approximately 95 health care cost recovery cases pending against PM Inc. and, in some cases, the Company, of which approximately 75 were filed by unions. Health care cost recovery actions have also been brought in Israel, the Marshall Islands and British Columbia, Canada, and, in the United States, by Bolivia, Guatemala, Panama, Nicaragua, Thailand and Venezuela. Other foreign entities, including a local agency of the French social security health insurance system, and others have stated that they are considering filing health care cost recovery actions. In January 1999, President Clinton announced that the United States Department of Justice is preparing a litigation plan to take tobacco companies to court and to use recovered funds to strengthen Medicare. Courts have ruled on preliminary motions to dismiss various claims in approximately 50 health care cost recovery actions. Although many of the rulings in cases not settled by the State Settlement Agreements have been favorable to the industry, a number have been adverse, including rulings in the union cases scheduled for trial in 1999. In late January and in February of 1999, the Third and Second Circuit Courts of Appeal heard oral argument on appeals from lower court rulings on motions to dismiss various claims in health care cost recovery actions filed by unions. The Company cannot predict the ultimate outcome of such appeals. 18 OHIO IRON WORKERS Trial in this union health care cost recovery action began in February 1999, and on March 16 the case went to the jury for a verdict on "Phase I" of the trial (see discussion of trial Phases below). This case is being brought on behalf of a class consisting of approximately 114 employer-employee trust funds in Ohio. Plaintiffs seek compensatory damages in excess of $600 million, statutory treble damages under RICO, and declaratory and injunctive relief (including disgorgement of profits) as well as equitable relief, attorneys' fees and court costs. Most of plaintiffs' original causes of action have either been dismissed or voluntarily withdrawn. At present, plaintiffs have two remaining claims, one under the Ohio RICO law and the other under general conspiracy law. The current trial plan calls for the case to be tried in three Phases. Phase I will determine liability for the named plaintiffs and all other class members. Phase II will determine damages for the six class representatives. Phase III will set damages for all absent class members. CERTAIN OTHER TOBACCO-RELATED LITIGATION ASBESTOS CONTRIBUTION CASES--Since September 1997, a number of suits have been filed by former asbestos manufacturers, asbestos manufacturers' personal injury settlement trusts and an insurance company against domestic tobacco manufacturers, including PM Inc. and others. These cases seek, among other things, contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages. The trial of an asbestos contribution case in the Southern District of New York is scheduled to begin in November 1999. MARLBORO LIGHT/ULTRA LIGHT CASES--Since June 1998, six class actions have been filed against PM Inc. and the Company, in Florida, New Jersey, Pennsylvania, Massachusetts and Tennessee (2), on behalf of individuals who purchased and consumed MARLBORO LIGHTS and, in one case, MARLBORO ULTRA LIGHTS, as well. These cases allege, in connection with the use of the term "Lights" and/or "Ultra Lights," among other things, deceptive and unfair trade practices, unjust enrichment, and seek injunctive and equitable relief. RETAIL LEADERS CASE--In March 1999, R.J. Reynolds Tobacco Company filed suit against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that became available to retailers in October 1998. The complaint alleges that this retail incentive program is exclusionary and creates unreasonable restraint of trade and unlawful monopolization. In addition to an injunction, plaintiff seeks unspecified treble damages, attorneys' fees, costs, and interest. PROPOSITION 65 CASES--Since July 1998, two suits have been 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, restitution, disgorgement of profits and other relief. The courts have denied defendants' motions to dismiss in both of these cases. One of these cases is scheduled to begin trial in June 1999. ------------------------ One hundred eighty-eight tax assessments alleging the nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1995 and income taxes for the years 1987 to 1995) have been served upon certain affiliates of the Company. The aggregate amount of unpaid taxes assessed to date is alleged to be the Italian lira equivalent of $2.6 billion. In addition, the Italian lira equivalent of $3.5 billion in interest and 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 105 of the assessments. The 19 decisions to overturn 66 assessments have been appealed by the tax authorities. 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 charges of tax evasion to remain pending. In February 1998, the tax evasion charges were dismissed by the criminal court in Naples following a determination that jurisdiction was not proper, and the case file was transmitted to the public prosecutor in Milan, who will determine whether to bring charges, in which case a preliminary investigations judge will make a new finding as to whether there should be a trial on these charges. The Company, 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, and it is possible that some of these actions could be decided unfavorably. An unfavorable outcome or settlement of a pending smoking and health or health care cost recovery case could encourage the commencement of additional similar litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending 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 respective cases, that it has a number of valid defenses to all litigation pending against it. All such cases are, and will continue to be, vigorously defended. However, the Company and its subsidiaries may enter into discussions in an attempt to settle particular cases if they believe it is in the best interests of the Company's stockholders to do so. Reference is made to Note 16, incorporated herein by reference to the Company's 1998 Annual Report, for a description of certain pending legal proceedings. Reference is also made to Exhibit 99.1 to this Form 10-K for a list of pending smoking and health class actions, health care cost recovery actions, and certain other actions, and for a description of certain developments in such proceedings; Exhibit 99.2 for the status of the MSA in each of the settling jurisdictions; and Exhibit 99.3 for a schedule of smoking and health class actions, health care cost recovery and certain other actions that are currently scheduled for trial through 2000. Copies of Note 16 and Exhibits 99.1, 99.2 and 99.3 are available upon written request to the Corporate Secretary, Philip Morris Companies Inc., 120 Park Avenue, New York, NY 10017. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 20 EXECUTIVE OFFICERS OF THE COMPANY The following are the executive officers of the Company as of March 1, 1999:
NAME OFFICE AGE - ----------------------------------------------------- ----------------------------------------------------- --- Geoffrey C. Bible.................................... Chairman of the Board and Chief Executive Officer 61 John D. Bowlin....................................... President and Chief Executive Officer of Kraft Foods 48 International, Inc. Murray H. Bring...................................... Vice Chairman, External Affairs, and General Counsel 64 Bruce S. Brown....................................... Vice President, Taxes 59 Louis C. Camilleri................................... Senior Vice President and Chief Financial Officer 44 Siw de Gysser........................................ Vice President, Corporate Planning 55 Nancy J. De Lisi..................................... Vice President and Treasurer 48 Robert A. Eckert..................................... President and Chief Executive Officer of Kraft Foods, 44 Inc. Paul W. Hendrys...................................... President and Chief Executive Officer of Philip 51 Morris International Inc. G. Penn Holsenbeck................................... Vice President, Associate General Counsel and 52 Corporate Secretary John N. MacDonough................................... Chairman and Chief Executive Officer of Miller 55 Brewing Company Steven C. Parrish.................................... Senior Vice President, Corporate Affairs 48 Timothy A. Sompolski................................. Senior Vice President, Human Resources and 46 Administration Michael E. Szymanczyk................................ President and Chief Executive Officer of Philip 50 Morris Incorporated Frank T. Toscano..................................... Vice President and Controller 47 William H. Webb...................................... Chief Operating Officer 59
All of the above-mentioned officers, with the exception of Mr. Holsenbeck, have been employed by the Company in various capacities during the past five years. Mr. Holsenbeck was elected to his current position with the Company in January 1995. Previously, Mr. Holsenbeck held various positions with Bethlehem Steel Corporation, including Secretary and Deputy General Counsel from 1992 to January 1995. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information called for by this Item is hereby incorporated by reference to the paragraph captioned "Quarterly Financial Data (Unaudited)" on page 59 of the Company's 1998 Annual Report and made a part hereof. ITEM 6. SELECTED FINANCIAL DATA. The information called for by this Item is hereby incorporated by reference to the information with respect to 1994-1998 appearing under the caption "Selected Financial Data" on pages 36 and 37 of the Company's 1998 Annual Report and made a part hereof. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information called for by this Item is hereby incorporated by reference to the paragraphs captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 21 to 35 of the Company's 1998 Annual Report and made a part hereof. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information called for by this Item is hereby incorporated by reference to the paragraphs in the MD&A captioned "Market Risk" and "Value at Risk" on pages 33 to 35 of the Company's 1998 Annual Report and made a part hereof. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information called for by this Item is hereby incorporated by reference to the Company's 1998 Annual Report as set forth under the caption "Quarterly Financial Data (Unaudited)" on page 59 and in the Index to Consolidated Financial Statements and Schedules (see Item 14) and made a part hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ITEM 11. EXECUTIVE COMPENSATION. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Except for the information relating to the executive officers of the Company set forth in Part I of this Report, the information called for by Items 10-13 is hereby incorporated by reference to the Company's definitive proxy statement for use in connection with its annual meeting of stockholders to be held on April 29, 1999, and made a part hereof. 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Index to Consolidated Financial Statements and Schedules
REFERENCE ---------------------------- FORM 10-K 1998 ANNUAL REPORT ANNUAL REPORT PAGE PAGE ------------- ------------- Data incorporated by reference to the Company's 1998 Annual Report: Consolidated Balance Sheets at December 31, 1998 and 1997 -- 38 - 39 Consolidated Statements of Earnings for the years ended December 31, 1998, 1997 and 1996................................................ -- 40 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996................................... -- 42 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996............................................ -- 40 - 41 Notes to Consolidated Financial Statements........................... -- 43 - 59 Report of Independent Accountants.................................... -- 60 Data submitted herewith: Report of Independent Accountants.................................... S-1 -- Financial Statement Schedule--Valuation and Qualifying Accounts...... S-2 --
Schedules other than those listed above have been omitted either because such schedules are not required or are not applicable. (b) Reports on Form 8-K: During the last quarter of the period for which this Report is filed, the Company filed a Current Report on Form 8-K dated November 25, 1998, and a Form 8-K/A dated December 24, 1998, relating to the MSA. Subsequent to the last quarter of the period for which this Report is filed, the Company filed a Current Report on Form 8-K dated January 27, 1999, relating to its 1998 financial statements. 23 (c) The following exhibits are filed as part of this Report (Exhibit Nos. 10.1-10.15 are management contracts, compensatory plans or arrangements): 3.1. Restated Articles of Incorporation of the Company. (1) 3.2. By-Laws, as amended, of the Company. 4.1. Indenture dated as of August 1, 1990, between the Company and The Chase Manhattan Bank (formerly known as Chemical Bank), Trustee. (2) 4.2. First Supplemental Indenture dated as of February 1, 1991, to Indenture dated as of August 1, 1990, between the Company and The Chase Manhattan Bank (formerly known as Chemical Bank), Trustee. (3) 4.3. Second Supplemental Indenture dated as of January 21, 1992, to Indenture dated as of August 1, 1990, between the Company and The Chase Manhattan Bank (formerly known as Chemical Bank), Trustee. (4) 4.4. Indenture dated as of December 2, 1996, between the Company and The Chase Manhattan Bank, Trustee. (5) 4.5. 5-Year Revolving Credit Agreement dated as of October 14, 1997, among the Company, and the Initial Lenders named therein and Citibank, N.A., and The Chase Manhattan Bank, as Administrative Agents, and Credit Suisse First Boston, as Syndication Agent, and Deutsche Bank AG, New York Branch, as Documentation Agent. (6) 10.1. Financial Counseling Program. (7) 10.2. Philip Morris Benefit Equalization Plan, as amended. (8) 10.3. Form of Employee Grantor Trust Enrollment Agreement. (9) 10.4. Automobile Policy. (7) 10.5. Form of Employment Agreement between the Company and its executive officers. (10) 10.6. Supplemental Management Employees' Retirement Plan of the Company, as amended. (7) 10.7. The Philip Morris 1992 Incentive Compensation and Stock Option Plan. (7) 10.8. 1992 Compensation Plan for Non-Employee Directors, as amended. (11) 10.9. Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996. (9) 10.10. The Philip Morris 1987 Long Term Incentive Plan. (7) 10.11. Form of Executive Master Trust between the Company, The Chase Manhattan Bank (formerly known as Chemical Bank) and Handy Associates. (10) 10.12. 1997 Performance Incentive Plan. (12) 10.13. Philip Morris Long-Term Disability Benefit Equalization Plan, as amended. (7) 10.14. Philip Morris Survivor Income Benefit Equalization Plan, as amended. (7) 10.15. Amended and Restated Employment Agreement between the Company and Murray H. Bring. 10.16. Comprehensive Settlement Agreement and Release dated October 17, 1997, related to settlement of Mississippi health care cost recovery action. (7) 10.17. Settlement Agreement dated August 25, 1997, related to settlement of Florida health care cost recovery action. (13)
24 10.18. Comprehensive Settlement Agreement and Release dated January 16, 1998, related to settlement of Texas health care cost recovery action. (14) 10.19. Settlement Agreement and Stipulation for Entry of Judgment, dated May 8, 1998, regarding the claims of the State of Minnesota. (15) 10.20. Settlement Agreement and Release, dated May 8, 1998, regarding the claims of Blue Cross and Blue Shield of Minnesota. (15) 10.21. Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order, dated July 2, 1998, regarding the settlement of the Mississippi health care cost recovery action. (16) 10.22. Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated July 24, 1998, regarding the settlement of the Texas health care cost recovery action. (16) 10.23. Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated September 11, 1998, regarding the settlement of the Florida health care cost recovery action. (17) 10.24. Master Settlement Agreement relating to state health care cost recovery and other claims. (18) 12. Statements re computation of ratios. (19) 13. Pages 21-60 of the Company's 1998 Annual Report, but only to the extent set forth in Items 1-3, 5-7, 7A, 8 and 14 hereof. With the exception of the aforementioned information incorporated by reference in this Annual Report on Form 10-K, the Company's 1998 Annual Report is not to be deemed "filed" as part of this Report. 21. Subsidiaries of the Company. 23. Consent of independent accountants. 24. Powers of attorney. 99.1. Certain Pending Litigation Matters and Recent Developments. 99.2. Status of the Master Settlement Agreement. 99.3. Trial Schedule.
- ------------------------ (1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1997. (2) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 33-36450) dated August 22, 1990. (3) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 33-39059) dated February 21, 1991. (4) Incorporated by reference to the Company's Registration Statement on Form S-3 (No. 33-45210) dated January 22, 1992. (5) Incorporated by reference to the Company's Registration Statement on Form S-3/A (No. 333-35143) dated January 29, 1998. (6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1997. (7) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 25 (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (9) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (10) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1997. (12) Incorporated by reference to the Company's proxy statement dated March 10, 1997. (13) Incorporated by reference to the Company's Current Report on Form 8-K dated August 25, 1997. (14) Incorporated by reference to the Company's Current Report on Form 8-K dated January 16, 1998. (15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1998. (16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998. (17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1998. (18) Incorporated by reference to the Company's Current Report on Form 8-K dated November 25, 1998, as amended by Form 8/K-A dated December 24, 1998. (19) Incorporated by reference to the Company's Current Report on Form 8-K dated January 27, 1999. 26 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. PHILIP MORRIS COMPANIES INC. By: /s/ GEOFFREY C. BIBLE ----------------------------------------- (Geoffrey C. Bible, Chairman of the Board and Chief Executive Officer) Date: March 17, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED: SIGNATURE TITLE DATE - ------------------------------------- -------------------------- -------------- /s/ GEOFFREY C. BIBLE Director, Chairman of the - ------------------------------------- Board and Chief March 17, 1999 (Geoffrey C. Bible) Executive Officer /s/ LOUIS C. CAMILLERI - ------------------------------------- Senior Vice President and March 17, 1999 (Louis C. Camilleri) Chief Financial Officer /s/ FRANK T. TOSCANO - ------------------------------------- Vice President and March 17, 1999 (Frank T. Toscano) Controller * ELIZABETH E. BAILEY, MURRAY H. BRING, HAROLD BROWN, WILLIAM H. DONALDSON, JANE EVANS, ROBERT E. R. HUNTLEY, RUPERT MURDOCH, JOHN D. NICHOLS, LUCIO A. NOTO, RICHARD D. PARSONS, JOHN S. REED, CARLOS SLIM HELU, STEPHEN M. WOLF Directors *BY: /S/ LOUIS C. CAMILLERI - ------------------------------------- (Louis C. Camilleri March 17, 1999 Attorney-in-fact) 27 REPORT OF INDEPENDENT ACCOUNTANTS Our report on our audits of the consolidated financial statements of Philip Morris Companies Inc. has been incorporated by reference in this Form 10-K from page 60 of the 1998 annual report to stockholders of Philip Morris Companies Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index in Item 14(a) on page 23 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York January 25, 1999 S-1 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN MILLIONS)
COL. A COL. B COL. C COL. D COL. E - ----------------------------------------- ----------- -------------------------- ----------- ----------- ADDITIONS -------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD - ----------------------------------------- ----------- ----------- ------------- ----------- ----------- (a) (b) 1998: CONSUMER PRODUCTS: Allowance for discounts................ $ 8 $ 607 $ -- $ 606 $ 9 Allowance for doubtful accounts........ 157 36 27 28 192 Allowance for returned goods........... 6 79 -- 64 21 ----- ----- --- ----- ----- $ 171 $ 722 $ 27 $ 698 $ 222 ----- ----- --- ----- ----- ----- ----- --- ----- ----- FINANCIAL SERVICES: Allowance for losses................... $ 101 $ 15 $ -- $ -- $ 116 ----- ----- --- ----- ----- ----- ----- --- ----- ----- 1997: CONSUMER PRODUCTS: Allowance for discounts................ $ 5 $ 534 $ -- $ 531 $ 8 Allowance for doubtful accounts........ 167 35 (13) 32 157 Allowance for returned goods........... 5 66 -- 65 6 ----- ----- --- ----- ----- $ 177 $ 635 $ (13) $ 628 $ 171 ----- ----- --- ----- ----- ----- ----- --- ----- ----- FINANCIAL SERVICES: Allowance for losses................... $ 101 $ -- $ -- $ -- $ 101 ----- ----- --- ----- ----- ----- ----- --- ----- ----- 1996: CONSUMER PRODUCTS: Allowance for discounts................ $ 12 $ 492 $ -- $ 499 $ 5 Allowance for doubtful accounts........ 163 27 16 39 167 Allowance for returned goods........... 3 64 -- 62 5 ----- ----- --- ----- ----- $ 178 $ 583 $ 16 $ 600 $ 177 ----- ----- --- ----- ----- ----- ----- --- ----- ----- FINANCIAL SERVICES: Allowance for losses................... $ 101 $ -- $ -- $ -- $ 101 ----- ----- --- ----- ----- ----- ----- --- ----- -----
- ------------------------ Notes: (a) Related to divestitures, acquisitions, the consolidation of previously unconsolidated subsidiaries and currency translation. (b) Represents charges for which allowances were created. S-2 EX-3.2 2 BYLAWS Exhibit 3.2 BY-LAWS OF PHILIP MORRIS COMPANIES INC. ARTICLE I MEETINGS OF STOCKHOLDERS Section 1. Annual Meetings. - The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting, and any postponement or adjournment thereof, shall be held on such date and at such time as the Board of Directors may in its discretion determine. Section 2. Special Meetings. - Unless otherwise provided by law, special meetings of the stockholders may be called by the chairman of the Board of Directors, or in the chairman's absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, an executive vice president or by order of the Board of Directors, whenever deemed necessary. Section 3. Place of Meetings. - All meetings of the stockholders shall be held at such place in the Commonwealth of Virginia as from time to time may be fixed by the Board of Directors. Section 4. Notice of Meetings. - Notice, stating the place, day and hour and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting (except as a different time is specified herein or by law), to each stockholder of record having voting power in respect of the business to be transacted thereat. Notice of a stockholders' meeting to act on an amendment of the Articles of Incorporation, a plan of merger or share exchange, a proposed sale of all, or substantially all of the Corporation's assets, otherwise than in the usual and regular course of business, or the dissolution of the Corporation shall be given not less than twenty-five nor more than sixty days before the date of the meeting and shall be accompanied, as appropriate, by a copy of the proposed amendment, plan of merger or share exchange or sale agreement. February 1, 1999 -1- Notwithstanding the foregoing, a written waiver of notice signed by the person or persons entitled to such notice, either before or after the time stated therein, shall be equivalent to the giving of such notice. A stockholder who attends a meeting shall be deemed to have (i) waived objection to lack of notice or defective notice of the meeting, unless at the beginning of the meeting he or she objects to holding the meeting or transacting business at the meeting, and (ii) waived objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless he or she objects to considering the matter when it is presented. Section 5. Quorum. - At all meetings of the stockholders, unless a greater number or voting by classes is required by law, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, action on a matter is approved if the votes cast favoring the action exceed the votes cast opposing the action, unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation, and except that in elections of directors those receiving the greatest number of votes shall be deemed elected even though not receiving a majority. Less than a quorum may adjourn. Section 6. Organization and Order of Business. - At all meetings of the stockholders, the chairman of the Board of Directors or, in the chairman's absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, the most senior executive vice president, shall act as chairman. In the absence of all of the foregoing officers or, if present, with their consent, a majority of the shares entitled to vote at such meeting, may appoint any person to act as chairman. The secretary of the Corporation or, in the secretary's absence, an assistant secretary, shall act as secretary at all meetings of the stockholders. In the event that neither the secretary nor any assistant secretary is present, the chairman may appoint any person to act as secretary of the meeting. The chairman shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the dismissal of business not properly presented, the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the opening and closing of the voting polls. At each annual meeting of stockholders, only such business shall be conducted as shall have been properly brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who shall be entitled to -2- vote at such meeting and who complies with the notice procedures set forth in this Section 6. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a stockholder's notice must be given, either by personal delivery or by United States certified mail, postage prepaid, and received at the principal executive offices of the Corporation (i) not less than 120 days nor more than 150 days before the first anniversary of the date of the Corporation's proxy statement in connection with the last annual meeting of stockholders or (ii) if no annual meeting was held in the previous year or the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, not less than 60 days before the date of the applicable annual meeting. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, including the complete text of any resolutions to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's stock transfer books, of such stockholder proposing such business, (c) a representation that such stockholder is a stockholder of record and intends to appear in person or by proxy at such meeting to bring the business before the meeting specified in the notice, (d) the class and number of shares of stock of the Corporation beneficially owned by the stockholder and (e) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 6. The chairman of an annual meeting shall, if the facts warrant, determine that the business was not brought before the meeting in accordance with the procedures prescribed by this Section 6. If the chairman should so determine,he or she shall so declare to the meeting and the business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 6, a stockholder seeking to have a proposal included in the Corporation's proxy statement shall comply with the requirements of Regulation 14A under the Securities Exchange Act of 1934, as amended (including, but not limited to, Rule 14a-8 or its successor provision). The secretary of the Corporation shall deliver each such stockholder's notice that has been timely received to the Board of Directors or a committee designated by the Board of Directors for review. Section 7. Voting. - A stockholder may vote his or her shares in person or by proxy. Any proxy shall be delivered to the secretary of the meeting at or prior to the time designated by the chairman or in the order of business for so delivering such proxies. No proxy shall be valid after eleven months from its date, unless otherwise provided in the proxy. Each holder of record of stock of any class shall, as to all matters in respect of which stock of such class has voting power, be entitled to such vote as is provided in the Articles of Incorporation for each share of stock of such class standing -3- in the holders's name on the books of the Corporation. Unless required by statute or determined by the chairman to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting or by such stockholder's proxy, if there be such proxy. Section 8. Written Authorization. - A stockholder or a stockholder's duly authorized attorney-in-fact may execute a writing authorizing another person or persons to act for him or her as proxy. Execution may be accomplished by the stockholder or such stockholder's duly authorized attorney-in-fact or authorized officer, director, employee or agent signing such writing or causing such stockholder's signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. Section 9. Electronic Authorization. - The secretary or any vice president may approve procedures to enable a stockholder or a stockholder's duly authorized attorney-in-fact to authorize another person or persons to act for him or her as proxy by transmitting or authorizing the transmission of a telegram, cablegram, internet transmission, telephone transmission or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such transmission must either set forth or be submitted with information from which the inspectors of election can determine that the transmission was authorized by the stockholder or the stockholder's duly authorized attorney-in-fact. If it is determined that such transmissions are valid, the inspectors shall specify the information upon which they relied. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section 9 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 10. Inspectors. - At every meeting of the stockholders for election of directors, the proxies shall be received and taken in charge, all ballots shall be received and counted and all questions concerning the qualifications of voters, the validity of proxies, and the acceptance or rejection of votes shall be decided, by two or more inspectors. Such inspectors shall be appointed by the chairman of the meeting. They shall be sworn faithfully to perform their duties and shall in writing certify to the returns. No candidate for election as director shall be appointed or act as inspector. -4- ARTICLE II Board of Directors Section 1. General Powers. - The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. Section 2. Number. - The number of directors shall be fifteen (15). Section 3. Term of Office and Qualification. - Each director shall serve for the term for which he or she shall have been elected and until a successor shall have been duly elected. Section 4. Nomination and Election of Directors. - At each annual meeting of stockholders, the stockholders entitled to vote shall elect the directors. No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in this Section 4. Nominations of persons for election to the Board of Directors may be made by the Board of Directors or any committee designated by the Board of Directors or by any stockholder entitled to vote for the election of directors at the applicable meeting of stockholders who complies with the notice procedures set forth in this Section4. Such nominations, other than those made by the Board of Directors or any committee designated by the Board of Directors, may be made only if written notice of a stockholder's intent to nominate one or more persons for election as directors at the applicable meeting of stockholders has been given,either by personal delivery or by United States certified mail, postage prepaid, to the secretary of the Corporation and received (i) not less than 120 days nor more than 150 days before the first anniversary of the date of the Corporation's proxy statement in connection with the last annual meeting of stockholders, or (ii) if no annual meeting was held in the previous year or the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, not less than 60 days before the date of the applicable annual meeting, or (iii) with respect to any special meeting of stockholders called for the election of directors, not later than the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such stockholder's notice shall set forth (a) as to the stockholder giving the notice, (i) the name and address, as they appear on the Corporation's stock transfer books, of such stockholder, (ii) a representation that such stockholder is a stockholder of record and intends to appear in person or by proxy at such meeting to nominate the person or persons specified in the notice, (iii) the class and number of shares of stock of the Corporation beneficially owned by such stockholder, and (iv) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder; and (b) as to each person whom the stockholder proposes to nominate for -5- election as a director, (i) the name, age, business address and, if known, residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of stock of the Corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or is otherwise required by the rules and regulations of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934, as amended, and (v) the written consent of such person to be named in the proxy statement as a nominee and to serve as a director if elected. The secretary of the Corporation shall deliver each such stockholder's notice that has been timely received to the Board of Directors or a committee designated by the Board of Directors for review. Any person nominated for election as director by the Board of Directors or any committee designated by the Board of Directors shall, upon the request of the Board of Directors or such committee, furnish to the secretary of the Corporation all such information pertaining to such person that is required to be set forth in a stockholder's notice of nomination. The chairman of the meeting of stockholders shall, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed by this Section 4. If the chairman should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. Section 5. Organization. - At all meetings of the Board of Directors, the chairman of the Board of Directors or, in the chairman's absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, the senior most executive vice president, shall act as chairman of the meeting. The secretary of the Corporation or, in the secretary's absence, an assistant secretary, shall act as secretary of meetings of the Board of Directors. In the event that neither the secretary nor any assistant secretary shall be present at such meeting, the chairman of the meeting shall appoint any person to act as secretary of the meeting. Section 6. Vacancies. - Any vacancy occurring in the Board of Directors, including a vacancy resulting from amending these By-Laws to increase the number of directors by thirty percent or less, may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. Section 7. Place of Meeting. - Meetings of the Board of Directors, regular or special, may be held either within or without the Commonwealth of Virginia. Section 8. Organizational Meeting. - The annual organizational meeting of the Board of Directors shall be held immediately following adjournment of the annual meeting of stockholders and at the same place, without the requirement of any notice other than this provision of the By-Laws. -6- Section 9. Regular Meetings: Notice. - Regular meetings of the Board of Directors shall be held at such times and places as it may from time to time determine. Notice of such meetings need not be given if the time and place have been fixed at a previous meeting. Section 10. Special Meetings. - Special meetings of the Board of Directors shall be held whenever called by order of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if any) or two of the directors. Notice of each such meeting, which need not specify the business to be transacted thereat, shall be mailed to each director, addressed to his or her residence or usual place of business, at least two days before the day on which the meeting is to be held, or shall be sent to such place by telegraph, telex or telecopy or be delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. Section 11. Waiver of Notice. - Whenever any notice is required to be given to a director of any meeting for any purpose under the provisions of law, the Articles of Incorporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, either before or after the time stated therein, shall be equivalent to the giving of such notice. A director's attendance at or participation in a meeting waives any required notice to him or her of the meeting unless at the beginning of the meeting or promptly upon the director's arrival, he or she objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Section 12. Quorum and Manner of Acting. - Except where otherwise provided by law, a majority of the directors fixed by these By-Laws at the time of any regular or special meeting shall constitute a quorum for the transaction of business at such meeting, and the act of a majority of the directors present at any such meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of those present may adjourn the meeting from time to time until a quorum be had. Notice of any such adjourned meeting need not be given. Section 13. Order of Business. - At all meetings of the Board of Directors business may be transacted in such order as from time to time the Board of Directors may determine. Section 14. Committees. - In addition to the executive committee authorized by Article III of these By-Laws, other committees, consisting of two or more directors, may be designated by the Board of Directors by a resolution adopted by the greater number of (i) a majority of all directors in office at the time the action is being taken or (ii) the number of directors required to take action under Article II, Section 12 hereof. -7- Any such committee, to the extent provided in the resolution of the Board of Directors designating the committee, shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, except as limited by law. ARTICLE III Executive Committee Section 1. How Constituted and Powers. - The Board of Directors, by resolution adopted pursuant to Article II, Section 14 hereof, may designate, in addition to the chairman of the Board of Directors, one or more directors to constitute an executive committee, who shall serve during the pleasure of the Board of Directors. The executive committee, to the extent provided in such resolution and permitted by law, shall have and may exercise all of the authority of the Board of Directors. Section 2. Organization, Etc. - The executive committee may choose a chairman and secretary. The executive committee shall keep a record of its acts and proceedings and report the same from time to time to the Board of Directors. Section 3. Meetings. - Meetings of the executive committee may be called by any member of the committee. Notice of each such meeting, which need not specify the business to be transacted thereat, shall be mailed to each member of the committee, addressed to his or her residence or usual place of business, at least two days before the day on which the meeting is to be held or shall be sent to such place by telegraph, telex or telecopy or be delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. Section 4. Quorum and Manner of Acting. - A majority of the executive committee shall constitute a quorum for transaction of business, and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the executive committee. The members of the executive committee shall act only as a committee, and the individual members shall have no powers as such. Section 5. Removal. - Any member of the executive committee may be removed, with or without cause, at any time, by the Board of Directors. Section 6. Vacancies. - Any vacancy in the executive committee shall be filled by the Board of Directors. -8- ARTICLE IV Officers Section 1. Number. - The officers of the Corporation shall be a chairman of the Board of Directors, a deputy chairman of the Board of Directors (if elected by the Board of Directors), a president (if elected by the Board of Directors), one or more vice chairmen of the Board of Directors (if elected by the Board of Directors), a chief operating officer (if elected by the Board of Directors), one or more vice presidents (one or more of whom may be designated executive vice president or senior vice president), a treasurer, a controller, a secretary, one or more assistant treasurers, assistant controllers and assistant secretaries and such other officers as may from time to time be chosen by the Board of Directors. Any two or more offices may be held by the same person. Section 2. Election, Term of Office and Qualifications. - All officers of the Corporation shall be chosen annually by the Board of Directors, and each officer shall hold office until a successor shall have been duly chosen and qualified or until the officer resigns or is removed in the manner hereinafter provided. The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any) and the vice chairmen of the Board of Directors (if any) shall be chosen from among the directors. Section 3. Vacancies. - If any vacancy shall occur among the officers of the Corporation, such vacancy shall be filled by the Board of Directors. Section 4. Other Officers, Agents and Employees - Their Powers and Duties. - The Board of Directors may from time to time appoint such other officers as the Board of Directors may deem necessary, to hold office for such time as may be designated by it or during its pleasure, and the Board of Directors or the chairman of the Board of Directors may appoint, from time to time, such agents and employees of the Corporation as may be deemed proper, and may authorize any officers to appoint and remove agents and employees. The Board of Directors or the chairman of the Board of Directors may from time to time prescribe the powers and duties of such other officers, agents and employees of the Corporation. Section 5. Removal. - Any officer, agent or employee of the Corporation may be removed, either with or without cause, by a vote of a majority of the Board of Directors or, in the case of any agent or employee not appointed by the Board of Directors, by a superior officer upon whom such power of removal may be conferred by the Board of Directors or the chairman of the Board of Directors. -9- Section 6. Chairman of the Board of Directors and Chief Executive Officer. - The chairman of the Board of Directors shall preside at meetings of the stockholders and of the Board of Directors and shall be a member of the executive committee. The chairman shall be the Chief Executive Officer of the Corporation and shall be responsible to the Board of Directors. He or she shall be responsible for the general management and control of the business and affairs of the Corporation and shall see to it that all orders and resolutions of the Board of Directors are implemented. The chairman shall from, time to time, report to the Board of Directors on matters within his or her knowledge which the interests of the Corporation may require be brought to its notice. The chairman shall do and perform such other duties as from time to time the Board of Directors may prescribe. Section 7. Deputy Chairman of the Board of Directors. - In the absence of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if elected by the Board of Directors) shall preside at meetings of the stockholders and of the Board of Directors. The deputy chairman shall be responsible to the chairman of the Board of Directors and shall perform such duties as shall be assigned to him or her by the chairman of the Board of Directors. The deputy chairman shall from time to time report to the chairman of the Board of Directors on matters within the deputy chairman's knowledge which the interests of the Corporation may require be brought to the chairman's notice. Section 8. President. - In the absence of the chairman of the Board of Directors and the deputy chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) shall preside at meetings of the stockholders and of the Board of Directors. The president shall be responsible to the chairman of the Board of Directors. Subject to the authority of the chairman of the Board of Directors, the president shall be devoted to the Corporation's business and affairs under the basic policies set by the Board of Directors and the chairman of the Board of Directors. He or she shall from, time to time, report to the chairman of the Board of Directors on matters within the president's knowledge which the interests of the Corporation may require be brought to the chairman's notice. In the absence of the chairman of the Board of Directors and the deputy chairman of the Board of Directors (if any), the president (if any) shall, except as otherwise directed by the Board of Directors, have all of the powers and the duties of the chairman of the Board of Directors. The president (if any) shall do and perform such other duties as from time to time the Board of Directors or the chairman of the Board of Directors may prescribe. Section 9. Vice Chairmen of the Board of Directors. - In the absence of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any) and the president (if any), the vice chairman of the Board of Directors designated for such purpose by the chairman of the Board of Directors (if any) shall preside at meetings of the stockholders and of the Board of Directors. Each vice chairman of the -10- Board of Directors shall be responsible to the chairman of the Board of Directors. Each vice chairman of the Board of Directors shall from time to time report to the chairman of the Board of Directors on matters within the vice chairman's knowledge which the interests of the Corporation may require be brought to the chairman's notice. In the absence or inability to act of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any) and the president (if any), such vice chairman of the Board of Directors as the chairman of the Board of Directors may designate for the purpose shall have the powers and discharge the duties of the chairman of the Board of Directors. In the event of the failure or inability of the chairman of the Board of Directors to so designate a vice chairman of the Board of Directors, the Board of Directors may designate a vice chairman of the Board of Directors who shall have the powers and discharge the duties of the chairman of the Board of Directors. Section 10. Chief Operating Officer. - The chief operating officer (if any) shall be responsible to the Chairman of the Board of Directors for the principal operating businesses of the Corporation and shall perform those duties which may from time to time be assigned. Section 11. Vice Presidents. - The vice presidents of the Corporation shall assist the chairman of the Board of Directors, the deputy chairman of the Board of Directors, the president (if any) and the vice chairmen (if any) of the Board of Directors in carrying out their respective duties and shall perform those duties which may from time to time be assigned to them. The chief financial officer shall be a vice president of the Corporation (or more senior) and shall be responsible for the management and supervision of the financial affairs of the Corporation. Section 12. Treasurer. - The treasurer shall have charge of the funds, securities, receipts and disbursements of the Corporation. He or she shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such banks or trust companies or with such bankers or other depositaries as the Board of Directors may from time to time designate. The treasurer shall render to the Board of Directors, the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), the vice chairmen of the Board of Directors (if any), and the chief financial officer, whenever required by any of them, an account of all of his transactions as treasurer. If required, the treasurer shall give a bond in such sum as the Board of Directors may designate, conditioned upon the faithful performance of the duties of the treasurer's office and the restoration to the Corporation at the expiration of his or her term of office or in case of death, resignation or removal from office, of all books, papers, vouchers, money or other property of whatever kind in his or her possession or under his or her control belonging to the Corporation. The treasurer shall perform such other duties as from time to time may be assigned to him or her. -11- Section 13. Assistant Treasurers. - In the absence or disability of the treasurer, one or more assistant treasurers shall perform all the duties of the treasurer and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the treasurer. Assistant treasurers shall also perform such other duties as from time to time may be assigned to them. Section 14. Secretary. - The secretary shall keep the minutes of all meetings of the stockholders and of the Board of Directors in a book or books kept for that purpose. He or she shall keep in safe custody the seal of the Corporation, and shall affix such seal to any instrument requiring it. The secretary shall have charge of such books and papers as the Board of Directors may direct. He or she shall attend to the giving and serving of all notices of the Corporation and shall also have such other powers and perform such other duties as pertain to the secretary's office, or as the Board of Directors, the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any) or any vice chairman of the Board of Directors may from time to time prescribe. Section 15. Assistant Secretaries. - In the absence or disability of the secretary, one or more assistant secretaries shall perform all of the duties of the secretary and, when so acting, shall have all of the powers of, and be subject to all the restrictions upon, the secretary. Assistant secretaries shall also perform such other duties as from time to time may be assigned to them. Section 16. Controller. - The controller shall be administrative head of the controller's department. He or she shall be in charge of all functions relating to accounting and the preparation and analysis of budgets and statistical reports and shall establish, through appropriate channels, recording and reporting procedures and standards pertaining to such matters. The controller shall report to the chief financial officer and shall aid in developing internal corporate policies whereby the business of the Corporation shall be conducted with the maximum safety, efficiency and economy. The controller shall be available to all departments of the Corporation for advice and guidance in the interpretation and application of policies which are within the scope of his or her authority. The controller shall perform such other duties as from time to time may be assigned to him or her. Section 17. Assistant Controllers. - In the absence or disability of the controller, one or more assistant controllers shall perform all of the duties of the controller and, when so acting, shall have all of the powers of, and be subject to all the restrictions upon, the controller. Assistant controllers shall also perform such other duties as from time to time may be assigned to them. -12- ARTICLE V Contracts, Checks, Drafts, Bank Accounts, Etc. Section 1. Contracts. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president, the treasurer and such other persons as the chairman of the Board of Directors may authorize shall have the power to execute any contract or other instrument on behalf of the Corporation; no other officer, agent or employee shall, unless otherwise in these By-Laws provided, have any power or authority to bind the Corporation by any contract or acknowledgement, or pledge its credit or render it liable pecuniarily for any purpose or to any amount. Section 2. Loans. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president, the treasurer and such other persons as the Board of Directors may authorize shall have the power to effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any corporation, firm or individual, and for such loans and advances may make, execute and deliver promissory notes or other evidences of indebtedness of the Corporation, and, as security for the payment of any and all loans, advances, indebtedness and liability of the Corporation, may pledge, hypothecate or transfer any and all stocks, securities and other personal property at any time held by the Corporation, and to that end endorse, assign and deliver the same. Section 3. Voting of Stock Held. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president or the secretary may from time to time appoint an attorney or attorneys or agent or agents of the Corporation to cast the votes that the Corporation may be entitled to cast as a stockholder or otherwise in any other corporation, any of whose stock or securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing to any action by any other such corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed on behalf of the Corporation such written proxies, consents, waivers or other instruments as such officer may deem necessary or proper in the premises; or the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president or the secretary may attend in person any meeting of the holders of stock or other securities of such other corporation and thereat vote or exercise any and all powers of the Corporation as the holder of such stock or other securities of such other corporation. -13- ARTICLE VI Certificates Representing Shares Certificates representing shares of the Corporation shall be signed by the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), or the vice chairman of the Board of Directors (if any), or the president of the Corporation (if any) and the secretary or an assistant secretary. Any and all signatures on such certificates, including signatures of officers, transfer agents and registrars, may be facsimile. ARTICLE VII Dividends The Board of Directors may declare dividends from funds of the Corporation legally available therefor. ARTICLE VIII Seal The Board of Directors shall provide a suitable seal or seals, which shall be in the form of a circle, and shall bear around the circumference the words "Philip Morris Companies Inc." and in the center the word and figures "Virginia, 1985." ARTICLE IX Fiscal Year The fiscal year of the Corporation shall be the calendar year. -14- ARTICLE X Amendment The power to alter, amend or repeal the By-Laws of the Corporation or to adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made by the Board of Directors may be repealed or changed by the stockholders, or new By-Laws may be adopted by the stockholders, and the stockholders may prescribe that any By-Laws made by them shall not be altered, amended or repealed by the directors. ARTICLE XI Emergency By-Laws If a quorum of the Board of Directors cannot be readily assembled because of some catastrophic event, and only in such event, these By-Laws shall, without further action by the Board of Directors, be deemed to have been amended for the duration of such emergency, as follows: Section 1. Section 6 of Article II shall read as follows: Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the directors present at a meeting of the Board of Directors called in accordance with these By-Laws. Section 2. The first sentence of Section 10 of Article II shall read as follows: Special meetings of the Board of Directors shall be held whenever called by order of the chairman of the Board of Directors or a deputy chairman (if any),or of the president (if any) or any vice chairman of the Board of Directors (if any) or any director or of any person having the powers and duties of the chairman of the Board of Directors, the deputy chairman, the president or any vice chairman of the Board of Directors. Section 3. Section 12 of Article II shall read as follows: The directors present at any regular or special meeting called in accordance with these By-Laws shall constitute a quorum for the transaction of business at such meeting, and the action of a majority of such directors shall be the act of the Board of Directors, provided, however, that in the event that only one director is present at any such meeting no action except the election of directors shall be taken until at least two additional directors have been elected and are in attendance. -15- EX-10.15 3 EMPLOYMENT AGREEMENT Exhibit 10.15 AMENDED AND RESTATED EMPLOYMENT AGREEMENT AGREEMENT by and between Philip Morris Companies Inc., a Virginia corporation (the "Company") and Murray H. Bring (the "Executive"), dated as of the 30th day of July, 1998. WHEREAS, the Company and the Executive previously entered into an initial employment agreement dated October 12, 1987, which was amended by a letter agreement dated October 5, 1993, and also entered into a supplemental employment agreement dated March 24, 1997, which supplemental agreement set forth terms and conditions that would become applicable in the event of a change of control of the Company; and WHEREAS, such prior agreements provide for certain incentives to continued employment, including certain supplemental retirement benefits, and recognize the importance of ensuring that the compensation and benefits expectations of the Executive will be satisfied in the event of a change of control or other contingencies; and WHEREAS, the Company wishes to ensure to itself the continued benefit of the Executive's services for the period extending at least until his Normal Retirement Date following Executive's attaining age 65; and WHEREAS, the Executive has agreed to provide such continued services; NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth in this Amended and Restated Employment Agreement, which replaces the prior supplemental employment agreement dated March 24, 1997, the Company and the Executive agree as follows: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated or the Executive ceases to be Vice Chairman, External Affairs and General Counsel of Philip Morris Companies Inc. prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment or cessation of status as Vice Chairman, External Affairs and General Counsel of Philip Morris Companies Inc. (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control (an event described in (i) or (ii) above being hereinafter referred to as a "Potential Change of Control"), then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment or cessation of status as Vice Chairman, External Affairs and General Counsel of Philip Morris Companies Inc. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the earliest to occur of (x) any date prior to the Effective Date on which the Executive ceases to hold the position Vice Chairman, External Affairs and General Counsel of Philip Morris Companies Inc., (y) the third anniversary of the date hereof, and (z) the Executive's normal retirement date (the "Normal Retirement Date") under the Philip Morris Salaried Employees' Retirement Plan (the "Retirement Plan"); provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger, share exchange or consolidation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the 2 Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (A) more than 80% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) less than 20% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by any Person (excluding any employee benefit plan (or related trust) of the Company or such corporation), except to the extent that such Person owned 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the sale or disposition and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such sale or other disposition of assets of the Company or were elected, appointed or nominated by the Board. 3 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the earlier to occur of (x) the third anniversary of such date and (y) the Executive's Normal Retirement Date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually and shall be first increased no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually by the highest of (x) 7%, (y) the average increase (excluding promotional increases) in base salary awarded to the Executive for each of the three full fiscal years 4 (annualized in the case of any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve months) prior to the Effective Date, and (z) the percentage increase (excluding promotional increases) in base salary generally awarded to peer executives of the Company and its affiliated companies for the year of determination. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus"), in cash at least equal to the higher of (x) the average of the three highest bonuses paid or payable, including any bonus or portion thereof which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the five fiscal years immediately preceding the fiscal year in which the Effective Date occurs (annualized for any fiscal year during such period consisting of less than twelve full months or with respect to which the Executive has been employed by the Company for less than twelve full months) and (y) the bonus paid or payable (annualized as described above), including any bonus or portion thereof which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the most recently completed fiscal year prior to the Effective Date (such higher amount being referred to as the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. A. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. 5 B. Notwithstanding any other provision of this Agreement, upon the filing at any time (whether before, during or after the Employment Period) of a voluntary or an involuntary petition for relief commencing a case under Title 11, United States Code (including, without limitation, any petition filed under chapter 7, chapter 11 or any other chapter thereof or a case under any successor federal statute) by or against the Company (an "Other Contingent Event"), the Executive shall immediately become entitled to a single sum payment equal to the present value of the retirement benefits to which he would be entitled under all Retirement Arrangements if he continued in employment with the Company until his Normal Retirement Date, less the present value of the amounts then accrued and payable at Normal Retirement Date to the Executive under the Qualified Retirement Arrangements. The "Retirement Arrangements" consist of the Philip Morris Salaried Employees' Retirement Plan and the Philip Morris Deferred Profit-Sharing Plan (the two "Qualified Retirement Arrangements"), and the Philip Morris Benefit Equalization Plan and the Supplemental Management Employees' Retirement Plan of Philip Morris Companies Inc. (the two "Nonqualified Retirement Arrangements"). For purposes of calculating the amount of such single sum payment (before its reduction by amounts payable under the Qualified Arrangements), (1) the Executive's compensation taken into account in the computation of benefits under the Retirement Arrangements shall be determined by assuming that base compensation increases to $87,500 per month effective May 1, 1999 and remains constant until the Executive's Normal Retirement Date and that Incentive Compensation paid in 1999 for 1998 is $1,134,000 and in 2000 for 1999 is $1,253,363 (provided, however, that to the extent base compensation or Incentive Compensation has been paid for a portion of the period taken into account in the determination, the amounts actually paid shall be utilized for that portion of the period in such determination), (2) years of accredited service (to a maximum of 35 years) shall be determined by crediting the Executive with two years of accredited service for each year of service to age 60, with three years of accredited service for each year of service from age 60 to age 65, and with six additional years of accredited service reflecting the intention of the Executive to continue his employment with the Company until his Normal Retirement Date, (3) the periodic annuity amount determined under the Philip Morris Salaried Employees' Retirement Plan, the Philip Morris Benefit Equalization Plan, and the Supplemental Management Employees' Retirement Plan of Philip Morris Companies Inc. shall be calculated as an amount payable commencing at the Executive's Normal Retirement Date for the remainder of his life only, (4) the single sum actuarial equivalent payment of the annuity benefit determined under (3) immediately above shall be calculated as the 6 present value as of the date of the occurrence of the Other Contingent Event (using the average of the interest rates established by the Pension Benefit Guaranty Corporation ("PBGC") to value immediate annuities in the case of a plan termination for the 24 months preceding the date on which such single sum amount becomes payable, less one-half of one percent, and the UP-1984 Unisex Mortality Table or the average of the 30-year Treasury rates for the 24 months preceding the date of the occurrence of the Other Contingent Event, less one-half of one percent, and the GAM83 Unisex Mortality Table, whichever assumptions produce the greater single sum actuarial equivalent value, provided that if the PBGC rates are no longer published the most recently published PBGC rate shall be used in computing the PBGC rate average for that portion of the 24 month period during which PBGC rates were no longer published) of the periodic amounts payable commencing at the Executive's Normal Retirement Date as computed based on the assumptions set forth in this Section 4(b)(iii)(B), and (5) the statutory Internal Revenue Code of 1986 limits on tax-qualified plan benefits shall be assumed to increase at the rate of 4 percent per year during the period from the date of the calculation until the Executive's Normal Retirement Date. In addition, the portion of the retirement benefit to which the Executive would be entitled if he continued employment until his Normal Retirement Date that is attributable to the Philip Morris Deferred Profit-Sharing Plan and the Deferred Profit-Sharing portion of the Philip Morris Benefit Equalization Plan shall be computed based on the compensation assumptions specified in (1) of the immediately preceding sentence; by crediting the account balance existing as of the date of the Other Contingent Event and the assumed future annual profit-sharing amounts (which future amounts shall total 10 percent of base compensation, with such crediting assumed to occur as of February 28 of the year immediately following the year in which such compensation was earned) with interest at 6 percent per year from the later of the date of the Other Contingent Event or, with respect to future amounts, the date assumed credited, to the Executive's Normal Retirement Date; and by discounting the amounts that would be credited as of the Executive's Normal Retirement Date based on these assumptions back to the date of the Other Contingent Event at the rate of 6 percent per year. The amount computed on the assumptions described above shall be computed for all Retirement Arrangements and then reduced by the present value (computed on the basis of the same assumptions) at the date of the Other Contingent Event of the amounts that would be payable under the Qualified Retirement Arrangements to the Executive at his Normal Retirement Date if the Executive terminated employment with the Company on the date of the Other Contingent Event. If actual payment of the single sum payment is not made within 15 days of the date of the Other Contingent Event, the amount of the payment shall be increased to reflect the delay in payment using the actuarial assumptions specified above. 7 If the Executive dies prior to retirement and an Other Contingent Event occurs before receipt by the Executive or his beneficiary of retirement benefits under the Nonqualified Retirement Arrangements having a present value (determined as of the date of the Other Contingent Event and on the basis of the actuarial assumptions described previously in this Section 4(b)(iii)(B)) equal to the single sum payment computed on the basis of such assumptions and as of such date, the beneficiary shall be entitled to immediate payment of an amount equal to the difference between the single sum payment so computed and the present value at that time of any such retirement benefits previously received. If an Other Contingent Event occurs after the Executive has retired, the Executive (or, if the Executive is then deceased, his beneficiary) shall immediately become entitled to payment of a single sum amount equal to the present value (determined on the basis of the actuarial assumptions previously set forth in this Section 4(b)(iii)(B)) on the date of the Other Contingent Event of all remaining payments projected to be made to the Executive or his beneficiary under the Nonqualified Retirement Arrangements. The beneficiary of the Executive shall be the Executive's beneficiary or beneficiaries designated under the Nonqualified Retirement Arrangements (or in any written designation accepted by the Company that supercedes such designation), or in the absence of such a designated beneficiary the Executive's estate. The single sum amounts determined under the preceding provisions of this Section 4(b)(iii)(B) shall be determined without regard to any amounts previously paid at the direction of the Executive to the trust established by the Executive pursuant to the Employee Grantor Trust Agreement between the Executive as grantor and Morgan Guaranty Trust Company of New York as trustee dated December 13, 1995, or any successor trust (the "Executive's Secular Trust"). After any such single sum amount is so determined, it shall then be reduced by subtracting from it the Pre-Tax Secular Trust Equivalent; the result shall be the net amount actually payable to the Executive or his beneficiary with respect to the Nonqualified Retirement Arrangements. The Pre-Tax Secular Trust Equivalent shall be determined by taking the fair market value of the assets held in the Executive's Secular Trust on the date of the Other Contingent Event, reducing the value of such assets by the amount of any unpaid taxes on earnings or on unrealized appreciation that would be realized were the assets immediately sold, and then converting the resulting after-tax amount to its pre-tax equivalent based on the tax assumptions set forth in Exhibit B of the Employee Grantor Trust Enrollment Agreement between the Executive and the Company dated December 13, 1995. If the Executive should voluntarily terminate employment with the Company prior to his Normal Retirement Date for reasons other than disability or Good Reason, the Executive shall promptly pay to the Company an amount equal to the amount, if any, by which (x) the present value (as of the date of such termination) of the sum of the Pre-Tax Secular Trust Equivalent and any other payments previously received under the Nonqualified Retirement Arrangements exceeds (y) the present value (as of such date) of the amount to which the Executive would be entitled under this Section 4(b)(iii)(B), determined without regard to any reduction by the Pre-Tax Secular Trust Equivalent, if his years of accredited service were reduced by three years for each year of service prior to his Normal Retirement Date not completed by the Executive and then by six additional years and if his compensation taken into account in the computation of benefits were 8 determined without regard to any compensation assumed for the period from his date of termination to his Normal Retirement Date. Present value for this purpose shall be determined on the basis of the actuarial assumptions specified above; and Good Reason shall have the meaning specified in Section 5(c) hereof, except that any failure by the Company to make payments under this Section 4(b)(iii)(B) shall not constitute Good Reason to the extent that the Company is precluded by applicable law from making such payment. This Section 4(b)(iii)(B) shall become operative upon the occurrence of an Other Contingent Event, whether before or after the Executive's termination of employment or death and irrespective of whether the Effective Date described in Section 1 or any of the events described in Section 2 of this Agreement have occurred. In the event of any conflict between the applicable provisions of this Section and any other provisions of this Agreement or of other agreements previously entered into between the Company and the Executive, the provisions of this Section 4(b)(iii)(B) shall govern the determination and payment of benefits to the Executive or his beneficiaries under the Nonqualified Retirement Arrangements. (iv) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies 9 in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For the sole and exclusive purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental 10 illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the Executive for Good Reason. For the sole and exclusive purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, or in the compensation payable to the Executive, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the 11 Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: 12 (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) two and one-half and (2) the sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus and (3) a fraction, the numerator of which is the number of full months from the Date of Termination until the Executive's Normal Retirement Date but which shall be no greater than thirty (30), and the denominator of which is thirty (30); and C. an amount equal to the difference between (a) the actuarial equivalent of the benefit (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Retirement Plan immediately prior to the Effective Date, except as specified below with respect to increases in base salary and annual bonus) under the Retirement Plan and any excess or supplemental retirement plan in which the Executive participates (together, the "SERP") which the Executive would receive if the Executive's employment continued for two and one-half years after the Date of Termination assuming for this purpose that all accrued benefits are fully vested, and, assuming that (1) the Executive's base salary increased on an annualized basis during the two and one-half year period by the amount required by Section 4(b)(ii) (in the case of Section 4(b)(ii)(z) based on increases (excluding promotional increases) in base salary for the most recently completed fiscal year prior to the Date of Termination) had the Executive remained employed, and (2) the Executive's annual bonus (annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months) in each of the two and one-half years (on an annualized basis) bears the same proportion to the Executive's base salary in such year or fraction thereof as it did for the last full year prior to the Date of Termination, and (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination; 13 (ii) for two and one-half years after the Executive's Date of Termination, or such longer period as may be provided by Section 6(a)(iii) with respect to the benefits covered thereby or by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) and Section 4(b)(vi) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies applicable generally to other peer executives and their families during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until two and one-half years after the Date of Termination and to have retired on the last day of such period; (iii) if two and one-half years after the Executive's Date of Termination, the Executive would be at least 55 years old and eligible for retirement benefits (including, without limitation, early retirement benefits) under the Retirement Plan (assuming continuous service with the Company during such two and one-half year period), the Company shall continue lifetime medical, dental and life insurance benefits (including supplemental benefits) to the Executive and/or the Executive's family at least equal to those that would have been provided to them in accordance with the plans, programs and policies described in Section 4(b)(iv) of this Agreement (except the Company's business travel accident plans) if the Executive's employment had not been terminated, if and as in effect at any time during the 120-day period immediately preceding the Effective Date with respect to other peer executives and their families or, if more favorable to the Executive, as in effect at any time thereafter with respect to other peer executives and their families; provided, however, that, in the event that the Executive becomes reemployed with another employer, whether or not such employer is related to the Corporation or any of its affiliates, and is eligible to receive medical or other welfare benefits under any employer-sponsored plan, the medical and other welfare benefits described herein shall be the secondary coverage for such applicable period of eligibility; (iv) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; and 14 (v) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies, including, without limitation, any amounts payable pursuant to Section 4(b)(iii) (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations, the timely payment or provision of Other Benefits, and the payment of any amounts payable to the Executive's beneficiary pursuant to Section 4(b)(iii)(B) hereof. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations, the timely payment or provision of Other Benefits, and the payment of any amounts payable to the Executive or his beneficiary pursuant to Section 4(b)(iii)(B) hereof. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. 15 (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or 16 distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in 17 writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to 18 settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any 19 successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Murray H. Bring [Address Intentionally Omitted] If to the Company: Philip Morris Companies Inc. 120 Park Avenue New York, N.Y. 10017 Attention: Corporate Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed 20 to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, (i) the Executive's employment with the Company terminates or (ii) the Executive ceases to be Vice Chairman, External Affairs and General Counsel of Philip Morris Companies Inc., except, in each case in connection with a Potential Change of Control then the Executive shall have no further rights under this Agreement except for those rights provided under Section 4(b)(iii)(B) of this Agreement. (g) This Agreement is supplemental to the employment agreement between the Executive and the Company dated October 12, 1987, which was amended by a letter agreement dated October 5, 1993, and shall not be construed to reduce or otherwise limit any rights or benefits to which the Executive is or may become entitled under such prior 1987 agreement or the 1993 amendment thereto. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof; provided, however, that in no event (whether before or after the Effective Date) shall this Agreement be construed to provide rights or benefits less favorable to the Executive than those accorded under the prior 1987 agreement or the 1993 amendment thereto. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ MURRAY H. BRING ------------------------------ MURRAY H. BRING PHILIP MORRIS COMPANIES INC. By /s/ Timothy A. Sompolski --------------------------- 21 EX-13 4 MDN&A Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ Consolidated Operating Results (in millions) Operating Revenues - ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Operating Revenues Domestic tobacco $15,310 $13,584 $12,462 International tobacco 27,390 26,240 24,087 North American food 17,312 16,838 16,447 International food 9,999 10,852 11,503 Beer 4,105 4,201 4,327 Financial services 275 340 378 - ------------------------------------------------------------------------------- Operating revenues $74,391 $72,055 $69,204 =============================================================================== (in millions) Operating Income - ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Operating Income Domestic tobacco $ 1,489 $ 3,287 $ 4,206 International tobacco 5,029 4,572 4,078 North American food 3,055 2,873 2,628 International food 1,127 1,326 1,303 Beer 451 459 440 Financial services 183 297 193 - ------------------------------------------------------------------------------- Operating companies income 11,334 12,814 12,848 General corporate expenses (645) (479) (442) Minority interest (128) (87) (43) Amortization of goodwill (584) (585) (594) - ------------------------------------------------------------------------------- Operating income $ 9,977 $11,663 $11,769 =============================================================================== Amortization of goodwill is primarily attributable to the North American food segment. 1998 compared with 1997: Operating revenues for 1998 increased $2.3 billion (3.2%) from 1997, primarily due to domestic and international tobacco operations. The comparison of operating revenues was affected by the 1998 sales of several international food businesses and the 1997 sales of Brazilian ice cream businesses, North American maple-flavored syrup businesses and a Scandinavian sugar confectionery business. Financial services operating revenues in 1998 decreased due to the 1997 sale of its real estate business. Excluding the 1998 and 1997 divested operations, operating revenues increased $2.9 billion (4.1%) from 1997. Operating income for 1998 decreased $1.7 billion (14.5%) from 1997. Operating income was reduced in 1998 and 1997 as a result of pre-tax charges of $3.4 billion and $1.5 billion, respectively, taken by Philip Morris Incorporated ("PM Inc."), the Company's domestic tobacco subsidiary, for its share of all fixed and determinable portions of its obligations related primarily to the settlement of certain tobacco-related litigation. Operating income was further reduced in 1998 by pre-tax charges of $337 million primarily related to voluntary early retirement and separation programs at PM Inc. and $116 million related to the Company's settlement of shareholder litigation. During 1997, operating income was reduced by a $630 million pre-tax charge to realign the international food operations. In addition, 1997 operating income was increased by $877 million of pre-tax gains on the sales of ice cream businesses in Brazil and real estate operations in the United States. Excluding the foregoing pre-tax charges and gains and results of operations from businesses sold in 1998 and 1997, operating income increased $1.1 billion (8.3%) from 1997, reflecting favorable results of operations in domestic tobacco, international tobacco and North American food operations. Operating companies income, which is defined as operating income before general corporate expenses, minority interest and amortization of goodwill, decreased $1.5 billion (11.5%) from 1997 due primarily to the items noted above. Excluding these items, operating companies income increased 8.1% on higher earnings from domestic tobacco, international tobacco and North American food operations. Currency movements, primarily the strengthening of the U.S. dollar versus European and Asian currencies, decreased operating revenues by $2.2 billion ($1.4 billion, excluding excise taxes) and operating companies income by $365 million in 1998 versus 1997. In January of 1999, the U.S. dollar began to strengthen against the euro, the new common currency established by eleven of the fifteen member countries of the European Union. Although the Company cannot predict future movements in currency rates, strengthening of the dollar against the euro, if sustained during 1999, could have an unfavorable impact on operating revenues and operating companies income comparisons with 1998. In addition, the Company's businesses in certain Asian markets and, more recently, in Russia and Brazil have been adversely affected by economic instability in those areas. Although the Company cannot predict future economic developments, the Company anticipates that economic instability will continue to adversely affect its businesses in those markets during 1999. Interest and other debt expense, net, for 1998 decreased $162 million (15.4%) from 1997. This decline was due primarily to higher interest income, reflecting higher cash and cash equivalent balances and to lower average debt outstanding during 1998. Net earnings of $5.4 billion in 1998 decreased 14.9% from 1997, and basic EPS of $2.21 in 1998 decreased by 15.3% from 1997. Similarly, diluted EPS decreased 14.7% to $2.20 from $2.58 in 1997. Net earnings, basic EPS and diluted EPS in 1998 and 1997 were affected by the after-tax impact of the litigation settlement charges, voluntary early retirement and separation program charges, international food realignment charges and gains on divestitures, as previously noted. Excluding the impact of these items, net earnings increased 9.2% to $7.8 billion, basic 21 EPS increased 8.9% to $3.19 and diluted EPS increased 8.9% to $3.17, respectively, from $7.1 billion, $2.93 and $2.91, respectively, in 1997. 1997 compared with 1996: Operating revenues for 1997 increased $2.9 billion (4.1%) and operating companies income decreased $34 million (0.3%) from 1996. Operating revenues were higher due primarily to increases in domestic and international tobacco and North American food operations. Operating companies income was reduced as a result of pre-tax charges of $1.5 billion taken by PM Inc., for its share of all fixed and determinable portions of its obligations related to settling health care cost recovery litigation in Mississippi, Florida and Texas and a one-time charge for settling the Broin case, a Florida class action brought on behalf of airline flight attendants. Operating companies income was further reduced by pre-tax charges of $630 million to realign the international food operations. Operating companies income was increased by a $774 million pre-tax gain on the sale of ice cream businesses in Brazil and a $103 million pre-tax gain on the sale of real estate operations. Excluding these items, operating companies income increased 10.9%, reflecting favorable results of operations in domestic tobacco, international tobacco, North American food and beer operations. Currency movements, primarily the strengthening of the U.S. dollar versus European, Japanese and other Asian currencies, decreased operating revenues by $3.2 billion ($1.9 billion, excluding excise taxes) and operating companies income by $470 million in 1997 versus 1996. Year 2000: As many computer systems and other equipment with embedded chips or processors (collectively, "Business Systems") use only two digits to represent the year, they may be unable to process accurately certain data before, during or after the year 2000. As a result, business and governmental entities are at risk for possible miscalculations or systems failures causing disruptions in their business operations. This is commonly known as the Year 2000 ("Y2K") issue or Century Date Change ("CDC") issue. The CDC issue can arise at any point in the Company's supply, manufacturing, processing, distribution and financial chains. The Company and each of its operating subsidiaries are in the process of implementing a CDC readiness program with the objective of having all of their significant Business Systems, including those that affect facilities and manufacturing activities, functioning properly with respect to the CDC issue before January 1, 2000, and taking other appropriate measures to minimize possible disruptions to their business operations due to the CDC issue. This program is well underway. Generally, however, those subsidiaries with primarily North American operations (PM Inc., Kraft Foods North America, Miller Brewing Company and Philip Morris Capital Corporation) are closer to CDC readiness than those with extensive international operations (Philip Morris International ("PMI") and Kraft Foods International ("KFI")). During the first phase of the CDC readiness program, those internal Business Systems of the Company and its operating subsidiaries that are susceptible to system failures or processing errors as a result of the CDC issue were identified and assessed. This effort is complete. The second phase of the CDC readiness program involves the actual remediation and replacement of internal Business Systems. The Company and its operating subsidiaries are using both internal and external resources to complete this process. The Company's objective is to substantially complete this effort, as well as the testing and certification of individual systems for CDC readiness, by June 1999. Integration testing and certification (i.e., the testing and certification of the interfaces between individual Business Systems previously certified as Year 2000 ready as well as the testing and certification of the external linkages between the Company's systems with those of third parties) is expected to be substantially completed by September 1999. As part of the CDC readiness program, significant service providers, vendors, suppliers, customers and governmental entities ("Key Business Partners") that are believed to be critical to business operations after January 1, 2000, have been identified and steps are being undertaken in an attempt to reasonably ascertain their stage of CDC readiness through questionnaires, interviews, on-site visits and other available means. In many cases, governmental agencies and utilities (particularly outside North America) have a lower level of CDC awareness and are less willing to provide information concerning their state of CDC readiness. The CDC readiness of Key Business Partners will continue to be monitored and contingency plans will be developed, as appropriate, for those considered to have a significant risk of CDC failure. Because of the vast number of Business Systems used by the Company and its operating subsidiaries, the significant number of Key Business Partners, the extent of the Company's foreign operations, including operations within countries that are not actively promoting remediation of the CDC issue, the Company presently believes that it may experience some disruption in its business due to the CDC issue. More specifically, because of the interdependent nature of Business Systems, the Company and its operating subsidiaries could be materially adversely affected if utilities, private businesses and governmental entities with which they do business or that provide essential services are not CDC ready. The Company currently believes that the greatest risks of disruption in its businesses exist in certain international markets and with respect to the CDC readiness of certain of its Key Business Partners. Each of the Company's operating subsidiaries is developing its own risk assessment of the possible impact of the CDC issue on its business operations. Although it is not currently possible to quantify the most reasonably likely worst case scenario, the possible consequences of the Company or Key Business Partners not being fully CDC ready in a timely manner include, among other things, temporary plant closings, delays in the delivery of products, delays in the receipt of supplies, invoice and collection errors, and inventory and supply obsolescence. Consequently, the business and results of operations of the Company could be materially adversely affected by a temporary inability of the Company and its operating subsidiaries to 22 conduct their businesses in the ordinary course for periods of time due to the CDC issue. However, the Company believes that its CDC readiness program, including the contingency planning discussed below, should significantly reduce the adverse effect any such disruptions may have. Concurrently with the CDC readiness measures described above, the Company and its operating subsidiaries are developing contingency plans intended to mitigate the possible disruption in business operations that may result from the CDC issue. Contingency plans may include stockpiling raw, packaging and promotional materials, increasing inventory levels at the operating company, wholesale and retail levels, adjusting the timing of promotional programs, securing alternate sources of supply, distribution and warehousing, adjusting facility shut-down and start-up schedules, manual workarounds, procuring back-up power generators and heat supply for key plants, hiring additional staff and other appropriate measures. The Company's objective is to substantially complete its contingency planning effort by June 1999. These plans will continue to be evaluated and modified as additional information becomes available. While the Company cannot reasonably estimate at this time the cost of implementing contingency plans (since such costs will depend on the nature and extent of future Year 2000 events), it currently does not believe that such costs should have a material adverse effect on the Company's future consolidated results of operations. However, in any given reporting period, such costs may be a factor in describing changes in operating companies income for the Company's business segments. It is currently estimated that the aggregate cost of the Company's CDC compliance/remediation efforts will be approximately $550 million, of which approximately $325 million has been spent. The remaining costs relate to remediation efforts, the final testing and certification of Business Systems and other CDC-related efforts. Generally, the above costs are being expensed as they are incurred and are being funded through operating cash flow. These amounts do not include any costs associated with the implementation of contingency plans. The costs associated with the replacement of computerized systems, hardware or equipment (currently estimated to be approximately $150 million), substantially all of which would be capitalized, are also not included in the above estimates. Other non-Year 2000 information technology projects have not been materially affected by the Company's Year 2000 initiatives. The Company's CDC readiness program is an ongoing process and the risk assessments and estimates of costs and completion dates for various components of the CDC readiness program described above are forward looking statements and are subject to change. Factors that may cause such changes include, among others, the continued availability of qualified personnel and other information technology resources; the ability to identify and remediate all date-sensitive lines of computer code and embedded chips; the timely receipt and installation of CDC-ready replacement systems; the actions of governmental agencies, utilities and other third parties with respect to the Year 2000 issue; the ability to implement contingency plans (for example, the availability of additional warehouse space); and the occurrence of broad-based or systemic economic failures. 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 business transactions. Beginning in January 2002, new euro-denominated currency 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 Company currently anticipates that the euro conversion will not have a material adverse impact on its financial condition or results of operations. 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., PMI and the Company. These issues, some of which are more fully discussed below, include legislation or other governmental action seeking to ascribe to the industry responsibility and liability for the purported adverse health effects associated with both smoking and exposure to environmental tobacco smoke ("ETS"); increased smoking and health litigation; price increases in the United States related to the settlement of certain tobacco litigation; actual and proposed excise tax increases; the issuance of final regulations by the United States Food and Drug Administration ("FDA") that, if upheld by the courts, would regulate cigarettes as "drugs" or "medical devices"; governmental and grand jury investigations; actual and proposed requirements regarding disclosure of cigarette ingredients and other proprietary information as well as the testing and reporting of the yields of "tar," nicotine and other constituents found in cigarette smoke; governmental and private bans and restrictions on smoking; actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States; actual and proposed restrictions on tobacco manufacturing, marketing, advertising and sales (including two European Union directives that, if implemented, will (i) ban virtually all forms of 23 tobacco advertising and sponsorship in the European Union other than at the retail point of sale, and (ii) will abolish duty-free tobacco sales among the member states of the European Union); proposed legislation to eliminate the U.S. tax deductibility of tobacco advertising and promotional costs; proposed legislation in the United States to require the establishment of ignition propensity performance standards for cigarettes; the diminishing social acceptance of smoking and increased pressure from anti-smoking groups and unfavorable press reports; and other tobacco legislation that may be considered by the Congress, the states and other countries. Excise taxes: Cigarettes are subject to substantial federal and state excise taxes in the United States and to similar taxes in most foreign markets. The United States federal excise tax on cigarettes is currently $0.24 per pack of 20 cigarettes and is scheduled to increase to $0.34 per pack in the year 2000 and then to $0.39 per pack in 2002. In general, excise taxes and other taxes on cigarettes have been increasing. These taxes vary considerably and, when combined with sales taxes and the current federal excise tax, may be as high as $1.50 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 the Clinton Administration's fiscal year 2000 budget proposal includes an additional increase of $0.55 per pack in the federal excise tax. Increases in other cigarette-related taxes have been proposed at the state and local level 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 the "tar" and nicotine testing and reporting standards established by a 1970 voluntary agreement between the FTC and 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 assistance in developing specific recommendations on the future of the FTC's program for testing the "tar," nicotine and carbon monoxide content of cigarettes. FDA regulations: The FDA has promulgated regulations asserting jurisdiction over cigarettes as "drugs" or "medical devices" under the provisions of the Food, Drug and Cosmetic Act. These regulations include severe restrictions on the distribution, marketing and advertising of cigarettes, and would require the industry to comply with a wide range of labeling, reporting, recordkeeping, manufacturing and other requirements. The FDA's exercise of jurisdiction, if not reversed by judicial or legislative action, could lead to more expansive FDA-imposed restrictions on cigarette operations than those set forth in the regulations, and could materially adversely affect the business, volume, results of operations, cash flows and financial position of PM Inc. and the Company. In August 1998, the Fourth Circuit Court of Appeals ruled that the FDA does not have the authority to regulate tobacco products, and declared the FDA's regulations invalid and, in November 1998, that court denied the FDA's petition for rehearing. The FDA is now petitioning the U.S. Supreme Court to review the judgment of the Fourth Circuit Court of Appeals in this case. The ultimate outcome of this litigation cannot be predicted. Ingredient disclosure laws: The Commonwealth of Massachusetts has enacted legislation to require cigarette manufacturers to report yearly the flavorings and other ingredients used in each brand of cigarettes sold in the Commonwealth, and on a qualified, by-brand basis to provide "nicotine-yield ratings" for their products based on standards to be established by the Commonwealth. Enforcement of the ingredient disclosure provisions of the statute could result in the public disclosure of valuable proprietary information. In December 1997, a federal district court in Boston granted the tobacco company plaintiffs a preliminary injunction and enjoined the Commonwealth from enforcing the ingredient disclosure provisions of the legislation. In November 1998, the First Circuit Court of Appeals affirmed this ruling. In addition, both parties' cross-motions for summary judgment are pending before the district court. The ultimate outcome of this lawsuit cannot be predicted. Similar legislation has been enacted or proposed in other states, such as Texas. Some jurisdictions outside the United States, including Thailand, have also enacted or proposed ingredient disclosure laws or regulations. The U.S. Environmental Protection Agency's report on ETS: In 1993, the U.S. Environmental Protection Agency (the "EPA") issued a report relating to certain alleged health effects of ETS. The report included a risk assessment relating to the alleged association between ETS and lung cancer in nonsmokers, and a determination by the EPA to classify ETS as a "Group A" carcinogen. In July 1998, a federal district court vacated those sections of the report relating to lung cancer, finding that 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. ---------------------------------- It is not possible to predict the outcome of the above-described matters, or to predict what, if any, other foreign or domestic governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or to the tobacco industry generally. However, if any or all of the foregoing were to be implemented, the business, volume, results of 24 operations, cash flows and financial position of PM Inc., PMI and the Company could be materially adversely affected. ---------------------------------- Governmental and grand jury investigations: PM Inc. has received requests for information (including grand jury subpoenas) in connection with governmental investigations of the tobacco industry, and is cooperating with respect to such requests. Present and former employees of PM Inc. have testified or have been asked to testify in connection with certain of these matters. The investigations include four grand jury investigations being conducted by: the United States Attorney for the Eastern District of New York relating to the Council for Tobacco Research-U.S.A., Inc., a research organization of which PM Inc. was a sponsor; the United States Department of Justice in Washington, D.C. relating to issues raised in testimony provided by tobacco industry executives before Congress and other related matters; the United States Department of Justice Antitrust Division in the Eastern District of Pennsylvania relating to tobacco leaf purchases; and the United States Attorney for the Northern District of New York relating to alleged contraband transactions primarily in Canadian-brand tobacco products. PMI and its subsidiary, Philip Morris Duty Free Inc., have also received subpoenas in the last referenced investigation. While the outcomes of these investigations cannot be predicted, PM Inc., PMI and Philip Morris Duty Free Inc. believe they have acted lawfully. Smoking and health litigation: As further discussed in Note 16 of the Notes to Consolidated Financial Statements ("Note 16"), there is litigation pending in various United States and foreign jurisdictions related to tobacco products. These cases generally fall within three 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, and (iii) health care cost recovery cases brought by governmental and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking. Governmental plaintiffs have included local, state and certain foreign governmental entities. Non-governmental plaintiffs in these cases include union health and welfare trust funds, Blue Cross/Blue Shield groups, health maintenance organizations, hospitals, native American tribes, taxpayers and others. Damages claimed in some of the smoking and health class actions and health care cost recovery cases range into the billions of dollars. There have been a number of jury verdicts in individual smoking and health cases over the past three years. In February 1999, a California jury awarded $1.5 million in compensatory damages and $50.0 million in punitive damages against PM Inc. PM Inc. has announced that it will appeal the verdict and the damage award. Prior to that, juries had returned verdicts for defendants in three individual smoking and health cases and in one individual ETS smoking and health case. In January 1999, a Florida court set aside a $1.0 million jury award in a smoking and health case against another United States cigarette manufacturer and ordered a new trial in the case. In June 1998, a Florida appeals court reversed a $750,000 jury verdict awarded in August 1996 against another United States cigarette manufacturer. Plaintiff is seeking an appeal of this ruling to the Florida Supreme Court. In Brazil, a court in 1997 awarded plaintiffs in a smoking and health case the Brazilian currency equivalent of $81,000, attorneys' fees and a monthly annuity for 35 years equal to two-thirds of the deceased smoker's last monthly salary. Neither the Company nor its affiliates were parties to that action. In recent years, there has been a substantial increase in the number of smoking and health cases being filed. As of December 31, 1998, there were approximately 510 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM Inc. and, in some cases, the Company, compared with approximately 375 such cases on December 31, 1997, and 185 such cases on December 31, 1996. Many of these cases are pending in Florida, West Virginia and New York. Fifteen of the individual cases involve allegations of various personal injuries allegedly related to exposure to ETS. In addition, as of December 31, 1998, there were approximately 60 smoking and health putative class actions pending in the United States against PM Inc. and, in some cases, the Company (including eight that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 50 such cases on December 31, 1997, and 20 such cases on December 31, 1996. Most of these actions purport to constitute statewide class actions and were filed after May 1996 when the Fifth Circuit Court of Appeals, in the Castano case, reversed a federal district court's certification of a purported nationwide class action on behalf of persons who were allegedly "addicted" to tobacco products. As of December 31, 1998, there were approximately 95 health care cost recovery actions pending in the United States (excluding the cases covered by the State Settlement Agreements discussed below), compared with approximately 105 health care cost recovery cases pending on December 31, 1997, and 25 such cases on December 31, 1996. In January 1999, President Clinton announced that the United States Department of Justice is preparing a litigation plan to take tobacco companies to court and to use recovered funds to strengthen Medicare. There are also a number of tobacco-related actions pending outside the United States against PMI and its affiliates and subsidiaries including, approximately 28 smoking and health cases initiated by one or more individuals (Argentina (20), Brazil (1), Canada (1), Italy (1), Japan (1), the Philippines (1), Scotland (1) and Turkey (2)), and six smoking and health class actions (Brazil (2), Canada (3) and Nigeria (1)). In addition, health care cost recovery actions have been brought in Israel, the Republic of the Marshall Islands and British Columbia, Canada, and, in the United States, by Thailand, Venezuela and the Republics of Bolivia, Guatemala, Panama and Nicaragua. Other foreign entities, including a local agency of the French social security 25 health insurance system, have stated that they are considering filing health care cost recovery actions. In addition to the foregoing smoking and health cases, a number of suits have been filed by former asbestos manufacturers, asbestos manufacturers' personal injury settlement trusts and, in one case, by an insurance company 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. Damages claimed in some of these cases range into the billions of dollars. It is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries. Litigation is subject to many uncertainties, and it is possible that some of these actions could be decided unfavorably. An unfavorable outcome or settlement of a 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 respective cases, that it has a number of valid defenses to all litigation pending against it. All such cases are, and will continue to be, vigorously defended. 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. Litigation settlements: In November 1998, PM Inc. and certain other United States tobacco product manufacturers entered into a Master Settlement Agreement (the "MSA") with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM Inc. and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the "State Settlement Agreements") and an ETS smoking and health class action brought on behalf of airline flight attendants. The State Settlement Agreements and certain ancillary agreements are filed as exhibits to various of the Company's reports filed with the Securities and Exchange Commission, and such agreements and the ETS settlement are discussed in detail therein, and the discussion herein is qualified by reference thereto. PM Inc. recorded pre-tax charges of $3.1 billion and $1.5 billion during 1998 and 1997, respectively, to accrue for its share of all fixed and determinable portions of its obligations under the tobacco settlements, as well as $300 million during 1998 for its unconditional obligation under an agreement in principle to contribute to a tobacco growers trust fund, discussed in Note 16. As of December 31, 1998, PM Inc. had accrued costs of its obligations under the settlements and to tobacco growers aggregating $1.4 billion, payable principally before the end of the year 2000. The settlement agreements require that the domestic tobacco industry make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement in principle with tobacco growers discussed in Note 16), subject to adjustment for several factors, including inflation, market share and industry volume: 1999, $4.2 billion (of which $2.7 billion related to the MSA and has already been paid by the industry); 2000, $9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion; and thereafter, $9.4 billion. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional amounts as follows: 1999, $450 million; 2000, $416 million; and 2001 through 2002, $250 million. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of the future adjusted payments and legal fees, which is not currently estimable, will be based on its share of domestic cigarette shipments in the year preceding that in which the payment is made. PM Inc.'s shipment share in 1998 was approximately 50%. The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to tobacco control and underage use laws and other provisions. Among other things, the MSA: (i) prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products; (ii) bans the use of cartoon characters in all tobacco advertising and promotion; (iii) limits each participating manufacturer in the MSA to one tobacco brand name sponsorship during any twelve-month period (except for wind-down of existing contracts). The single permitted sponsorship may not include major team sports or events in which the intended audience includes a significant percentage of youth. The agreement limits the advertising and promotion in connection with such permitted sponsorship, and bans agreements to name any stadium or arena in the name of a tobacco brand name; (iv) bans all outdoor advertising of tobacco products (including, but not limited to, billboards and tobacco advertising in transportation facilities, vehicles, enclosed stadia and 26 shopping malls), with the exception of signs fourteen square feet or less in dimension at retail establishments that sell tobacco products (other than solely through vending machines). The settling states may use removed billboards for anti-tobacco advertising for the duration of the existing lease period at the expense of the applicable participating manufacturer; (v) bars participating manufacturers from entering into agreements that prohibit a third party from selling, purchasing or displaying anti-tobacco advertising; (vi) prohibits payments for tobacco product placement in various media; (vii) bans participating manufacturers from offering or selling non-tobacco apparel and other merchandise that bears a tobacco brand name, subject to specified exceptions; (viii) prohibits the distribution of free samples of tobacco products except within an adult-only facility; (ix) bans gift offers based on the purchase of tobacco products without sufficient proof that the intended gift recipient is an adult; (x) prohibits each participating manufacturer from licensing or expressly authorizing third parties to advertise such manufacturer's tobacco brand names in any manner prohibited under the agreement to that manufacturer itself; (xi) prohibits participating manufacturers from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or individual celebrities, subject to specified exceptions; (xii) prohibits participating manufacturers from selling or manufacturing packs containing fewer than twenty cigarettes through December 31, 2001, and bars participating manufacturers from opposing proposed legislation to prohibit the sale of packs containing fewer than twenty cigarettes; (xiii) requires participating manufacturers to affirm corporate principles to comply with the agreement and to reduce underage usage of tobacco products; (xiv) imposes requirements applicable to lobbying activities conducted on behalf of participating manufacturers; (xv) prohibits participating manufacturers from agreeing to limit or suppress smoking and health information or research or product development research; (xvi) prohibits participating manufacturers from making any material misrepresentation of fact regarding the health consequences of using tobacco products; and (xvii) provides for the dissolution of the Council for Tobacco Research--U.S.A., Inc., The Tobacco Institute, Inc. and the Center for Indoor Air Research, Inc. and establishes rules for the regulation and oversight of any new tobacco-related trade association. As of January 22, 1999, the MSA had been approved by courts in 41 states and in the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and Northern Marianas. If a jurisdiction does not obtain final judicial approval of the MSA by December 31, 2001, the agreement will be terminated with respect to such jurisdiction. The Company believes that the State Settlement Agreements may materially adversely affect the business, volume, results of operations, cash flows or financial position of PM Inc. and the Company in future years. The degree of the adverse impact will depend, among other things, on the rates of decline in United States cigarette sales in the premium and discount segments, PM Inc.'s share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements. As of January 22, 1999, manufacturers representing almost all domestic shipments in 1998 had agreed to become subject to the terms of the MSA. Operating Results Operating (in millions) Operating Revenues Companies Income - -------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------- Domestic tobacco $15,310 $13,584 $12,462 $1,489 $3,287 $4,206 International tobacco 27,390 26,240 24,087 5,029 4,572 4,078 - -------------------------------------------------------------------------------- Total $42,700 $39,824 $36,549 $6,518 $7,859 $8,284 ================================================================================ In 1998, current year and historical operating revenues and operating companies income of the Company's domestic tobacco and international tobacco operations were reclassified to reflect the transfer of tobacco sales in certain U.S. territories from the international tobacco business to the domestic tobacco business, consistent with the terms of PM Inc.'s settlements of state health care cost recovery and other claims. 1998 Compared with 1997 Domestic tobacco: During 1998, PM Inc.'s operating revenues increased $1.7 billion (12.7%) over 1997, due primarily to pricing ($2.1 billion) and improved product mix ($33 million), partially offset by lower volume ($450 million). As discussed above, during 1998 and 1997, PM Inc. recorded pre-tax charges totaling $3.1 billion and $1.5 billion, respectively, as PM Inc. and other companies in the United States tobacco industry settled tobacco-related litigation. PM Inc. also recorded an additional pre-tax charge of $300 million in 1998 for a contribution to be made into a fund to compensate domestic tobacco growers for the economic impact that they may experience as a result of the settlement agreements. In addition, PM Inc. recorded pre-tax charges of $319 million related primarily to voluntary early retirement and separation programs for salaried and hourly employees. On February 24, 1999, PM Inc. announced that it plans to phase out cigarette production at its Louisville, Kentucky manufacturing plant by December 2000. PM Inc. estimates that this will result in a pre-tax charge of approximately $200 million, principally for severance, in the first half of 1999. Operating companies income for 1998 decreased $1.8 billion (54.7%) from 1997, due primarily to higher tobacco-related settlement charges ($1.9 billion), charges for voluntary early retirement and separation programs and severance 27 ($319 million), higher marketing, administration and research costs ($989 million, primarily higher marketing expenses as competition intensified), and lower volume ($295 million), partially offset by price increases, net of cost increases ($1.8 billion) and improved product mix. Excluding the impact of tobacco-related settlements and the voluntary early retirement and separation programs, PM Inc.'s operating companies income of $5,189 million in 1998 increased 9.4% over $4,744 million in 1997. Domestic tobacco industry shipment volume during 1998 declined 4.6% from 1997 primarily as a result of settlement-related price increases and wholesalers' decisions to lower their inventories at the end of the year as compared with a 1997 increase in wholesaler inventories, which PM Inc. believes was partially in anticipation of price increases. PM Inc.'s shipment volume for 1998 was 227.6 billion units, a decrease of 3.2% from 1997. For 1998, PM Inc.'s shipment market share was 49.4%, an increase of 0.7 share points over 1997. Marlboro shipment volume declined 1.5 billion units (0.9%) to 162.5 billion units for a 35.3% share of the total industry, an increase of 1.3 share points over 1997. Based on shipments, the premium segment accounted for approximately 73.0% of the domestic cigarette industry volume in 1998, an increase of 0.7 share points over 1997; however, during the fourth quarter the premium segment accounted for approximately 72.3% of domestic cigarette industry volume, an increase of 0.1 share points over the fourth quarter of 1997. In the premium segment, PM Inc.'s volume decreased 2.4% during 1998, compared with a 3.7% decrease for the industry, resulting in a premium segment share of 58.4%, an increase of 0.8 share points over 1997. In the discount segment, PM Inc.'s shipments decreased 8.1% to 31.0 billion units in 1998, compared with an industry decline of 6.9%, resulting in a discount segment share of 25.0%, a decrease of 0.3 share points from 1997. Basic shipment volume declined 111 million units to 23.4 billion units, for an 18.8% share of the discount segment, an increase of 1.2 share points over 1997. PM Inc. cannot predict future change or rates of change in domestic tobacco industry volume, the relative sizes of the premium and discount segments or in PM Inc.'s shipments, shipment market share 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. In November 1998, PM Inc. announced a price increase of $22.50 per thousand cigarettes on its domestic premium and discount brands. This announcement followed similar announcements of price increases of $3.00 per thousand in July 1998, $2.50 per thousand in May 1998, $2.50 per thousand in April 1998, $1.25 per thousand in January 1998, $3.50 per thousand in September 1997 and $2.50 per thousand in March 1997. Each $1.00 per thousand increase by PM Inc. equates to a $.02 increase in the wholesale price of each pack of twenty cigarettes. In December 1998, PM Inc. paid $150 million for options to purchase the U.S. rights to manufacture and market three cigarette trademarks, L&M, Lark and Chesterfield, the international rights to which are already owned by PMI. The exercise of the options is subject to certain conditions. Including the $150 million paid in December, the total acquisition price for these trademarks will be $300 million. L&M, Lark and Chesterfield represented less than 0.2% of domestic cigarette industry volume in 1998. International tobacco: During 1998, international tobacco operating revenues of PMI increased $1.2 billion (4.4%) over 1997, including excise taxes. Excluding excise taxes, operating revenues increased 2.9%, due primarily to price increases ($529 million), the consolidation of previously unconsolidated subsidiaries ($406 million) and favorable volume/mix ($126 million), partially offset by unfavorable currency movements ($857 million). Operating companies income for 1998 increased 10.0% over 1997, due primarily to price increases, net of cost increases ($460 million), favorable volume/mix ($96 million), the consolidation of previously unconsolidated subsidiaries ($40 million) and lower fixed manufacturing expenses and marketing, administration and research costs, partially offset by unfavorable currency movements ($336 million). PMI's volume increased 7.2 billion units (1.0%) from 1997 to 716.9 billion units, due primarily to volume gains in the higher-margin markets of Western Europe and Japan, partially offset by volume declines in certain lower-margin markets of Asia and Eastern Europe due to weaker business conditions. In PMI's established markets of Western Europe and Japan, 1998 volume grew a collective 5.8%. Volume advanced strongly in a number of important markets including Italy, France, the Benelux countries, Spain, Switzerland, the Middle East, Turkey, Poland, Hungary, Japan, Australia, Argentina and Mexico. In addition, PMI recorded market share gains in most major markets. In the Czech Republic, industry and PMI volumes were down, and in Germany, PMI's volume was essentially flat as a result of a tax-driven price increase. Overall volume growth was led by Marlboro, which increased 3.8% over 1997, partially offset by volume declines for L&M in Eastern Europe. Local brands also grew by 4.7% during 1998. 1997 Compared with 1996 Domestic tobacco: PM Inc.'s 1997 operating revenues increased $1.1 billion (9.0%) over 1996, due primarily to pricing ($783 million), higher volume ($222 million, including excise taxes) and improved product mix. Operating companies income for 1997 decreased $919 million (21.8%) from 1996, due primarily to previously discussed tobacco-related litigation settlement charges ($1.5 billion), higher marketing, administration and research costs ($195 million, primarily higher marketing expense) and higher fixed manufacturing costs ($79 million), partially offset by pricing ($625 million), higher volume ($142 million) and improved product mix. Excluding the impact of litigation settlement charges, PM Inc.'s operating companies income of $4,744 million in 1997 increased 12.8% over $4,206 million in 1996. 28 PM Inc.'s 1997 shipment volume was 235.2 billion units, an increase of 1.9% over 1996 on higher Marlboro volume and increased wholesaler purchases, which PM Inc. believes was partially in anticipation of price increases. Marlboro shipment volume increased 7.8 billion units (5.0%) to 164.0 billion units for a 34.0% share of the total industry, an increase of 1.8 share points over 1996. Domestic tobacco industry volume declined 0.6%; however, PM Inc. estimates that, excluding the effects of increased wholesaler buying mentioned above and one less shipping day in 1997, the industry's volume declined by more than 2.0% from 1996. Based on shipments, the premium and discount segments accounted for approximately 72.3% and 27.7%, respectively, of domestic cigarette industry volume in 1997, versus approximately 71.4% and 28.6%, respectively, in 1996, reflecting a continued shift to the higher-margin premium segment. PM Inc.'s 1997 shipment market share was 48.7%, an increase of 1.2 share points over 1996. In the premium segment, PM Inc.'s volume increased 3.4%, compared with a 0.6% increase for the industry, resulting in a premium segment share of 57.6%, an increase of 1.5 share points from 1996, reflecting higher Marlboro volume. In the discount segment, PM Inc.'s shipments decreased 6.4% to 33.7 billion units in 1997 compared with an industry decline of 4.0%, resulting in a discount segment share of 25.3%, a decrease of 0.6 share points from 1996. Within the discount segment, Basic shipment volume increased 355 million units to 23.5 billion units for a 17.6% share of the discount segment, an increase of 1.0 share point over 1996. International tobacco: During 1997, tobacco operating revenues of PMI increased $2.2 billion (8.9%) over 1996, including excise taxes. Excluding excise taxes, operating revenues increased 7.3%, due primarily to price increases ($679 million), favorable volume/mix ($618 million) and the consolidation of previously unconsolidated and newly acquired subsidiaries ($577 million), partially offset by unfavorable currency movements ($961 million). Operating companies income for 1997 increased 12.1% over 1996, due primarily to price increases, net of cost increases ($550 million), favorable volume/mix ($371 million) and the consolidation of previously unconsolidated and newly acquired subsidiaries ($114 million), partially offset by unfavorable currency movements ($408 million) and higher marketing, administration and research costs. PMI's volume grew 49.6 billion units (7.5%) in 1997 over 1996 to 709.7 billion units, including local brands manufactured by Tabaqueira-Empresa Industrial de Tabacos, S.A., Portugal's leading tobacco company in which PMI acquired a controlling interest in January 1997. Volume advanced in most major markets, including Germany, Italy, the Benelux countries, Spain, Central and Eastern Europe, the Middle East, Turkey, the Asia/Pacific region, Argentina and Mexico. In addition, PMI recorded market share gains in most major markets. In France, industry and PMI volumes were down, and in Brazil and Australia, PMI lost volume and share. However, volume and market share for Marlboro increased in France and Brazil. Overall volume growth was driven by PMI's portfolio of international brands, including Marlboro, which increased 5.5% over 1996, and Bond Street, Parliament, Chesterfield and Virginia Slims, each of which recorded double-digit volume increases. Food Business Environment Kraft Foods, Inc. ("Kraft"), the largest processor and marketer of retail packaged food in the United States, and its subsidiary KFI, which markets coffee, confectionery and grocery products in Europe 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. Additionally, certain subsidiaries and affiliates of PMI that manufacture and sell food products in Latin America are also subject to competitive challenges in various product categories and markets. To confront these challenges, Kraft, KFI and PMI 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. Fluctuations in commodity costs can cause retail price volatility, can intensify price competition and can influence consumer and trade buying patterns. The North American and international food businesses are subject to fluctuating commodity costs, particularly dairy, coffee bean and cocoa prices. During the second half of 1998, the cost of certain United States dairy commodities reached record high levels. Despite increased retail prices of certain products during 1998, high dairy commodity costs had an adverse impact on Kraft's operating results during the latter half of the year. However, dairy commodity costs began to moderate early in 1999. Coffee bean prices declined during the last three quarters of 1998, as compared with 1997, after reaching a twenty-year high in May 1997. Lower coffee bean prices in 1998 led to price reductions by Kraft, KFI and their competitors. During 1998, KFI sold four international food businesses. During 1997, PMI sold its Brazilian ice cream businesses, Kraft sold North American maple-flavored syrup businesses and KFI sold a Scandinavian sugar confectionery business. During 1996, Kraft sold its bagel business and KFI sold margarine businesses in the U.K. and Italy. In the fourth quarter of 1997, KFI and the food operations of PMI recorded realignment charges related primarily to the downsizing or closure of manufacturing and other facilities, as well as the discontinuance of certain low-margin product lines. Included in the charges were provisions for incremental postemployment benefits, primarily related to severance. During 1998, the Company undertook certain actions contemplated by the charges, including the divestiture or closure of four businesses, the commencement of two manufacturing facilities closures and consolidation of certain sales force and headquarters functions, and began to make periodic postemployment payments to 29 severed employees, the duration of such payments being dictated by the severed employees' salary grades, years of service and the customs of the respective countries in which actions were taken. KFI anticipates that the majority of the remaining postemployment payments will be made by the end of the year 2000. During January 1999, Kraft announced that it will take a pre-tax charge of approximately $150 million during 1999, primarily for voluntary retirement incentive and separation programs for employees in the United States. During 1998, Kraft entered into a licensing agreement with the Starbucks coffee chain to market, sell and distribute Starbucks coffee to grocery customers across the United States. In addition, Kraft entered into a licensing agreement with the California Pizza Kitchen restaurant chain to manufacture, market and sell California Pizza Kitchen frozen pizza to grocery customers. Kraft acquired the Taco Bell grocery business during 1996. In Latin America, PMI acquired nearly all of the remaining voting shares of Industrias de Chocolate Lacta S.A. ("Lacta"), a Brazilian confectionery company, in the second quarter of 1996. Operating Results Operating (in millions) Operating Revenues Companies Income - -------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------- North American food $17,312 $16,838 $16,447 $3,055 $2,873 $2,628 International food 9,999 10,852 11,503 1,127 1,326 1,303 - -------------------------------------------------------------------------------- Total $27,311 $27,690 $27,950 $4,182 $4,199 $3,931 ================================================================================ 1998 Compared with 1997 North American food: During 1998, operating revenues increased $474 million (2.8%) over 1997, due primarily to favorable volume ($510 million) and pricing ($212 million, primarily due to commodity-driven price increases), partially offset by the impact of divestitures ($90 million), unfavorable product mix ($56 million) and unfavorable currency movements ($103 million). Operating companies income for 1998 increased $182 million (6.3%) over 1997, due primarily to volume increases in ongoing operations ($284 million), price increases, net of cost increases ($166 million, including the impact of lower manufacturing and overhead costs which moderated the impact of higher cheese costs), partially offset by unfavorable marketing, administration and research costs ($118 million, due primarily to higher marketing), unfavorable product mix ($115 million), the impact of divestitures ($22 million) and unfavorable currency movements ($13 million). Excluding operating results of the North American food businesses divested in 1997, operating revenues of $17,312 million in 1998 increased 3.4% over $16,748 million in 1997, and operating companies income of $3,055 million in 1998 increased 7.2% over $2,851 million in 1997. Volume gains were driven by beverages, from the strength of ready-to-drink products, while powdered products decreased slightly; frozen pizza, from the continued success of rising crust pizza; meals, due to the growth of Taco Bell grocery products, as well as continued strength in macaroni and cheese dinners; cereals, aided by new product introductions; cheese, due to volume gains in most product lines and the introduction of new products; and processed meats, driven by continued growth of lunch combinations (including new product introductions) and growth in bacon. Coffee volume was slightly higher in 1998 due in part to commodity-driven price decreases. Enhancers volume was flat as increases in spoonable and pourable dressings were offset by declines in meat enhancements. Desserts and snacks volume was slightly lower, due to declines in dry packaged desserts and frozen toppings, partially offset by gains in ready-to-eat puddings. In Canada, volume decreased due to a planned reduction of trade promotions to more closely align them with business performance. International food: Operating revenues for 1998 decreased $853 million (7.9%) from 1997, due to unfavorable currency movements ($463 million), the impact of divestitures ($403 million), lower volume/mix ($39 million) and unfavorable pricing, partially offset by the impact of newly acquired and previously unconsolidated subsidiaries ($57 million). Operating companies income for 1998 decreased $199 million (15.0%) from 1997, due primarily to higher marketing, administration and research costs ($179 million), the impact of divestitures ($46 million) and unfavorable currency movements ($20 million), partially offset by favorable volume/mix ($24 million) and favorable pricing ($15 million, primarily related to lower coffee costs). The increase in marketing, administration and research costs reflects an unfavorable comparison to 1997 due primarily to a 1997 gain of $774 million on the divestiture of the Brazilian ice cream businesses, partially offset by 1997 charges totaling $630 million for the previously discussed realignment of international food operations and related incremental postemployment costs. Excluding the operating results of the divested international food businesses, the gain on the sale of the Brazilian ice cream businesses and the charges for realignment of international food operations, discussed above, operating revenues of $9,963 million in 1998 decreased 4.3% from $10,413 million in 1997, and operating companies income of $1,126 million in 1998 decreased 0.8% from $1,135 million in 1997. KFI's coffee volume decreased during 1998, as volume in the first half of the year was adversely affected by soft consumption and trade de-stocking in anticipation of price declines in certain markets, as well as a difficult comparison to 1997 when shipments were heavy in advance of rising retail prices. KFI's confectionery volume decreased due to market conditions in Russia and higher retail pricing in Germany. KFI's cheese and grocery volumes increased due primarily to higher shipments of cream cheese in Italy, Spain and Australia; cheese snacks and lunch combinations in the United Kingdom; snacks in Scandinavia; and powdered soft drinks in the Middle East and China. PMI's food volume in Latin America for 1998 decreased from 1997, due primarily to lower powdered soft drink volume in Argentina and lower confectionery volume in Brazil, partially offset by higher shipments of powdered soft drinks in Brazil and Mexico, as well as higher shipments of ready-to-drink beverages in Puerto Rico. 30 1997 Compared with 1996 North American food: During 1997, operating revenues increased $391 million (2.4%) over 1996, due to volume increases ($576 million), pricing ($275 million, primarily due to commodity-driven cost increases) and the impact of acquisitions ($93 million), partially offset by the impact of divestitures ($372 million), unfavorable product mix ($155 million) and unfavorable currency movements ($26 million). Operating companies income for 1997 increased $245 million (9.3%) over 1996, due primarily to price increases and net cost decreases (aggregating $377 million, aided by productivity-driven cost savings and lower cheese commodity costs) and volume increases ($335 million), partially offset by unfavorable product mix ($97 million), the impact of divestitures ($61 million), and higher marketing, administration and research costs ($304 million, due primarily to higher marketing expense, which included additional marketing activities for new products). Included in 1997 marketing, administration and research costs was a gain of $159 million on the sale of maple-flavored syrup businesses, as well as charges of $64 million related to the discontinuation of several small operations, Year 2000 systems conversion costs of $38 million and the above-mentioned additional marketing expense for new product initiatives. Excluding operating results of the divested North American food businesses discussed above, operating revenues of $16,748 million in 1997 increased 4.8% over $15,985 million in 1996, and operating companies income of $2,851 million in 1997 increased 12.0% over $2,545 million in 1996. Strong ongoing volume gains were driven by frozen pizza, resulting from geographic expansion and new products; beverages, from the strength of ready-to-drink products; meals, due to the acquisition and subsequent growth of Taco Bell grocery products as well as strength in macaroni and cheese dinners; cereals, aided by new product introductions; and desserts and snacks, due to new product introductions and strength in refrigerated ready-to-eat desserts, shelf-stable puddings and dry packaged desserts. Cheese volume also increased, benefiting from lower prices due to lower commodity costs, new products and marketing initiatives. Volume gains were also realized in processed meats, driven by continued growth of lunch combinations (including new product introductions) and growth in hot dogs and cold cuts. Coffee volume in 1997 declined from 1996 as customers reacted negatively to commodity-driven price increases. Volume for pourable salad dressings increased despite intense competition. In Canada, volume decreased due to a planned exit of lower-margin foodservice product lines; however, retail volume increased. International food: Operating revenues for 1997 decreased $651 million (5.7%) from 1996, due to unfavorable currency movements ($955 million), lower volume/mix ($70 million) and the impact of divestitures ($295 million), partially offset by pricing ($397 million) and the impact of newly acquired and previously unconsolidated subsidiaries ($272 million). Operating companies income for 1997 increased $23 million (1.8%) over 1996, due primarily to lower marketing, administration and research costs ($52 million), the impact of newly acquired and previously unconsolidated subsidiaries ($41 million) and the gain on the sale of PMI's Brazilian ice cream businesses ($774 million), partially offset by unfavorable currency movements ($62 million), cost increases, net of price increases (aggregating $59 million, primarily related to higher coffee and cocoa costs), the impact of divestitures ($108 million) and charges recorded during 1997 for the realignment of international food operations ($630 million). Marketing, administration and research costs included the previously discussed gain on the divestiture of the Brazilian ice cream businesses and international food realignment charges. Excluding the operating results of the divested international food businesses, the gain on the sale of the Brazilian ice cream businesses and the charges for realignment of international food operations, discussed above, operating revenues of $10,578 million in 1997 decreased 3.3% from $10,934 million in 1996, and operating companies income of $1,145 million in 1997 decreased 1.1% from $1,158 million in 1996. KFI's coffee volume decreased during 1997, reflecting customers' adverse reactions to commodity-driven price increases. KFI's confectionery volume, excluding the impact of divestitures, increased slightly due to volume increases in Ukraine and the former Yugoslavia, partially offset by lower Scandinavian volume, due to an exceptionally warm summer, and lower volume in Romania and Bulgaria, reflecting poor economic environments. KFI's cheese and grocery volumes, excluding the impact of divestitures, increased due primarily to gains in KFI's Asia/Pacific region, principally China, the Philippines and Australia. PMI's food volume in Latin America for 1997 increased over 1996, due primarily to the acquisition of Lacta and higher beverage volume. Beer 1998 compared with 1997: Operating revenues of the Miller Brewing Company ("Miller") for 1998 decreased $96 million (2.3%) from 1997, due primarily to lower volume ($97 million). Operating companies income for 1998 decreased $8 million (1.7%) from 1997, due primarily to lower volume ($40 million), the impact of divestitures ($14 million) and unfavorable price/mix ($10 million), partially offset by lower manufacturing expenses and marketing, administration and research costs ($51 million). Excluding the 1997 results of then 20%-owned Molson Breweries of Canada, operating companies income of $451 million in 1998 increased 1.3% over $445 million in 1997. Miller's domestic shipment volume of 41.7 million barrels for 1998 decreased 1.8% from 1997, due to decreases in premium and budget brands. Domestic shipments of premium products were below 1997 as lower shipments of Miller, Miller Lite and Miller Genuine Draft more than offset double-digit gains in Icehouse and Foster's. Domestic shipments of near-premium products were slightly higher than 1997 on increased shipments of the Miller High Life family and Red Dog. Shipments of budget products declined across all brands. Miller's estimated market share 31 of the U.S. malt beverage industry (based on shipments, including exports) was 21.0%, a decline of 0.7 share points from the prior year. Wholesalers' sales to retailers in 1998 decreased 1.3% from 1997, reflecting lower sales of Miller Lite, Miller and Miller Genuine Draft, partially offset by increased shipments of Icehouse and Foster's. Export shipments declined 18.6% from 1997, reflecting a shift toward international licensing agreements. The increase in international sales of Miller's products under such agreements more than offset the decrease in export shipments. On February 8, 1999, Miller announced an agreement to acquire four trademarks from the Pabst Brewing Company and the Stroh Brewery Company, subject to regulatory review. Miller also agreed to increase its contract manufacturing of Pabst products, including brands that Pabst has agreed to acquire from Stroh in a separate agreement. Miller estimates that the acquisition and increased contract manufacturing could result in incremental 1999 operating companies income, depending upon the timing of regulatory review and the subsequent beginning of production. 1997 compared with 1996: Miller's operating revenues for 1997 decreased $126 million (2.9%) from 1996, due to unfavorable price/mix ($114 million) and lower volume ($12 million). Operating companies income for 1997 increased $19 million (4.3%) over 1996, due primarily to lower marketing, administration and research costs ($67 million) and lower manufacturing costs ($25 million), partially offset by unfavorable price/mix ($71 million) and lower volume ($5 million). Included in marketing, administration and research costs was a $12 million gain on the sale of Miller's 20% equity interest in Molson Breweries of Canada along with a 49% interest in Molson USA, LLC, a beer import operation. Miller's domestic shipment volume of 42.5 million barrels for 1997 increased 0.8% over 1996, reflecting higher shipments of both premium and budget brands. Volume for domestic premium products increased on higher shipments of Miller Lite, Icehouse and Foster's, partially offset by lower shipments of Miller. Near-premium products grew on higher shipments of Miller High Life and Red Dog, while budget brands grew on higher shipments of Milwaukee's Best. Miller's estimated market share of the U.S. malt beverage industry (based on shipments, including exports) was 21.7%, as compared with 21.8% in the prior year. Wholesalers' sales to retailers in 1997 increased slightly from 1996, reflecting higher sales of Miller Lite. Export shipments decreased in 1997, reflecting a shift toward international licensing and contract brewing arrangements. International sales of Miller products under such arrangements more than offset the 1997 decrease in export shipments. Financial Services Philip Morris Capital Corporation ("PMCC"): Operating revenues and operating companies income declined from 1997 due to the sale of Mission Viejo Company in the third quarter of 1997 for a pre-tax gain of $103 million. Excluding the impact of the divestiture, operating revenues and operating companies income increased by 14.1% and 14.4%, respectively, reflecting increased leasing and structured finance investments and the continued profitability of PMCC's existing portfolio of finance assets. Financial Review Net cash provided by operating activities: During 1998, net cash provided by operating activities was $8.1 billion compared with $8.3 billion in 1997. The decrease was due primarily to tobacco settlement payments of $3.5 billion during 1998, partially offset by higher underlying net earnings (net earnings excluding previously mentioned settlement charges, voluntary early retirement and separation program charges, 1997 gains on sales of two businesses and the international food realignment charges). During 1997, net cash provided by operating activities was $8.3 billion compared with $7.6 billion in 1996. The increase was due primarily to higher net earnings, excluding litigation settlement charges. Net cash used in investing activities: During 1998, 1997 and 1996, net cash used in investing activities was $2.6 billion, $619 million and $2.1 billion, respectively. The increase from 1997 to 1998 and the decrease from 1996 to 1997 are both primarily attributable to $2.2 billion of cash proceeds from sales of businesses in 1997. Also affecting the comparison of 1998 to 1997 was lower cash spent on the acquisition of businesses ($613 million), partially offset by PM Inc.'s purchase of options to acquire three U.S. trademarks ($150 million). During 1997, $2.2 billion was provided by the sales of PMI's Brazilian ice cream businesses, Mission Viejo real estate operations and several other food and beer businesses. Also during 1997, PMI acquired a controlling interest in a Portuguese tobacco company and increased its ownership interest in a Mexican cigarette business for an aggregate cost of $620 million. During 1996, PMI acquired a controlling interest in a Polish tobacco company and nearly all of the remaining voting shares of a Brazilian confectionery company for an aggregate cost of $599 million. During 1996, the Company sold several domestic and international food businesses, including the North American bagel business, for proceeds of $612 million. Capital expenditures for 1998 decreased 3.7%, to $1.8 billion, of which 45% related to tobacco operations and 47% related to food operations, primarily for modernization and consolidation of manufacturing facilities and expansion of certain production capacity. Capital expenditures are expected to be approximately the same amount in 1999 and are currently expected to be funded from operations. Net cash used in financing activities: During 1998, the Company's net cash used in financing operations decreased to $3.9 billion from $5.5 billion in 1997. The decrease was primarily due to a $962 million net repayment of short-term borrowings and long-term debt during 1997 versus a net issuance of $332 mil- 32 lion in 1998 and lower cash paid for the repurchase of common stock in 1998 ($498 million). During 1997, the Company's net cash used in financing activities decreased to $5.5 billion, compared with $6.4 billion used in 1996, due primarily to lower stock repurchases, partially offset by higher dividends paid and an increase in net repayments of short-term borrowings and long-term debt. Debt and liquidity: The Company's total debt (consumer products and financial services) was $14.7 billion, $14.1 billion and $15.2 billion at December 31, 1998, 1997 and 1996, respectively. Total consumer products debt was $14.0 billion, $13.3 billion and $13.9 billion at December 31, 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, the Company's ratio of consumer products debt to total equity was 0.86 and 0.89, respectively. The ratio of total debt to total equity was 0.91 and 0.95 at December 31, 1998 and 1997, respectively. Fixed rate debt constituted approximately 91% and 98% of total consumer products debt at December 31, 1998 and 1997, respectively. The decrease reflects an interest rate swap agreement entered into by the Company during 1998. The agreement effectively converts $800 million of fixed rate debt to variable rate debt. The average interest rate on total consumer products debt, including the impact of currency and interest rate swap agreements discussed in Market Risk below, was approximately 7.2% and 7.6% at December 31, 1998 and 1997, respectively. The Company and its subsidiaries maintain credit facilities with a number of lending institutions, amounting to approximately $12.2 billion at December 31, 1998. Approximately $12.0 billion of these facilities were unused at December 31, 1998. These include revolving bank credit agreements totaling $10.0 billion, which may be used to support commercial paper borrowings by the Company and are available for acquisitions and other corporate purposes. Of these revolving bank agreements, an agreement for $2.0 billion expires in October 1999, and an agreement for $8.0 billion expires in 2002, enabling the Company to refinance short-term debt on a long-term basis. The Company expects that it may 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 December 31, 1998 and 1997 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 December 31, 1998 and 1997 were "A-1" in the commercial paper market and "A" for long-term debt obligations. As discussed in Note 16, PM Inc., along with other domestic tobacco companies, has entered into tobacco litigation settlement agreements that will require the domestic tobacco industry to make substantial future annual payments in the following amounts: 1999, $4.2 billion (of which $2.7 billion had already been paid by the industry at December 31, 1998); 2000, $9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion; and thereafter, $9.4 billion. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional amounts as follows: 1999, $450 million; 2000, $416 million; and 2001 and 2002, $250 million. The domestic tobacco industry has also agreed in principle to contribute $5.15 billion over a period of twelve years into a fund to compensate domestic tobacco growers for the potential adverse economic impact of the foregoing tobacco settlements. PM Inc.'s portion of the foregoing payments is subject to adjustment for several factors, including inflation, market share and industry volume. While PM Inc.'s share of future annual payments is not currently determinable, it is anticipated that such future payments will be funded primarily through price increases. Equity and dividends: During 1998 and 1997, the Company repurchased 6.5 million and 18.2 million shares of its common stock, respectively, at a cost of $350 million and $743 million, respectively. Purchases in 1998 were made in the fourth quarter when the Company resumed repurchases under an existing, three-year $8 billion authority approved by the Board of Directors in the first quarter of 1997, the duration of which was extended to November 2001 by the Board of Directors in the fourth quarter of 1998. Cumulative purchases under the $8 billion authority totaled $401 million at December 31, 1998. Dividends paid in 1998 were 2.5% higher than in 1997, reflecting a higher dividend rate in 1998. During the third quarter of 1998, the Company's Board of Directors approved a 10% increase in the quarterly dividend rate to $0.44. As a result, the annualized dividend rate increased to $1.76 from $1.60. Return on average stockholders' equity decreased to 34.5% in 1998 from 43.3% in 1997. The decrease from 1997 primarily reflects higher average stockholders' equity and the effect of litigation settlements in 1998. Cash and cash equivalents: Cash and cash equivalents increased to $4.1 billion at December 31, 1998 from $2.3 billion at December 31, 1997. The increase primarily reflects cash provided by operations, lower cash spent on acquisitions and lower common share repurchases, partially offset by litigation settlement payments and higher dividends. 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. 33 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 those instruments generally would be offset by increases in the value of those hedged 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, other Asian and Latin American currencies. Consequently, it enters into various contracts, which change in value as foreign exchange rates change, to preserve the value of commitments and anticipated transactions. The Company uses foreign currency option contracts to hedge certain anticipated foreign currency revenues and raw materials purchases. The Company also enters into short-term currency forward contracts, primarily to hedge intercompany transactions denominated in foreign currencies and to hedge the purchase of commodities. At December 31, 1998, the Company had long and short forward exchange/option contracts with U.S. dollar equivalent values of $3.6 billion and $4.5 billion, respectively. At December 31, 1997, the Company had long and short forward exchange/option contracts with U.S. dollar equivalent values of $1.3 billion and $1.2 billion, respectively. The Company also seeks to protect its foreign currency net asset exposure, primarily the Swiss franc and German mark, through the use of foreign-currency denominated debt or currency swap agreements. At December 31, 1998 and 1997, the notional amounts of currency swap agreements aggregated $2.5 billion and $1.4 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 coffee, cocoa, sugar, wheat and corn. At December 31, 1998 and 1997, the Company had net long commodity positions of $158 million and $266 million, respectively. Unrealized losses on net commodity positions were immaterial at December 31, 1998 and 1997. 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. The Company's percentage of fixed rate debt to total debt (consumer products and financial services) was 93% and 98% at December 31, 1998 and 1997, respectively. The decrease reflects an interest rate swap agreement entered into by the Company during 1998. The agreement effectively converts $800 million of fixed rate debt to variable rate debt. The Company had no interest rate swap agreements at December 31, 1997. Use of the above-mentioned derivative financial instruments has not had a material impact on the Company's financial position at December 31, 1998 and 1997 or the Company's results of operations for the years ended December 31, 1998, 1997 and 1996. Value at risk: The Company uses a value at risk ("VAR") computation to estimate the potential one-day loss in the fair value of its interest rate-sensitive financial instruments and to estimate the one-day loss in pre-tax earnings of its foreign currency and commodity price-sensitive derivative financial instruments. The VAR computation includes the Company's debt; short-term investments; foreign currency forwards, swaps and options; and commodity futures, forwards and options. Anticipated transactions, foreign currency trade payables and receivables, and net investments in foreign subsidiaries, which the foregoing instruments are intended to hedge, were excluded from the computation. The VAR estimates were made assuming normal market conditions, using a 95% confidence interval. The Company used a "variance/co-variance" model to determine the observed interrelationships between movements in interest rates and various currencies. These interrelationships were determined by observing interest rate and forward currency rate movements over the preceding quarter for the calculation of VAR amounts at December 31, 1998 and 1997 and over each of the four preceding quarters for the calculation of average VAR amounts during each year. The values of foreign currency and commodity options do not change on a one-to-one basis with the underlying currency or commodity and were valued accordingly in the VAR computation. The estimated potential one-day loss in fair value of the Company's interest rate-sensitive instruments, primarily debt, under normal market conditions and the estimated potential one-day loss in pre-tax earnings from foreign currency and commodity instruments under normal market conditions, as calculated in the VAR model, follow: Earnings Impact ---------------------------------------------- At (in millions) 12/31/98 Average High Low - -------------------------------------------------------------------------------- Instruments sensitive to: Foreign currency rates $41 $17 $41 $ 7 Commodity prices $ 2 $ 4 $ 6 $ 2 - -------------------------------------------------------------------------------- Fair Value Impact ---------------------------------------------- At (in millions) 12/31/98 Average High Low - -------------------------------------------------------------------------------- Instruments sensitive to: Interest rates $47 $45 $60 $36 - -------------------------------------------------------------------------------- 34 Earnings Impact ---------------------------------------------- At (in millions) 12/31/97 Average High Low - -------------------------------------------------------------------------------- Instruments sensitive to: Foreign currency rates $5 $7 $15 $3 Commodity prices $7 $8 $17 $5 - -------------------------------------------------------------------------------- Fair Value Impact ---------------------------------------------- At (in millions) 12/31/97 Average High Low - -------------------------------------------------------------------------------- Instruments sensitive to: Interest rates $37 $40 $47 $37 - -------------------------------------------------------------------------------- The VAR computation is a risk analysis tool designed to statistically estimate the maximum probable daily loss from adverse movements in interest rates, foreign currency rates and commodity prices under normal market conditions. The computation does not purport to represent actual losses in fair value or earnings to be incurred by the Company, nor does it consider the effect of favorable changes in market rates. The Company cannot predict actual future movements in such market rates and does not present these VAR results to be indicative of future movements in such market rates or to be representative of any actual impact that future changes in market rates may have on its future results of operations or financial position. New Accounting Standards During 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which must be adopted by the Company by January 1, 2000. 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. The Company has not yet determined the impact that adoption or subsequent application of SFAS No. 133 will have on its financial position or results of operations. In 1998, the American Institute of Certified Public Accountants' Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires certain costs incurred in connection with developing or obtaining internal-use software to be capitalized and other costs to be expensed. The Company adopted SOP No. 98-1 effective January 1, 1998, and its application for the year ended December 31, 1998 had no material effect on the Company's financial position or results of operations. In 1998, AcSEC issued SOP No. 98-5, "Reporting on the Costs of Start-Up Activities." SOP No. 98-5 establishes standards on accounting for start-up and organization costs, and in general, requires such costs to be expensed as incurred. This standard is required to be adopted on January 1, 1999. Adoption of SOP No. 98-5 will have no material effect on the Company's financial position or results of operations. Contingencies See Note 16 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. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company; any such statement is qualified by reference to the following cautionary statements. The tobacco industry continues to be subject to health concerns relating to the use of tobacco products and exposure to ETS, legislation, including tax increases, governmental regulation, privately imposed smoking restrictions, governmental and grand jury investigations, litigation, and the effects of price increases related to concluded tobacco litigation settlements. Each of the Company's operating subsidiaries is subject to intense competition, changes in consumer preferences, the effects of changing prices for its raw materials, local economic conditions and the potential impact of the CDC issue or the conversion to the euro. The performance of each of PMI, KFI and Kraft is affected by foreign economies 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. 35 SELECTED FINANCIAL DATA--ELEVEN-YEAR REVIEW (in millions of dollars, except per share data)
- -------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Summary of Operations: Operating revenues $ 74,391 $ 72,055 $ 69,204 $ 66,071 United States export sales 6,005 6,705 6,476 5,920 Cost of sales 26,820 26,689 26,560 26,685 Federal excise taxes on products 3,438 3,596 3,544 3,446 Foreign excise taxes on products 13,140 12,345 11,107 9,486 - -------------------------------------------------------------------------------------------------------------- Operating income 9,977 11,663 11,769 10,526 Interest and other debt expense, net 890 1,052 1,086 1,179 Earnings before income taxes and cumulative effect of accounting changes 9,087 10,611 10,683 9,347 Pre-tax profit margin 12.2% 14.7% 15.4% 14.1% Provision for income taxes 3,715 4,301 4,380 3,869 - -------------------------------------------------------------------------------------------------------------- Earnings before cumulative effect of accounting changes 5,372 6,310 6,303 5,478 Cumulative effect of accounting changes (28) Net earnings 5,372 6,310 6,303 5,450 Basic EPS before cumulative effect of accounting changes 2.21 2.61 2.57 2.18 Per share cumulative effect of accounting changes (0.01) - -------------------------------------------------------------------------------------------------------------- Basic EPS 2.21 2.61 2.57 2.17 Diluted EPS before cumulative effect of accounting changes 2.20 2.58 2.54 2.16 Per share cumulative effect of accounting changes (0.01) Diluted EPS 2.20 2.58 2.54 2.15 Dividends declared per share 1.68 1.60 1.47 1.22 Weighted average shares (millions)--Basic 2,429 2,420 2,456 2,517 Weighted average shares (millions)--Diluted 2,446 2,442 2,482 2,538 - -------------------------------------------------------------------------------------------------------------- Capital expenditures 1,804 1,874 1,782 1,621 Depreciation 1,106 1,044 1,037 1,024 Property, plant and equipment, net (consumer products) 12,335 11,621 11,751 11,116 Inventories (consumer products) 9,445 9,039 9,002 7,862 Total assets 59,920 55,947 54,871 53,811 Total long-term debt 12,615 12,430 12,961 13,107 Total debt--consumer products 13,953 13,258 13,933 14,372 --financial services and real estate 709 845 1,307 1,454 - -------------------------------------------------------------------------------------------------------------- Total deferred income taxes 3,638 3,382 3,336 2,827 Stockholders' equity 16,197 14,920 14,218 13,985 Common dividends declared as a % of Basic EPS 76.0% 61.3% 57.2% 56.2% Common dividends declared as a % of Diluted EPS 76.4% 62.0% 57.9% 56.7% Book value per common share outstanding 6.66 6.15 5.85 5.61 Market price per common share--high/low 59.50-34.75 48.13-36.00 39.67-28.54 31.46-18.58 - -------------------------------------------------------------------------------------------------------------- Closing price of common share at year end 53.50 45.25 37.67 30.08 Price/earnings ratio at year end--Basic 24 17 15 14 Price/earnings ratio at year end--Diluted 24 18 15 14 Number of common shares outstanding at year end (millions) 2,431 2,425 2,430 2,493 Number of employees 144,000 152,000 154,000 151,000 ==============================================================================================================
See notes to the consolidated financial statements regarding acquisitions and divestitures in 1998, 1997 and 1996; the international food realignment in 1997; tobacco and other litigation settlement charges in 1998 and 1997; and 1998 charges for early retirement and separation programs for domestic tobacco and corporate employees. 36
- ----------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 - ----------------------------------------------------------------------------------------- $ 65,125 $ 60,901 $ 59,131 $ 56,458 $ 51,169 $ 44,080 $ 31,273 4,942 4,105 3,797 3,061 2,928 2,288 1,863 28,351 26,771 26,082 25,612 24,430 21,868 13,565 3,431 3,081 2,879 2,978 2,159 2,140 2,127 7,918 7,199 6,157 5,416 4,687 3,608 3,755 - ----------------------------------------------------------------------------------------- 9,449 7,587 10,059 8,622 7,946 6,789 4,397 1,233 1,391 1,451 1,651 1,635 1,731 670 8,216 6,196 8,608 6,971 6,311 5,058 3,727 12.6% 10.2% 14.6% 12.3% 12.3% 11.5% 11.9% 3,491 2,628 3,669 3,044 2,771 2,112 1,663 - ----------------------------------------------------------------------------------------- 4,725 3,568 4,939 3,927 3,540 2,946 2,064 (477) (921) 273 4,725 3,091 4,939 3,006 3,540 2,946 2,337 1.82 1.35 1.82 1.41 1.28 1.06 0.74 (0.18) (0.33) 0.10 - ----------------------------------------------------------------------------------------- 1.82 1.17 1.82 1.08 1.28 1.06 0.84 1.81 1.35 1.80 1.40 1.27 1.05 0.73 (0.18) (0.33) 0.10 1.81 1.17 1.80 1.07 1.27 1.05 0.83 1.01 0.87 0.78 0.64 0.52 0.42 0.34 2,597 2,633 2,717 2,773 2,774 2,778 2,796 2,610 2,645 2,741 2,798 2,792 2,797 2,805 - ----------------------------------------------------------------------------------------- 1,726 1,592 1,573 1,562 1,355 1,246 1,024 1,025 1,042 963 938 876 755 608 11,171 10,463 10,530 9,946 9,604 8,457 8,648 7,987 7,358 7,785 7,445 7,153 5,751 5,384 52,649 51,205 50,014 47,384 46,569 38,528 36,960 14,975 15,221 14,583 14,213 16,121 14,551 16,812 14,978 16,364 16,269 15,289 17,182 14,887 16,442 1,494 1,792 1,934 1,611 1,560 1,538 1,504 - ----------------------------------------------------------------------------------------- 2,496 2,168 2,248 1,803 2,083 1,732 1,559 12,786 11,627 12,563 12,512 11,947 9,571 7,679 55.5% 74.4% 42.9% 59.3% 40.6% 39.6% 40.5% 55.8% 74.4% 43.3% 59.8% 40.9% 40.0% 41.0% 5.00 4.42 4.69 4.53 4.30 3.43 2.77 21.50-15.75 25.88-15.00 28.88-23.17 27.25-16.08 17.33-12.00 15.17-8.33 8.50-6.71 - ----------------------------------------------------------------------------------------- 19.17 18.54 25.71 26.75 17.25 13.88 8.50 11 16 14 25 13 13 10 11 16 14 25 14 13 10 2,559 2,631 2,679 2,760 2,778 2,787 2,772 165,000 173,000 161,000 166,000 168,000 157,000 155,000 =========================================================================================
37 CONSOLIDATED BALANCE SHEETS (in millions of dollars, except per share data) at December 31, - -------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------- Assets Consumer products Cash and cash equivalents $ 4,081 $ 2,282 Receivables, net 4,691 4,294 Inventories: Leaf tobacco 4,729 4,348 Other raw materials 1,728 1,689 Finished product 2,988 3,002 - -------------------------------------------------------------------------------- 9,445 9,039 Other current assets 2,013 1,825 - -------------------------------------------------------------------------------- Total current assets 20,230 17,440 Property, plant and equipment, at cost: Land and land improvements 655 666 Buildings and building equipment 5,386 5,114 Machinery and equipment 13,771 12,667 Construction in progress 1,422 1,555 - -------------------------------------------------------------------------------- 21,234 20,002 Less accumulated depreciation 8,899 8,381 - -------------------------------------------------------------------------------- 12,335 11,621 Goodwill and other intangible assets (less accumulated amortization of $5,436 and $4,814) 17,566 17,789 Other assets 3,309 3,211 - -------------------------------------------------------------------------------- Total consumer products assets 53,440 50,061 Financial services Finance assets, net 6,324 5,712 Other assets 156 174 - -------------------------------------------------------------------------------- Total financial services assets 6,480 5,886 - -------------------------------------------------------------------------------- Total Assets $59,920 $55,947 ================================================================================ See notes to consolidated financial statements. 38
- ----------------------------------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------------------------------- Liabilities Consumer products Short-term borrowings $ 225 $ 157 Current portion of long-term debt 1,822 1,516 Accounts payable 3,359 3,318 Accrued liabilities: Marketing 2,637 2,149 Taxes, except income taxes 1,408 1,234 Employment costs 968 1,083 Settlement charges 1,135 886 Other 2,608 2,894 Income taxes 1,144 862 Dividends payable 1,073 972 - ----------------------------------------------------------------------------------------------------- Total current liabilities 16,379 15,071 Long-term debt 11,906 11,585 Deferred income taxes 929 889 Accrued postretirement health care costs 2,543 2,432 Other liabilities 7,019 6,218 - ----------------------------------------------------------------------------------------------------- Total consumer products liabilities 38,776 36,195 Financial services Long-term debt 709 845 Deferred income taxes 4,151 3,877 Other liabilities 87 110 - ----------------------------------------------------------------------------------------------------- Total financial services liabilities 4,947 4,832 - ----------------------------------------------------------------------------------------------------- Total liabilities 43,723 41,027 Contingencies (Note 16) 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 26,261 24,924 Accumulated other comprehensive earnings (including currency translation of $1,081 and $1,109) (1,106) (1,109) Cost of repurchased stock (375,426,742 and 380,474,028 shares) (9,893) (9,830) - ----------------------------------------------------------------------------------------------------- Total stockholders' equity 16,197 14,920 - ----------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 59,920 $ 55,947 =====================================================================================================
See notes to consolidated financial statements. 39 CONSOLIDATED STATEMENTS OF EARNINGS (in millions of dollars, except per share data) for the years ended December 31, - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Operating revenues $74,391 $72,055 $69,204 Cost of sales 26,820 26,689 26,560 Excise taxes on products 16,578 15,941 14,651 - -------------------------------------------------------------------------------- Gross profit 30,993 29,425 27,993 Marketing, administration and research costs 17,051 15,720 15,630 Settlement charges (Note 16) 3,381 1,457 Amortization of goodwill 584 585 594 - -------------------------------------------------------------------------------- Operating income 9,977 11,663 11,769 Interest and other debt expense, net 890 1,052 1,086 - -------------------------------------------------------------------------------- Earnings before income taxes 9,087 10,611 10,683 Provision for income taxes 3,715 4,301 4,380 - -------------------------------------------------------------------------------- Net earnings $ 5,372 $ 6,310 $ 6,303 ================================================================================ Per share data: Basic earnings per share $ 2.21 $ 2.61 $ 2.57 ================================================================================ Diluted earnings per share $ 2.20 $ 2.58 $ 2.54 ================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions of dollars)
for the years ended December 31, - ------------------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Cash Provided By (Used In) Operating Activities Net earnings--Consumer products $5,255 $6,152 $6,180 --Financial services 117 158 123 - ------------------------------------------------------------------------------------------------------ Net earnings 5,372 6,310 6,303 Adjustments to reconcile net earnings to operating cash flows: Consumer products Depreciation and amortization 1,690 1,629 1,631 International food realignment 630 Deferred income tax provision (benefit) 11 (188) 163 Gain on sale of Brazilian ice cream businesses (774) Gains on sales of other businesses (196) (320) Cash effects of changes, net of the effects from acquired and divested companies: Receivables, net (352) (168) 35 Inventories (192) (531) (952) Accounts payable (150) 37 60 Income taxes 565 48 373 Accrued liabilities and other current assets 254 726 (448) Other 671 653 527 ======================================================================================================
See notes to consolidated financial statements. 40 CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
for the years ended December 31, - -------------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------- Financial services Deferred income tax provision $ 265 $ 257 $ 224 Gain on sale of business (103) Other (14) 10 38 - -------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,120 8,340 7,634 - -------------------------------------------------------------------------------------------- Cash Provided By (Used In) Investing Activities Consumer products Capital expenditures (1,804) (1,874) (1,782) Purchase of businesses, net of acquired cash (17) (630) (616) Proceeds from sales of businesses 16 1,784 612 Other (154) 42 (47) Financial services Investments in finance assets (736) (652) (439) Proceeds from finance assets 141 287 217 Proceeds from sale of business 424 - -------------------------------------------------------------------------------------------- Net cash used in investing activities (2,554) (619) (2,055) - -------------------------------------------------------------------------------------------- Cash Provided By (Used In) Financing Activities Consumer products Net issuance (repayment) of short-term borrowings 61 (1,482) (1,119) Long-term debt proceeds 2,065 2,893 2,699 Long-term debt repaid (1,616) (1,987) (1,979) Financial services Net repayment of short-term borrowings (173) (498) Long-term debt proceeds 174 363 Long-term debt repaid (178) (387) Repurchase of common stock (307) (805) (2,770) Dividends paid (3,984) (3,885) (3,462) Issuance of common stock 265 205 448 Other (200) (74) (88) - -------------------------------------------------------------------------------------------- Net cash used in financing activities (3,894) (5,521) (6,406) - -------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 127 (158) (71) - -------------------------------------------------------------------------------------------- Cash and cash equivalents: Increase (decrease) 1,799 2,042 (898) Balance at beginning of year 2,282 240 1,138 - -------------------------------------------------------------------------------------------- Balance at end of year $ 4,081 $ 2,282 $ 240 ============================================================================================ Cash paid: Interest--Consumer products $ 1,141 $ 1,219 $ 1,244 ============================================================================================ --Financial services $ 79 $ 79 $ 95 ============================================================================================ Income taxes $ 2,644 $ 3,794 $ 3,424 ============================================================================================
See notes to consolidated financial statements. 41 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in millions of dollars, except per share data)
Accumulated Other Comprehensive Earnings --------------------------------- Earnings Reinvested Currency Cost of Total Common in the Translation Repurchased Stockholders' Stock Business Adjustments Other Total Stock Equity - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Balances, January 1, 1996 $ 935 $19,811 $ 467 $ (32) $ 435 $(7,196) $13,985 Comprehensive earnings: Net earnings 6,303 6,303 Other comprehensive earnings, net of income taxes: Currency translation adjustments (275) (275) (275) Net unrealized appreciation on securities 30 30 30 - ----------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive earnings (245) - ----------------------------------------------------------------------------------------------------------------------------------- Total comprehensive earnings 6,058 - ----------------------------------------------------------------------------------------------------------------------------------- Exercise of stock options and issuance of other stock awards (28) 609 581 Cash dividends declared ($1.47 per share) (3,606) (3,606) Stock repurchased (2,800) (2,800) - ----------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1996 935 22,480 192 (2) 190 (9,387) 14,218 Comprehensive earnings: Net earnings 6,310 6,310 Other comprehensive earnings, net of income taxes: Currency translation adjustments (1,301) (1,301) (1,301) Net unrealized appreciation on securities 2 2 2 - ----------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive earnings (1,299) - ----------------------------------------------------------------------------------------------------------------------------------- Total comprehensive earnings 5,011 - ----------------------------------------------------------------------------------------------------------------------------------- Exercise of stock options and issuance of other stock awards 14 300 314 Cash dividends declared ($1.60 per share) (3,880) (3,880) Stock repurchased (743) (743) - ----------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1997 935 24,924 (1,109) (1,109) (9,830) 14,920 Comprehensive earnings: Net earnings 5,372 5,372 Other comprehensive earnings, net of income taxes: Currency translation adjustments 28 28 28 Additional minimum pension liability (25) (25) (25) - ----------------------------------------------------------------------------------------------------------------------------------- Total other comprehensive earnings 3 - ----------------------------------------------------------------------------------------------------------------------------------- Total comprehensive earnings 5,375 - ----------------------------------------------------------------------------------------------------------------------------------- Exercise of stock options and issuance of other stock awards 50 287 337 Cash dividends declared ($1.68 per share) (4,085) (4,085) Stock repurchased (350) (350) - ----------------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1998 $ 935 $26,261 $(1,081) $ (25) $(1,106) $(9,893) $16,197 ===================================================================================================================================
See notes to consolidated financial statements. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Note 1. Summary of Significant Accounting Policies: Basis of presentation: The consolidated financial statements include all significant subsidiaries. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of operating revenues and expenses during the reporting periods. Actual results could differ from those estimates. Balance sheet accounts are segregated by two broad types of business. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordance with respective industry practices. Certain prior years' amounts have been reclassified to conform with the current year's presentation. Cash and cash equivalents: Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out ("LIFO") method is used to cost substantially all domestic inventories. The cost of other inventories is determined by the average cost or first-in, first-out methods. It is a generally recognized industry practice to classify leaf tobacco inventory as a current asset although part of such inventory, because of the duration of the aging process, ordinarily would not be utilized within one year. Impairment of long-lived assets: The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed, if any, are based on the estimated proceeds to be received, less costs of disposal. Depreciation, amortization and goodwill valuation: Depreciation is recorded by the straight-line method. Goodwill and other intangible assets substantially comprise brand names purchased through acquisitions, which are amortized on the straight-line method over 40 years. The Company periodically evaluates the recoverability of its intangible assets and measures any impairment by comparison to estimated undiscounted cash flows from future operations. Advertising costs: Advertising costs are expensed as incurred. Revenue recognition: The Company recognizes operating revenues upon shipment of goods to customers. Hedging instruments: The Company utilizes certain financial instruments to manage its foreign currency, commodity and interest rate exposures. The Company does not engage in trading or other speculative use of these financial instruments. To qualify as a hedge, the Company must be exposed to price, currency or interest rate risk and the financial instrument must reduce the exposure and be designated as a hedge. Additionally, for hedges of anticipated transactions, the significant characteristics and expected terms of the anticipated transaction must be identified and it must be probable that the anticipated transaction will occur. Financial instruments qualifying for hedge accounting must maintain a high correlation between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company uses forward contracts, options and swap agreements to mitigate its foreign currency exposure. The corresponding gains and losses on those contracts are deferred and included in the basis of the underlying hedged transactions when settled. Options are used to hedge anticipated transactions. Option premiums are recorded generally as other current assets on the consolidated balance sheets and amortized to interest and other debt expense, net over the lives of the related options. The values of options, excluding their time values, are 43 recognized as adjustments to the related hedged items. If anticipated transactions were not to occur, any gains or losses would be recognized in earnings currently. Foreign currency and related interest rate swap agreements are used to hedge certain foreign currency net investments. Realized and unrealized gains and losses on foreign currency swap agreements that are effective as hedges of net assets in foreign subsidiaries are offset against currency translation adjustments as a component of stockholders' equity. The interest differential to be paid or received under the currency and related interest rate swap agreements is recognized over the life of the related debt and is included in interest and other debt expense, net. Gains and losses on terminated foreign currency swap agreements, if any, are recorded as currency translation adjustments, which is a component of stockholders' equity. Commodity futures and forward contracts are used by the Company to procure raw materials, primarily coffee, cocoa, sugar, wheat and corn. Commodity futures and options are also used to hedge the price of certain commodities, primarily coffee and cocoa. Realized gains and losses on commodity futures, forward contracts and options are deferred as a component of inventories and are recognized when related raw material costs are charged to cost of sales. If the anticipated transaction were not to occur, the gains and losses would be recognized in earnings currently. Interest rate swap agreements are accounted for on an accrual basis with the net receivable or payable recognized as an adjustment to interest expense. Gains and losses on terminated interest rate swaps, if any, are recognized over the remaining life of the arrangement, or immediately, if the hedged items do not remain outstanding. The fair value of the interest rate swap agreements and changes in these fair values as a result of changes in market interest rates are not recognized in the consolidated financial statements. During 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which must be adopted by the Company by January 1, 2000. 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. The Company has not yet determined the impact that adoption or subsequent application of SFAS No. 133 will have on its financial position or results of operations. Stock-based compensation: The Company accounts for employee stock compensation plans in accordance with the intrinsic value-based method permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," which generally does not result in compensation cost. Software costs: The Company capitalizes certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use in accordance with Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which was adopted by the Company as of January 1, 1998. The adoption of SOP 98-1 had no material effect on the Company's financial position or results of operations. Capitalized costs are amortized on a straight-line basis over the estimated useful lives of the software. Note 2. Divestitures: During 1997, the Company sold several domestic and international food businesses, including its Brazilian ice cream businesses and its North American maple-flavored syrup businesses, for total proceeds of $1.5 billion and net pre-tax gains of $958 million. In addition, the Company sold its equity interest in a Canadian beer operation and sold a minority interest in a beer import operation for proceeds of $306 million and a pre-tax gain of $12 million. The Company also sold its real estate operations for total proceeds of $424 million and a pre-tax gain of $103 million. During 1996, the Company sold several domestic and international food businesses, including its North American bagel business, for total proceeds of $612 million and net pre-tax gains of $320 million. 44 The operating results of these businesses were not material to the Company's consolidated operating results in any of the periods presented. Pre-tax gains on these divestitures were included in marketing, administration and research costs on the Company's consolidated statements of earnings. Note 3. Acquisitions: During December 1998, the Company's domestic tobacco subsidiary paid $150 million for options to purchase the voting and non-voting common stock of a company ("the acquiree"), the sole assets of which are three U.S. cigarette brands. The exercise of the options is subject to regulatory approval. Upon exercise of these options, the Company will acquire all the common stock of the acquiree for an additional $150 million. During 1997, the Company acquired a controlling interest in a Portuguese tobacco company at a cost of $217 million and increased its ownership interest in a Mexican cigarette business from 28.8% to 50.0% at a cost of $403 million. During 1996, the Company acquired a controlling interest in a Polish tobacco company, at a cost of $285 million and nearly all of the remaining voting shares of a Brazilian confectionery company, at a cost of $314 million. The effects of these and other smaller acquisitions were not material to the Company's financial position or results of operations in any of the periods presented. Note 4. Food Realignment Charges: In the fourth quarter of 1997, the Company's international food operations recorded a charge of $342 million related primarily to the downsizing or closure of manufacturing and other facilities, as well as the discontinuance of certain low-margin product lines. The Company also recorded a charge of $288 million for incremental postemployment benefits, primarily related to severance. In 1996, the Company's North American food and international food operations charged $252 million and $68 million, respectively, to marketing, administration and research costs. These charges related primarily to the downsizing and closure of certain food manufacturing facilities, related incremental postemployment costs, primarily severance, and an early retirement program. These charges, which were recorded to marketing, administration and research costs, reduced earnings before income taxes by $630 million and $320 million in 1997 and 1996, respectively. Note 5. Inventories: The cost of approximately 50% of inventories in 1998 and 1997 was determined using the LIFO method. The stated LIFO values of inventories were approximately $1.1 billion and $1.0 billion lower than the current cost of inventories at December 31, 1998 and 1997, respectively. Note 6. Short-Term Borrowings and Borrowing Arrangements: At December 31, the Company's short-term borrowings and related average interest rates consisted of the following: (in millions) - ------------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------------- Average Average Amount Year-End Amount Year-End Outstanding Rate Outstanding Rate =============================================================================== Consumer products: Bank loans $260 10.3% $194 8.8% Amount reclassified as long-term debt (35) (37) - ------------------------------------------------------------------------------- $225 $157 =============================================================================== The fair values of the Company's short-term borrowings at December 31, 1998 and 1997, based upon market rates, approximate the amounts disclosed above. The Company and its subsidiaries maintain credit facilities with a number of lending institutions, amounting to approximately $12.2 billion at December 31, 1998. Approximately $12.0 billion of these facilities were unused at December 31, 1998. Certain of these facilities are used to support commercial paper borrowings, are available for acquisitions and other corporate purposes and require the maintenance of a fixed charges coverage ratio. The Company's credit facilities include revolving bank credit agreements totaling $10.0 billion. Included in this total are an agreement for $2.0 billion, which expires in October 1999, and an agreement for $8.0 billion, expiring in 2002, which enable the Company to refinance short-term debt on a long-term basis. Accordingly, short-term borrowings intended to be refinanced were reclassified as long-term debt. 45 Note 7. Long-Term Debt: At December 31, 1998 and 1997 the Company's long-term debt consisted of the following: (in millions) - ------------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------------- Consumer products: Short-term borrowings, reclassified $ 35 $ 37 Notes, 6.15% to 9.25% (average effective rate 7.39%), due through 2008 9,615 9,735 Debentures, 6.00% to 8.50% (average effective rate 9.90%), $1.9 billion face amount, due through 2027 1,691 1,830 Foreign currency obligations: Swiss franc, 1.39% to 5.50% (average effective rate 4.96%), due through 2000 463 857 German mark, 5.63% to 6.38% (average effective rate 5.63%), due through 2008 1,566 341 Other foreign 122 61 Other 236 240 - ------------------------------------------------------------------------------- 13,728 13,101 Less current portion of long-term debt (1,822) (1,516) - ------------------------------------------------------------------------------- $11,906 $11,585 =============================================================================== Financial services: Eurodollar note, 6.63%, due 1999 $ 200 $ 200 Foreign currency obligations: French franc, 6.88%, due 2006 179 169 German mark, 6.50% and 5.38%, (average effective rate 5.89%) due 2003 and 2004 330 311 ECU note, 8.50%, due 1998 165 - ------------------------------------------------------------------------------- $ 709 $ 845 =============================================================================== Aggregate maturities of long-term debt, excluding short-term borrowings reclassified as long-term debt, are as follows: Consumer Financial (in millions) Products Services - -------------------------------------------------------------------------------- 1999 $1,822 $200 2000 1,662 2001 1,843 2002 1,402 2003 1,251 150 2004-2008 4,795 359 2009-2013 248 Thereafter 815 - -------------------------------------------------------------------------------- Based on market quotes, where available, or interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities, the aggregate fair value of consumer products and financial services long-term debt, including current portion of long-term debt, at December 31, 1998 and 1997 was $15.4 billion and $14.6 billion, respectively. Note 8. Capital Stock: In 1997, the Company's Board of Directors declared a three-for-one split of the Company's common stock, changed the common stock's par value from $1.00 to $0.33 1/3 per share and increased the number of authorized shares of common stock from 4 billion to 12 billion shares. All references in the consolidated financial statements to shares and related prices, weighted average number of shares, per share amounts and stock plan data have been adjusted to reflect the split. Shares of common stock issued, repurchased and outstanding were as follows: Shares Shares Net Shares Issued Repurchased Outstanding =============================================================================== Balances, January 1, 1996 2,805,961,317 (312,451,299) 2,493,510,018 Exercise of stock options and issuance of other stock awards 23,672,505 23,672,505 Repurchased (85,836,249) (85,836,249) - ------------------------------------------------------------------------------- Balances, December 31, 1996 2,805,961,317 (374,615,043) 2,431,346,274 Exercise of stock options and issuance of other stock awards 12,345,228 12,345,228 Repurchased (18,204,213) (18,204,213) - ------------------------------------------------------------------------------- Balances, December 31, 1997 2,805,961,317 (380,474,028) 2,425,487,289 Exercise of stock options and issuance of other stock awards 11,501,286 11,501,286 Repurchased (6,454,000) (6,454,000) - ------------------------------------------------------------------------------- Balances, December 31, 1998 2,805,961,317 (375,426,742) 2,430,534,575 =============================================================================== At December 31, 1998, 173,607,574 shares of common stock were reserved for stock options and other stock awards under the Company's stock plans and 10 million shares of Serial Preferred Stock, $1.00 par value, were authorized, none of which have been issued. Note 9. Stock Plans: Under the Philip Morris 1997 Performance Incentive Plan (the "Plan"), the Company may grant to eligible employees stock options, stock appreciation rights, restricted stock, and other stock-based awards, as well as cash-based annual and long-term incentive awards. Up to 120 million shares of common stock may be issued under the Plan, of which no more than 36 million shares may be awarded as restricted stock. Shares available to be granted at December 31, 1998 were 85,883,360. 46 Stock options are granted at an exercise price of not less than fair value on the date of the grant. Stock options granted under the Plan generally become exercisable on the first anniversary of the grant date and have a maximum term of ten years. Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Company applies the intrinsic value-based methodology permitted by SFAS No. 123 in accounting for the Plan. Accordingly, no compensation expense has been recognized other than for restricted stock awards. Had compensation cost for stock option awards under the Plan been determined on the fair value at the grant date, the Company's net earnings, basic EPS and diluted EPS would have been $5,280 million, $2.17 and $2.16, respectively, for the year ended December 31, 1998; $6,218 million, $2.57 and $2.55, respectively, for the year ended December 31, 1997; and $6,235 million, $2.54 and $2.51, respectively, for the year ended December 31, 1996. The foregoing impact of compensation cost, calculated in accordance with the fair value method prescribed by SFAS No. 123, was determined using a modified Black-Scholes methodology and the following assumptions: Weighted Average Expected Risk-Free Expected Expected Dividend Fair Value at Interest Rate Life Volatility Yield Grant Date ================================================================================ 1998 5.52% 5 23.83% 4.03% $ 7.78 1997 6.38 5 27.86 3.65 10.83 1996 6.70 5 23.80 3.83 7.73 ================================================================================ Option activity was as follows for the years ended December 31, 1996, 1997 and 1998: Weighted Shares Subject Options Average to Option Exercisable Exercise Price ================================================================================ Balance at January 1, 1996 85,224,372 62,102,802 $20.09 Options granted 22,627,215 36.08 Options exercised (25,310,940) 18.94 Options canceled (1,327,266) 26.21 - -------------------------------------------------------------------------------- Balance at December 31, 1996 81,213,381 58,949,796 24.81 Options granted 16,105,390 43.88 Options exercised (12,782,568) 19.86 Options canceled (890,644) 34.75 - -------------------------------------------------------------------------------- Balance at December 31, 1997 83,645,559 67,827,399 29.13 Options granted 18,652,100 39.74 Options exercised (12,042,497) 22.56 Options canceled (3,051,498) 31.74 - -------------------------------------------------------------------------------- Balance at December 31, 1998 87,203,664 68,864,594 $32.21 ================================================================================ The weighted average exercise prices of options exercisable at December 31, 1998, 1997 and 1996 were $30.21, $25.69 and $20.56, respectively. The following table summarizes the status of stock options outstanding and exercisable as of December 31, 1998, by range of exercise price: Options Outstanding Options Exercisable ---------------------------------- ----------------------- Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ================================================================================ $11.80-$17.23 10,965,163 3 years $15.70 10,965,163 $15.70 18.35- 26.28 24,813,444 5 years 24.16 24,813,444 24.16 28.27- 40.00 36,608,512 8 years 37.89 18,291,382 36.06 41.62- 58.72 14,816,545 8 years 43.89 14,794,605 43.88 - -------------------------------------------------------------------------------- 87,203,664 68,864,594 ========== ========== The Company may grant shares of restricted stock and rights to receive shares of stock to eligible employees, giving them in most instances all of the rights of stockholders, except that they may not sell, assign, pledge or otherwise encumber such shares and rights. Such shares and rights are subject to forfeiture if certain employment conditions are not met. During 1998, 1997 and 1996 the Company granted 603,650, 692,100 and 180,000 shares, respectively, of restricted stock to eligible U.S. based employees and also issued to eligible non-U.S. employees rights to receive 120,500 and 392,400 like shares, respectively, during 1998 and 1997. At December 31, 1998, restrictions on the stock, net of forfeitures, lapse as follows: 1999-120,300 shares; 2000-654,000 shares; 2002-1,263,450 shares; 2003-290,250 shares; and 2004 and thereafter-636,000 shares. The fair value of the restricted shares and rights at the date of grant is amortized to expense ratably over the restriction period. The Company recorded compensation expense related to restricted stock and other stock awards of $34 million, $29 million and $37 million for the years ended December 31, 1998, 1997 and 1996, respectively. The unamortized portion is reported as a reduction of earnings reinvested in the business and was $59 million and $49 million at December 31, 1998 and 1997, respectively. 47 Note 10. Earnings per Share: Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share," which established standards for computing and presenting both basic and diluted earnings per share ("EPS"). Basic and diluted EPS were calculated using the following for the years ended December 31, 1998, 1997 and 1996: (in millions) - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Net earnings $5,372 $6,310 $6,303 ================================================================================ Weighted average shares for basic EPS 2,429 2,420 2,456 Plus incremental shares from conversions: Restricted stock and stock rights 1 1 8 Stock options 16 21 18 - -------------------------------------------------------------------------------- Weighted average shares for diluted EPS 2,446 2,442 2,482 ================================================================================ In 1998, 1997 and 1996, options on 14,797,260, 11,988,118 and 18,737,224 shares of common stock, respectively, were not included in the calculation of weighted average shares for diluted EPS because their effects would be antidilutive. Note 11. Pre-tax Earnings and Provision for Income Taxes: Pre-tax earnings and provision for income taxes consisted of the following for the years ended December 31, 1998, 1997 and 1996: (in millions) - ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Pre-tax earnings: United States $5,134 $ 7,515 $ 7,399 Outside United States 3,953 3,096 3,284 - ------------------------------------------------------------------------------- Total pre-tax earnings $9,087 $10,611 $10,683 ================================================================================ Provision for income taxes: United States federal: Current $1,614 $ 2,027 $ 1,836 Deferred 171 12 438 - ------------------------------------------------------------------------------- 1,785 2,039 2,274 State and local 350 354 430 - ------------------------------------------------------------------------------- Total United States 2,135 2,393 2,704 - ------------------------------------------------------------------------------- Outside United States: Current 1,475 1,851 1,727 Deferred 105 57 (51) - ------------------------------------------------------------------------------- Total outside United States 1,580 1,908 1,676 - ------------------------------------------------------------------------------- Total provision for income taxes $3,715 $ 4,301 $ 4,380 ================================================================================ At December 31, 1998, applicable United States federal income taxes and foreign withholding taxes have not been provided on approximately $3.4 billion of accumulated earnings of foreign subsidiaries that are expected to be permanently reinvested. If these amounts were not considered permanently reinvested, additional deferred income taxes of approximately $173 million would have been provided. The Company and its subsidiaries are subject to tax examinations in various U.S. and foreign jurisdictions. The Company believes that adequate tax payments have been made and accruals recorded for all years. The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, 1998, 1997 and 1996: - ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ U.S. federal statutory rate 35.0% 35.0% 35.0% Increase (decrease) resulting from: State and local income taxes, net of federal tax benefit 2.5 2.2 2.6 Rate differences--foreign operations 0.6 3.7 3.3 Goodwill amortization 2.0 1.7 1.8 Other 0.8 (2.1) (1.7) - ------------------------------------------------------------------------------ Effective tax rate 40.9% 40.5% 41.0% ============================================================================== The tax effects of temporary differences which gave rise to consumer products deferred income tax assets and liabilities consisted of the following at December 31, 1998 and 1997: (in millions) - ------------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------------- Deferred income tax assets: Accrued postretirement and postemployment benefits $ 1,104 $ 1,084 Accrued liabilities 568 577 Realignment and other reserves 356 427 Settlement charges 476 261 Other 154 167 - ------------------------------------------------------------------------------- Total deferred income tax assets 2,658 2,516 - ------------------------------------------------------------------------------- Deferred income tax liabilities: Property, plant and equipment (1,866) (1,695) Prepaid pension costs (279) (326) - ------------------------------------------------------------------------------- Total deferred income tax liabilities (2,145) (2,021) - ------------------------------------------------------------------------------- Net deferred income tax assets $ 513 $ 495 =============================================================================== Financial services deferred income tax liabilities are primarily attributable to temporary differences from investments in finance leases. 48 Note 12. Segment Reporting: Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 supersedes previously issued segment reporting disclosure rules and requires reporting of segment information that is consistent with the way in which management operates the Company. The adoption of SFAS No. 131 at December 31, 1998 did not have any impact on the Company's financial position or the results of operations. The segment disclosures presented for prior years have been restated to conform with the presentation adopted for the current year. 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 financial instruments. These products and services 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. The Company's assets are managed on a worldwide basis by major products and accordingly, asset information is reported for the tobacco, food, beer and financial services segments. Goodwill and amortization of goodwill is principally attributable to the North American food segment. Other assets consist primarily of cash and cash equivalents. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies. Reportable segment data were as follows: For the years ended December 31, (in millions) - ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Operating revenues: Domestic tobacco $15,310 $13,584 $12,462 International tobacco 27,390 26,240 24,087 North American food 17,312 16,838 16,447 International food 9,999 10,852 11,503 Beer 4,105 4,201 4,327 Financial services 275 340 378 - ------------------------------------------------------------------------------- Total operating revenues $74,391 $72,055 $69,204 =============================================================================== Operating companies income: Domestic tobacco $ 1,489 $ 3,287 $ 4,206 International tobacco 5,029 4,572 4,078 North American food 3,055 2,873 2,628 International food 1,127 1,326 1,303 Beer 451 459 440 Financial services 183 297 193 - ------------------------------------------------------------------------------- Total operating companies income 11,334 12,814 12,848 General corporate expenses (645) (479) (442) Minority interest (128) (87) (43) Amortization of goodwill (584) (585) (594) - ------------------------------------------------------------------------------- Total operating income 9,977 11,663 11,769 Interest and other debt expense, net (890) (1,052) (1,086) - ------------------------------------------------------------------------------- Total earnings before income taxes $ 9,087 $10,611 $10,683 =============================================================================== Operating companies income for the domestic tobacco segment included pre-tax tobacco litigation settlement charges of $3,381 million and $1,457 million for the years ended December 31, 1998 and 1997, respectively. General corporate expenses for the year ended December 31, 1998 included a pre-tax charge of $116 million related to the settlement of shareholder litigation. In addition, during 1998 pre-tax charges of $319 million and $18 million were recorded for voluntary separation and early retirement and severance programs by the domestic tobacco operations and the Company's corporate headquarters, respectively. See Notes 2, 3 and 4 regarding divestitures, acquisitions and food realignment charges. 49 For the years ended December 31, (in millions) - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Depreciation expense: Domestic tobacco $ 216 $ 171 $ 172 International tobacco 267 236 206 North American food 267 268 268 International food 227 246 270 Beer 108 104 104 - -------------------------------------------------------------------------------- 1,085 1,025 1,020 Other 21 19 17 - -------------------------------------------------------------------------------- Total depreciation expense $ 1,106 $ 1,044 $ 1,037 ================================================================================ Assets: Tobacco $16,395 $15,012 $13,545 Food 31,397 31,170 33,241 Beer 1,503 1,451 1,705 Financial services 6,480 5,886 5,917 - -------------------------------------------------------------------------------- 55,775 53,519 54,408 Other 4,145 2,428 463 - -------------------------------------------------------------------------------- Total assets $59,920 $55,947 $54,871 ================================================================================ Capital expenditures: Domestic tobacco $ 217 $ 483 $ 457 International tobacco 588 455 372 North American food 534 440 430 International food 307 297 382 Beer 129 115 122 - -------------------------------------------------------------------------------- 1,775 1,790 1,763 Other 29 84 19 - -------------------------------------------------------------------------------- Total capital expenditures $ 1,804 $ 1,874 $ 1,782 ================================================================================ The Company's operations outside the United States, which are principally in the tobacco and food businesses, are organized into geographic regions within each segment, with Europe being the most significant. Total tobacco and food segment revenues attributable to customers located in Germany were $9.2 billion, $9.5 billion and $10.4 billion for the years ended December 31, 1998, 1997 and 1996, respectively. Geographic data for operating revenues and long-lived assets (which consist of all financial services assets and non-current consumer products assets other than goodwill and other intangible assets) were as follows: For the years ended December 31, (in millions) - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Operating revenues: United States--domestic $35,432 $33,208 $31,993 --export 6,005 6,705 6,476 Europe 25,169 24,796 24,232 Other 7,785 7,346 6,503 - -------------------------------------------------------------------------------- Total operating revenues $74,391 $72,055 $69,204 ================================================================================ Long-lived assets: United States $15,616 $14,533 $13,985 Europe 4,159 4,057 4,575 Other 2,349 2,128 2,123 - -------------------------------------------------------------------------------- Total long-lived assets $22,124 $20,718 $20,683 ================================================================================ Note 13. Benefit Plans: The Company and its subsidiaries sponsor noncontributory defined benefit pension plans covering substantially all U.S. employees. Pension coverage for employees of the Company's non-U.S. subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. In addition, the Company and its U.S. and Canadian subsidiaries provide health care and other benefits to substantially all retired employees. Health care benefits for retirees outside the United States and Canada are generally covered through local government plans. Effective December 31, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 does not change the measurement or recognition of those plans, but revises the disclosure requirements for pension and other postretirement benefit plans for all years presented. Pension Plans: Net pension cost (income) consisted of the following for the years ended December 31, 1998, 1997 and 1996: (in millions) U.S. Plans Non-U.S. Plans - ------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------- Service cost $ 156 $ 137 $ 143 $ 91 $ 83 $ 80 Interest cost 406 382 373 165 163 166 Expected return on plan assets (615) (564) (533) (150) (135) (131) Amortization: Net gain on adoption of SFAS No. 87 (24) (24) (25) Unrecognized net loss (gain) from experience differences 9 (4) (1) Prior service cost 15 14 14 6 6 3 Termination, settlement and curtailment 251 (22) (35) - ------------------------------------------------------------------------------- Net pension cost (income) $ 189 $ (77) $ (54) $ 108 $ 116 $ 118 =============================================================================== During 1998, 1997 and 1996, the Company instituted early retirement and workforce reduction programs and, during 1997 and 1996, the Company also sold businesses. These actions resulted in additional termination benefits and curtailment losses of $279 million, net of settlement gains of $28 million in 1998, settlement gains of $22 million in 1997 and settlement gains of $69 million, net of additional termination benefits of $34 million in 1996. 50 The changes in benefit obligations and plan assets, as well as the funded status of the Company's pension plans at December 31, 1998 and 1997 were as follows: (in millions) U.S. Plans Non-U.S. Plans - ------------------------------------------------------------------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------- Benefit obligation at January 1 $ 5,523 $ 4,880 $ 2,701 $ 2,642 Service cost 156 137 91 83 Interest cost 406 382 165 163 Benefits paid (396) (309) (129) (79) Termination, settlement and curtailment 305 (22) Actuarial losses 238 461 263 80 Currency 95 (188) Other (12) (6) 15 - ------------------------------------------------------------------------------- Benefit obligation at December 31 6,220 5,523 3,201 2,701 - ------------------------------------------------------------------------------- Fair value of plan assets at January 1 8,085 7,101 2,189 1,927 Actual return on plan assets 973 1,308 116 269 Contributions 14 15 53 49 Benefits paid (372) (292) (93) (70) Currency 39 (26) Actuarial (losses) gains 3 (47) (56) 40 - ------------------------------------------------------------------------------- Fair value of plan assets at December 31 8,703 8,085 2,248 2,189 - ------------------------------------------------------------------------------- Excess (Deficit) of plan assets versus benefit obligations at December 31 2,483 2,562 (953) (512) Unrecognized actuarial (gains) losses (1,718) (1,659) 171 (187) Unrecognized prior service cost 107 121 37 40 Unrecognized net transition obligation (58) (83) 12 11 - ------------------------------------------------------------------------------- Net prepaid pension asset (liability) $ 814 $ 941 $ (733) $ (648) =============================================================================== The combined domestic and foreign pension plans resulted in a net prepaid pension asset of $81 million and $293 million at December 31, 1998 and 1997, respectively. These amounts were recognized in the Company's consolidated balance sheets at December 31, 1998 and 1997 as other assets of $1.9 billion and $1.7 billion, respectively, for those plans in which plan assets exceeded their accumulated benefit obligations and other liabilities of $1.8 billion and $1.4 billion, respectively, for those plans in which the accumulated benefit obligations exceeded their plan assets. For domestic plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $1,484 million, $1,374 million and $1,123 million, respectively, as of December 31, 1998 and $297 million, $229 million and $54 million, respectively, as of December 31, 1997. For foreign plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $1,111 million, $996 million and $155 million, respectively, as of December 31, 1998 and $935 million, $814 million and $115 million, respectively, as of December 31, 1997. The following weighted-average assumptions were used to determine the Company's obligations under the plans: U.S. Plans Non-U.S. Plans - ------------------------------------------------------------------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------- Discount rate 7.00% 7.25% 5.37% 6.30% Expected rate of return on plan assets 9.00 9.00 7.63 7.18 Rate of compensation increase 4.50 4.50 3.73 4.18 =============================================================================== The Company and certain of its subsidiaries sponsor deferred profit-sharing plans covering certain salaried, nonunion and union employees. Contributions and costs are determined generally as a percentage of pre-tax earnings, as defined by the plans. Certain other subsidiaries of the Company also maintain defined contribution plans. Amounts charged to expense for defined contribution plans totaled $201 million, $200 million and $199 million in 1998, 1997 and 1996, respectively. Postretirement Benefit Plans: Net postretirement health care costs consisted of the following for the years ended December 31, 1998, 1997 and 1996: (in millions) - ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Service cost $ 56 $ 54 $ 59 Interest cost 182 182 180 Amortization: Unrecognized net (gain) loss from experience differences (3) (3) 4 Unrecognized prior service cost (12) (12) (12) Other expense (income) 30 (8) - ------------------------------------------------------------------------------- Net postretirement health care costs $253 $221 $223 =============================================================================== During 1998, 1997 and 1996 the Company instituted early retirement and workforce reduction programs and, in 1996, the Company also sold businesses. These actions resulted in additional postretirement health care costs of $20 million and curtailment losses of $10 million in 1998 and curtailment gains in 1996, all of which are included in other expense (income) above. 51 The Company's postretirement health care plans currently are not funded. The changes in the benefit obligations of the plans at December 31, 1998 and 1997 were as follows: (in millions) - ------------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation at January 1 $2,627 $2,426 Service cost 56 54 Interest cost 182 182 Benefits paid (135) (136) Termination, settlement and curtailment 107 Plan amendments 1 6 Actuarial (gains) losses (67) 95 - ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation at December 31 2,771 2,627 Unrecognized actuarial losses (201) (173) Unrecognized prior service cost 96 109 - ------------------------------------------------------------------------------- Accrued postretirement health care costs $2,666 $2,563 =============================================================================== The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation for U.S. plans was 8.0% in 1997, 7.5% in 1998 and 7.0% in 1999, gradually declining to 5.0% by the year 2003 and remaining at that level thereafter. For Canadian plans, the assumed health care cost trend rate was 13.0% in 1997, 12.0% in 1998 and 11.0% in 1999, gradually declining to 4.0% by the year 2005 and remaining at that level thereafter. A one-percentage-point increase in the assumed health care cost trend rates for each year would increase the accumulated postretirement benefit obligation as of December 31, 1998 and postretirement health care cost (service cost and interest cost) for the year then ended by approximately 9.6% and 13.9%, respectively. A one-percentage-point decrease in the assumed health care cost trend rates for each year would decrease the accumulated postretirement benefit obligation as of December 31, 1998 and postretirement health care cost (service cost and interest cost) for the year then ended by approximately 7.9% and 10.9%, respectively. The accumulated postretirement benefit obligations for U.S. plans at December 31, 1998 and 1997 were determined using assumed discount rates of 7.0% and 7.25%, respectively. The accumulated postretirement benefit obligation at December 31, 1998 and 1997 for Canadian plans was determined using an assumed discount rate of 6.50%. Note 14. Additional Information: For the years ended December 31, (in millions) - ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Research and development expense $ 506 $ 533 $ 515 =============================================================================== Advertising expense $2,416 $2,530 $2,605 =============================================================================== Interest and other debt expense, net: Interest expense $1,144 $1,184 $1,183 Interest income (254) (132) (97) - ------------------------------------------------------------------------------- $ 890 $1,052 $1,086 =============================================================================== Interest expense of financial services operations included in cost of sales $ 77 $ 67 $ 80 =============================================================================== Rent expense $ 429 $ 443 $ 430 =============================================================================== Note 15. Financial Instruments: Derivative financial instruments: The Company operates internationally, with manufacturing and sales facilities in various locations around the world. Derivative financial instruments are used by the Company for purposes other than trading, principally to reduce exposures to market risks resulting from fluctuations in interest rates and foreign exchange rates by creating offsetting exposures. The Company is not a party to leveraged derivatives. The Company has foreign currency and related interest rate swap agreements which were executed to reduce the Company's borrowing costs and serve as hedges of the Company's net assets in foreign subsidiaries, principally those denominated in Swiss francs. At December 31, 1998 and 1997, the notional principal amounts of these agreements were $3.3 billion and $1.4 billion, respectively. Aggregate maturities at December 31, 1998 were as follows (in millions): 1999, $371; 2000, $1,015; 2002, $182; 2003, $150; and 2004 and thereafter $1,604. The notional amount is used to calculate interest payments which are exchanged over the life of the swap transaction and is equal to the amount of foreign currency or dollar principal exchanged at maturity. Forward exchange contracts and foreign currency options are used by the Company to reduce the effect of fluctuating foreign currencies on foreign currency denominated intercompany and third party transactions. At December 31, 1998, the Company had long and short forward exchange/option contracts with U.S. dollar equivalent values of $3.6 billion and $4.5 billion, respectively. At December 31, 1997, the Company had long and short forward exchange/option contracts with U.S. dollar equivalent values of $1.3 billion and $1.2 billion, respectively. 52 Credit exposure and credit risk: The Company is exposed to credit loss in the event of nonperformance by counterparties. However, the Company does not anticipate nonperformance and such exposure was not material at December 31, 1998. Fair value: The aggregate fair value, based on market quotes, of the Company's total debt at December 31, 1998 was $15.6 billion as compared to its carrying value of $14.7 billion. The aggregate fair value of the Company's total debt at December 31, 1997 was $14.7 billion as compared to its carrying value of $14.1 billion. The carrying values of the foreign currency and related interest rate swap agreements, the forward currency contracts and the currency option contracts, which did not differ materially from their fair values, were not material. See Notes 6 and 7 for additional disclosures of fair value for short-term borrowings and long-term debt. Note 16. Contingencies: Legal proceedings covering a wide range of matters are pending in various United States and foreign jurisdictions against the Company, its subsidiaries and affiliates, including Philip Morris Incorporated ("PM Inc."), the Company's domestic tobacco subsidiary, 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 and claims for contribution. Overview of Tobacco-Related Litigation Types and number of cases: Pending claims related to tobacco products generally fall within three 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, and (iii) health care cost recovery cases brought by governmental and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking. Governmental plaintiffs have included local, state and certain foreign governmental entities. Non-governmental plaintiffs in these cases include union health and welfare trust funds ("unions"), Blue Cross/Blue Shield groups, health maintenance organizations ("HMOs"), hospitals, native American tribes, taxpayers and others. Damages claimed in some of the smoking and health class actions and health care cost recovery cases range into the billions of dollars. Plaintiffs' theories of recovery and the defenses raised in those cases are discussed below. In recent years, there has been a substantial increase in the number of smoking and health cases being filed. As of December 31, 1998, there were approximately 510 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM Inc. and, in some cases, the Company, compared with approximately 375 such cases on December 31, 1997, and 185 such cases on December 31, 1996. Many of these cases are pending in Florida, West Virginia and New York. Fifteen of the individual cases involve allegations of various personal injuries allegedly related to exposure to environmental tobacco smoke ("ETS"). In addition, as of December 31, 1998, there were approximately 60 smoking and health putative class actions pending in the United States against PM Inc. and, in some cases, the Company (including eight that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 50 such cases on December 31, 1997, and 20 such cases on December 31, 1996. Most of these actions purport to constitute statewide class actions and were filed after May 1996 when the Fifth Circuit Court of Appeals, in the Castano case, reversed a federal district court's certification of a purported nationwide class action on behalf of persons who were allegedly "addicted" to tobacco products. During 1997 and 1998, PM Inc. and certain other United States tobacco product manufacturers entered into agreements settling the asserted and unasserted health care cost recovery and other claims of all 50 states and several commonwealths and territories of the United States. The settlements are in the process of being approved by the courts, and some of the settlements are being challenged by various third parties. As of December 31, 1998, there were approximately 95 health care cost recovery actions pending in the United States (excluding the cases covered by the settlements), compared with approximately 105 health care cost recovery cases pending on December 31, 1997, and 25 such cases on December 31, 1996. There are also a number of tobacco-related actions pending outside the United States against PMI and its affiliates and subsidiaries including, as of December 31, 1998, approximately 27 smoking and health cases initiated by one or more individuals (Argentina (20), Brazil (1), Canada (1), Italy (1), Japan (1), Scotland (1) and Turkey (2)), and six smoking and health class 53 actions (Brazil (2), Canada (3) and Nigeria (1)). In addition, health care cost recovery actions have been brought in Israel, the Republic of the Marshall Islands and British Columbia, Canada, and, in the United States, by the Republics of Bolivia, Guatemala, Panama and Nicaragua. Pending and upcoming trials: As of January 22, 1999, trials against PM Inc. and, in one case, the Company, were underway in the Engle smoking and health class action in Florida (discussed below) and in individual smoking and health cases in California and Tennessee. Additional cases are scheduled for trial during 1999, including three health care cost recovery actions brought by unions in Ohio (February), Washington (September) and New York (September), and two smoking and health class actions in Illinois (August) and Alabama (August). Also, twelve individual smoking and health cases against PM Inc. and, in some cases, the Company, are currently scheduled for trial during 1999. Trial dates, however, are subject to change. Verdicts in individual cases: During the past three years, juries have returned verdicts for defendants in three individual smoking and health cases and in one individual ETS smoking and health case. In June 1998, a Florida appeals court reversed a $750,000 jury verdict awarded in August 1996 against another United States cigarette manufacturer. Plaintiff is seeking an appeal of this ruling to the Florida Supreme Court. Also in June 1998, a Florida jury awarded the estate of a deceased smoker in a smoking and health case against another United States cigarette manufacturer $500,000 in compensatory damages, $52,000 for medical expenses and $450,000 in punitive damages. A Florida appeals court has ruled that this case was tried in the wrong venue and, accordingly, defendants are seeking to set aside the verdict and retry the case in the correct venue. In Brazil, a court in 1997 awarded plaintiffs in a smoking and health case the Brazilian currency equivalent of $81,000, attorneys' fees and a monthly annuity for 35 years equal to two-thirds of the deceased smoker's last monthly salary. Neither the Company nor its affiliates were parties to that action. Litigation settlements: In November 1998, PM Inc. and certain other United States tobacco product manufacturers entered into a Master Settlement Agreement (the "MSA") with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM Inc. and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the "State Settlement Agreements") and an ETS smoking and health class action brought on behalf of airline flight attendants. The State Settlement Agreements and certain ancillary agreements are filed as exhibits to various of the Company's reports filed with the Securities and Exchange Commission, and such agreements and the ETS settlement are discussed in detail therein. PM Inc. recorded pre-tax charges of $3,081 million and $1,457 million during 1998 and 1997, respectively, to accrue for its share of all fixed and determinable portions of its obligations under the tobacco settlements, as well as $300 million during 1998 for its unconditional obligation under an agreement in principle to contribute to a tobacco growers trust fund, discussed below. As of December 31, 1998, PM Inc. had accrued costs of its obligations under the settlements and to tobacco growers aggregating $1,359 million, payable principally before the end of the year 2000. 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 in principle with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 1999, $4.2 billion (of which $2.7 billion related to the MSA and has already been paid by the industry); 2000, $9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion; and thereafter, $9.4 billion. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional amounts as follows: 1999, $450 million; 2000, $416 million; and 2001 through 2002, $250 million. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of the future adjusted payments and legal fees, which is not currently estimable, will be based on its share of domestic cigarette shipments in the year preceding that in which the payment is made. PM Inc.'s shipment share in 1998 was approximately 50%. The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to tobacco control and underage use laws and other provisions. 54 As of January 22, 1999, the MSA had been approved by courts in 41 states and in the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and Northern Marianas. If a jurisdiction does not obtain final judicial approval of the MSA by December 31, 2001, the agreement will be terminated with respect to such jurisdiction. As part of the MSA, the settling defendants committed to work cooperatively with the tobacco grower community to address concerns about the potential adverse economic impact of the MSA on that community. To that end, in January 1999, the four major domestic tobacco product manufacturers, including PM Inc., agreed in principle to participate in the establishment of a $5.15 billion trust fund to be administered by the tobacco growing states. It is currently contemplated that the trust will be funded by industry participants over twelve years, beginning in 1999. PM Inc. has agreed to pay $300 million into the trust in 1999, which amount has been charged to 1998 operating income. Subsequent annual industry payments are to be adjusted for several factors, including inflation and United States cigarette consumption, and are to be allocated based on each manufacturer's market share. The Company believes that the State Settlement Agreements may materially adversely affect the business, volume, results of operations, cash flows or financial position of PM Inc. and the Company in future years. The degree of the adverse impact will depend, among other things, on the rates of decline in United States cigarette sales in the premium and discount segments, PM Inc.'s share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements. As of January 22, 1999, manufacturers representing almost all domestic shipments in 1998 had agreed to become subject to the terms of the MSA. A description of the smoking and health litigation, health care cost recovery litigation and certain other proceedings pending against the Company and/or its subsidiaries and affiliates follows. Smoking and Health Litigation Plaintiffs' allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal Racketeer Influenced and Corrupt Organization Act ("RICO") and state RICO statutes. In certain of these cases, plaintiffs claim that cigarette smoking exacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring 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 Fifth Circuit Court of Appeals held that a putative class consisting of all "addicted" smokers nationwide did not meet the standards and requirements of the federal rules governing class actions (Castano, et al. v. The American Tobacco Company, et al.). Since this class decertification, lawyers for plaintiffs have filed numerous smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states and raise "addiction" claims similar to those raised in the Castano case and, in some cases, claims of physical injury as well. As of December 31, 1998, smoking and health class actions were pending in Alabama, Arkansas, California, the District of Columbia, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia and Wisconsin, as well as in Canada, Brazil and Nigeria. Class certification has been denied or reversed by courts in 13 smoking and health class actions involving PM Inc. in Louisiana, the District of Columbia, New York (2), Pennsylvania, Puerto Rico, New Jersey (5), Wisconsin and Kansas, while classes remain certified in three cases in Florida, Louisiana and Maryland. A number of these class certification decisions are on appeal. Class certification motions are pending in a number of the other putative smoking and health class actions. As mentioned above, one ETS smoking and health class action was settled in 1997. 55 Engle trial: Trial in this Florida class action case began in July 1998. Plaintiffs seek compensatory and punitive damages ranging into the billions of dollars, as well as equitable relief including, but not limited to, a medical fund for future health care costs, attorneys' fees and court costs. The class consists of all Florida residents and citizens, and their survivors, who claim to have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarettes that contain nicotine. The current trial plan calls for the case to be tried in three "Phases." The court has stated, however, that the trial plan may be modified further. Phase One, which is currently underway, involves evidence concerning certain "common" class issues relating to the plaintiff class's causes of action. Entitlement to punitive damages will be decided at the end of Phase One, but no amount will be set at that time. If plaintiffs prevail in Phase One, the first two stages of Phase Two will involve individual determination of specific causation and other individual issues regarding entitlement to compensatory damages for the class representatives. Stage three of Phase Two will involve an assessment of the amount of punitive damages, if any, that individual class representatives will be awarded. Stage four of Phase Two will involve the setting of a percentage or ratio of punitive damages for absent class members, assuming entitlement was found at the end of Phase One. Phase Three of the trial will be held before separate juries to address absent class members' claims, including issues of specific causation and other individual issues regarding entitlement to compensatory damages. Health Care Cost Recovery Litigation In certain of the pending proceedings, domestic and foreign governmental entities and non-governmental plaintiffs, including unions, Blue Cross/Blue Shield groups, HMOs, hospitals, native American tribes, taxpayers and others are seeking reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, for future expenditures and damages as well. Certain of these cases purport to be brought on behalf of a class of plaintiffs and, in some cases, the class has been certified by the court. In one health care cost recovery case, private citizens seek recovery of alleged tobacco-related health care expenditures incurred by the federal Medicare program. In others, Blue Cross subscribers seek reimbursement of allegedly increased medical insurance premiums caused by tobacco products. In the native American cases, claims are also asserted for alleged lost productivity of tribal government employees. Other relief sought by some but not all plaintiffs includes punitive damages, treble/multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, disclosure of nicotine yields, and payment of attorney and expert witness fees. The claims asserted in these health care cost recovery actions include the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health care costs allegedly attributable to smoking, the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state RICO statutes. Defenses raised include failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust injury, federal preemption, lack of proximate cause, remoteness of injury, lack of statutory authority to bring suit and statute of limitations. In addition, defendants argue that they should be entitled to "set-off" any alleged damages to the extent the plaintiff benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by "standing in the shoes" of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party. Excluding the cases covered by the State Settlement Agreements described above, as of December 31, 1998, there were approximately 95 health care cost recovery cases pending against PM Inc. and, in some cases, the Company, of which approximately 75 were filed by unions. Health care cost recovery actions have also been brought in Israel, the Republic of the 56 Marshall Islands, and British Columbia, Canada, and, in the United States, by the Republics of Bolivia, Guatemala, Panama and Nicaragua. Other foreign governmental entities have stated that they are considering filing health care cost recovery actions. In addition, in January 1999, President Clinton announced that the United States Department of Justice is preparing a litigation plan to take tobacco companies to court and to use recovered funds to strengthen Medicare. Courts have ruled on preliminary motions to dismiss various claims in approximately 50 health care cost recovery actions. Although many of the rulings in cases not settled by the State Settlement Agreements have been favorable to the industry, a number have been adverse, including rulings in the three union cases currently scheduled for trial in 1999. In late January and in February of 1999, the Third and Second Circuit Courts of Appeal are scheduled to hear oral argument on appeals from lower court rulings on motions to dismiss various claims in health care cost recovery actions filed by unions. The Company cannot predict the ultimate outcome of such appeals. Certain Other Tobacco-Related Litigation Since September 1997, a number of suits have been filed by former asbestos manufacturers, asbestos manufacturers' personal injury settlement trusts and an insurance company against domestic tobacco manufacturers, including PM Inc. and others. These cases seek, among other things, contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages. Since June 1998, five class actions have been filed against PM Inc. and the Company, in Florida, New Jersey, Pennsylvania, Massachusetts and Tennessee, on behalf of individuals who purchased and consumed Marlboro Lights and, in one case, Marlboro Ultra Lights, as well. These cases allege, in connection with the use of the term "Lights" and/or "Ultra Lights," among other things, deceptive and unfair trade practices, unjust enrichment, and seek injunctive and equitable relief. Since July 1998, two suits have been filed in California courts alleging that domestic cigarette manufacturers, including PM Inc. and others, have violated the 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, restitution, disgorgement of profits and other relief. The courts have denied defendants' motions to dismiss in both of these cases. In December 1998, a putative class action was filed against PM Inc. and certain other domestic tobacco manufacturers on behalf of a class consisting of citizens of the United States who consume tobacco products manufactured by defendants. One count of the complaint alleges that defendants conspired to raise the prices of their tobacco products in order to pay the costs of the MSA in violation of the federal antitrust laws. The other two counts allege that the actions of defendants amount to an unconstitutional deprivation of property without due process of law and an unlawful burdening of interstate trade. The complaint seeks unspecified damages (to be trebled under the antitrust count), injunctive and declaratory relief, costs and attorneys' fees. Certain Other Actions In September 1997, a putative class action suit consolidating several previously filed class actions was filed in Wisconsin alleging that Kraft Foods, Inc. ("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. In June 1998, the court denied Kraft's motion to dismiss as to the antitrust and tortious interference claims and granted Kraft's motion to dismiss on breach of contract and false advertising claims. In October 1997, a putative class action suit was filed in Illinois against Kraft only and, in April 1998, a putative class action suit was filed in California against Kraft and others. Both of these suits contain allegations similar to those in the Wisconsin class action, but the Illinois case seeks a class comprising all of Kraft's milk suppliers, and the California case seeks a class comprising all of defendants' milk suppliers in California. In December 1998, the courts in both the Illinois and California cases granted Kraft's motions to dismiss the complaints. 57 In November 1998, the United States District Court in the Southern District of New York approved an agreement settling a class action suit filed on behalf of all persons who purchased common stock of the Company between June 11, 1991 and May 6, 1994 (Kurzweil, et al. v. Philip Morris Companies Inc., et al.). It is anticipated that the settlement will also result in the dismissal of another class action suit that was filed on behalf of certain persons who purchased common stock of the Company between July 10, 1991, and April 1, 1993 (Lawrence, et al. v. Philip Morris Companies Inc., et al.). The Company recorded a pre-tax charge of $116 million in the fourth quarter of 1998 in connection with these 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 unpaid taxes assessed to date is alleged to be the Italian lira equivalent of $2.7 billion. In addition, the Italian lira equivalent of $3.7 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 eighty-one of the assessments. The decisions to overturn forty-three assessments have been appealed by the tax authorities. 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 charges of tax evasion to remain pending. In February 1998, the tax evasion charges were dismissed by the criminal court in Naples following a determination that jurisdiction was not proper, and the case file was transmitted to the public prosecutor in Milan, who will determine whether to bring charges, in which case a preliminary investigations judge will make a new finding as to whether there should be a trial on these charges. The Company, 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, and it is possible that some of these actions could be decided unfavorably. An unfavorable outcome or settlement of a pending smoking and health or health care cost recovery case could encourage the commencement of additional similar litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending 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 respective cases, that it has a number of valid defenses to all litigation pending against it. All such cases are, and will continue to be, vigorously defended. 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. 58 Note 17. Quarterly Financial Data (Unaudited): (in millions, except per share data) 1998 Quarters - -------------------------------------------------------------------------------- 1st 2nd 3rd 4th - -------------------------------------------------------------------------------- Operating revenues $18,383 $18,978 $18,587 $18,443 ================================================================================ Gross profit $ 7,449 $ 7,903 $ 7,842 $ 7,799 ================================================================================ Net earnings $ 1,382 $ 1,736 $ 1,980 $ 274 ================================================================================ Per share data: Basic EPS $ 0.57 $ 0.72 $ 0.81 $ 0.11 ================================================================================ Diluted EPS $ 0.57 $ 0.71 $ 0.81 $ 0.11 ================================================================================ Dividends declared $ 0.40 $ 0.40 $ 0.44 $ 0.44 ================================================================================ Market price--high $ 47.88 $ 41.56 $ 48.13 $ 59.50 --low $ 39.06 $ 34.75 $ 38.06 $ 45.00 ================================================================================ During 1998, the Company recorded the following pre-tax charges for tobacco and shareholder litigation settlements, voluntary early retirement and separation programs ("VERS") and severance. (in millions) 1998 Quarters - -------------------------------------------------------------------------------- 1st 2nd 3rd 4th - -------------------------------------------------------------------------------- Tobacco settlements $806 $199 $111 $2,265 Shareholder settlement 116 VERS and severance 95 232 10 - -------------------------------------------------------------------------------- $901 $431 $121 $2,381 ================================================================================ 1997 Quarters ---------------------------------------- (in millions, except per share data) 1st 2nd 3rd 4th ================================================================================ Operating revenues $18,217 $18,413 $18,092 $17,333 ================================================================================ Gross profit $ 7,376 $ 7,600 $ 7,420 $ 7,029 ================================================================================ Net earnings $ 1,773 $ 1,836 $ 1,406 $ 1,295 ================================================================================ Per share data: Basic EPS $ 0.73 $ 0.76 $ 0.58 $ 0.54 ================================================================================ Diluted EPS $ 0.72 $ 0.75 $ 0.58 $ 0.53 ================================================================================ Dividends declared $ 0.40 $ 0.40 $ 0.40 $ 0.40 ================================================================================ Market price--high $ 46.58 $ 48.13 $ 46.56 $ 45.88 --low $ 36.00 $ 37.25 $ 39.94 $ 36.94 ================================================================================ During the fourth quarter of 1997, the Company sold several international food businesses, including its Brazilian ice cream businesses, for total proceeds of $1.1 billion and net pre-tax gains of $775 million. In addition, the Company sold its equity interest in a Canadian beer operation and sold a minority interest in a beer import operation for proceeds of $306 million and a pre-tax gain of $12 million. During the fourth quarter of 1997, the Company recorded a charge of $342 million related primarily to the downsizing or closure of manufacturing and other facilities, as well as the discontinuance of certain low-margin product lines of its international food operations. The Company also recorded a charge of $288 million for incremental postemployment benefits, primarily related to severance. During the third and fourth quarters of 1997, the Company recorded litigation settlement charges of $812 million and $645 million, respectively. ------------------------------- The principal stock exchange, on which the Company's common stock (par value $0.33 1/3 per share) is listed, is the New York Stock Exchange. At January 31, 1999, there were approximately 144,900 holders of record of the Company's common stock. 59 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Philip Morris Companies Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, stockholders' equity and cash flows present fairly, in all material respects, the consolidated financial position of Philip Morris Companies Inc. and its subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP New York, New York January 25, 1999 COMPANY REPORT ON FINANCIAL STATEMENTS The consolidated financial statements and all related financial information herein are the responsibility of the Company. The financial statements, which include amounts based on judgments, have been prepared in accordance with generally accepted accounting principles. Other financial information in the annual report is consistent with that in the financial statements. The Company maintains a system of internal controls that it believes provides reasonable assurance that transactions are executed in accordance with management's authorization and properly recorded, that assets are safeguarded, and that accountability for assets is maintained. The system of internal controls is characterized by a control-oriented environment within the Company, which includes written policies and procedures, careful selection and training of personnel, and audits by a professional staff of internal auditors. PricewaterhouseCoopers LLP, independent accountants, have audited and reported on the Company's consolidated financial statements. Their audits were performed in accordance with generally accepted auditing standards. The Audit Committee of the Board of Directors, composed of six non-management directors, meets periodically with PricewaterhouseCoopers LLP, the Company's internal auditors and management representatives to review internal accounting control, auditing and financial reporting matters. Both PricewaterhouseCoopers LLP and the internal auditors have unrestricted access to the Audit Committee and may meet with it without management representatives being present. 60 EX-21 5 LIST OF SUBSIDIARIES Exhibit 21 SUBSIDIARIES OF THE COMPANY Certain active subsidiaries of the Company and their subsidiaries as of December 31, 1998, are listed below. The names of certain subsidiaries, which considered in the aggregate would not constitute a significant subsidiary, have been omitted. STATE OR COUNTRY OF NAME ORGANIZATION ---- ------------ AB Estrella ............................................... Sweden AB Kraft Jacobs Suchard Lietuva ........................... Lithuania AGF SP, Inc. .............................................. Japan Ajinomoto General Foods, Inc. ............................. Japan Aktieselskabet F.C. Af 11. juni 1971 ...................... Denmark Aktieselskabet FMD af 11. juni 1920 ....................... Denmark Aktieselskabet M Af 2. januar 1992 ........................ Denmark A/O Almaty Tobacco Company ................................ Kazakhstan A/O Krasnadortabakprom .................................... Russia A/O Philip Morris NEVA .................................... Russia A/S Freia ................................................. Norway A/S Maarud ................................................ Norway Beijing Kraft Food Corporation Limited .................... China Branded Restaurant Group Inc. ............................. Delaware Burlington Foods, Inc. .................................... Delaware C.A. Tabacalera Nacional .................................. Venezuela Cafe GRAND'MERE S.A. ...................................... France Callard & Bowser-Suchard, Inc. ............................ Delaware Capri Sun, Inc. ........................................... Delaware Celis Brewery, Inc. ....................................... Texas Churny Company, Inc. ...................................... Delaware Comptoir De La Confiserie ................................. France Cote d'Or Italia S.r.l. ................................... Italy Dart & Kraft Finance N.V. ................................. Netherlands Antilles Dart Resorts Inc. ......................................... Delaware Dong Suh Foods Corporation ................................ Korea Dong Suh Oil & Fats Co., Ltd. ............................. Korea Egri Dohanygyar kft. ...................................... Hungary El Gallito Industrial, S.A. ............................... Costa Rica Estrella A/S .............................................. Denmark Fabriques de Tabac Reunies S.A. ........................... Switzerland Fattorie Osella S.p.A. .................................... Italy Franklin Baker Company of the Philippines ................. Philippines FTR Holding S.A. .......................................... Switzerland Gardner's Good Foods, Inc. ................................ New Jersey General Foods Credit Corporation .......................... Delaware General Foods Credit Investors No. 1 Corporation .......... Delaware General Foods Credit Investors No. 2 Corporation .......... Delaware STATE OR COUNTRY OF NAME ORGANIZATION ---- ------------ General Foods Credit Investors No. 3 Corporation .......... Delaware General Foods Foreign Sales Corporation ................... Virgin Islands (U.S.) Gevaliarosteriet AB ....................................... Sweden Grant Holdings, Inc. ...................................... Pennsylvania Grant Transit Co. ......................................... Delaware Grundstucksgemeinschaft Kraft Jacobs Suchard GbR .......... Germany HAG-Coffex ................................................ France HAG GF AG ................................................. Germany HNB Investment Corp. ...................................... Delaware Jacob Leinenkugel Brewing Company, Inc. ................... Wisconsin Jacobs Suchard do Brasil Alimentos LTDA ................... Brazil Jacobs Suchard Figaro A.S. ................................ Slovak Republic Jacobs Suchard Pavlides SA ................................ Greece The Kenco Coffee Company Limited .......................... United Kingdom Kharkiv Tobacco Factory ................................... Ukraine Kraft Canada Inc. ......................................... Canada Kraft Food Ingredients Corp. .............................. Delaware Kraft Foods AS ............................................ Norway Kraft Foods (Australia) Limited ........................... Australia Kraft Foods de Mexico S.A. de C.V. ........................ Mexico Kraft Foods Egypt LLC ..................................... Egypt Kraft Foods Holding (Europa) GmbH.......................... Switzerland Kraft Foods Holdings Norway, Inc. ......................... Delaware Kraft Foods, Inc. ......................................... Delaware Kraft Foods International, Inc. ........................... Delaware Kraft Foods International Services, Inc. .................. Delaware Kraft Foods Limited ....................................... Australia Kraft Foods Limited (Asia) ................................ Hong Kong Kraft Foods Manufacturing Corporation ..................... Delaware Kraft Foods (New Zealand) Limited ......................... New Zealand Kraft Foods (Philippines), Inc. ........................... Philippines Kraft Foods (Puerto Rico), Inc. ........................... Puerto Rico Kraft Foods (Singapore) Pte Ltd ........................... Singapore Kraft Foods (Thailand) Limited ............................ Thailand Kraft Freia Marabou AB .................................... Sweden Kraft Freia Marabou ApS ................................... Denmark Kraft Freia Marabou Danmark A/S ........................... Denmark Kraft Guangtong Food Company, Limited ..................... China Kraft Hellas SA ........................................... Greece Kraft Jacobs Suchard AG ................................... Switzerland Kraft Jacobs Suchard (Australia) Pty. Ltd. ................ Australia Kraft Jacobs Suchard BV ................................... Netherlands Kraft Jacobs Suchard Bulgaria AD .......................... Bulgaria Kraft Jacobs Suchard Central & Eastern Europe Service BV .. Netherlands Kraft Jacobs Suchard Erzeugnisse GmbH & Co. KG ............ Germany Kraft Jacobs Suchard France ............................... France Kraft Jacobs Suchard GmbH (Bremen) ........................ Germany Kraft Jacobs Suchard (Holdings) Limited (United Kingdom) .. United Kingdom Kraft Jacobs Suchard Hungaria KFT ......................... Hungary 2 STATE OR COUNTRY OF NAME ORGANIZATION ---- ------------ Kraft Jacobs Suchard Iberia, S.A. ......................... Spain Kraft Jacobs Suchard Ireland Ltd. ......................... Ireland Kraft Jacobs Suchard Laverune ............................. France KJS Limited ............................................... Hong Kong Kraft Jacobs Suchard Limited .............................. United Kingdom Kraft Jacobs Suchard Management & Consulting AG ........... Switzerland Kraft Jacobs Suchard Manufacturing GmbH & Co KG ........... Germany KJS Namur SA .............................................. Belgium Kraft Jacobs Suchard Oesterreich Gesellschaft MBH ......... Austria Kraft Jacobs Suchard Polska Sp. z o.o. .................... Poland Kraft Jacobs Suchard Portugal Productos Alimentares Lda. .. Portugal Kraft Jacobs Suchard Produktion GmbH ...................... Germany Kraft Jacobs Suchard R & D, Inc. .......................... Delaware Kraft Jacobs Suchard Reims ................................ France Kraft Jacobs Suchard Romania SA ........................... Romania Kraft Jacobs Suchard S.A. ................................. Belgium Kraft Jacobs Suchard (Schweiz) AG ......................... Switzerland Kraft Jacobs Suchard Service AG (Switzerland) ............. Switzerland Kraft Jacobs Suchard S.p.A. ............................... Italy Kraft Jacobs Suchard spol. s r.o. ......................... Czech Republic Kraft Jacobs Suchard Strasbourg ........................... France Kraft Jacobs Suchard Ukraina Open Joint Stock Company ..... Ukraine Kraft Japan, K.K. ......................................... Japan Kraft Korea Inc. .......................................... Korea, Republic of Kraft Lacta Suchard Brasil, S.A. .......................... Brazil Kraft Pizza Company ....................................... Delaware Kraft Suchard Argentina, S.A. ............................. Argentina Kraft Tianmei Food (Tianjin) Co., Ltd. .................... China Krema Limited ............................................. Ireland La Loire Investment Corp. ................................. Delaware La Seine Investment Corp. ................................. Delaware Le Rhone Investment Corp. ................................. Delaware MBC Holdings, Inc. ........................................ Wisconsin Marsa Kraft Jacobs Suchard Sabanci Gida Sanayi ve Ticaret A.S. .............................................. Turkey Martlet Importing Co. Inc. ................................ New York Massalin Particulares S.A. ................................ Argentina Maxpax France SA .......................................... France Michigan Investment Corp. ................................. Delaware Miller Brewing Company .................................... Wisconsin Miller Brewing do Brasil, Ltda. ........................... Brazil Miller Brewing 1855, Inc. ................................. Delaware Miller Brewing of Europe, Ltd. ............................ United Kingdom Mirabell Salzburger Confiserie-und Bisquit GmbH ........... German Democratic Rep. Molson Breweries U.S. Holdings Inc. ....................... Delaware Molson USA, LLC ........................................... Delaware Oy Estrella AB ............................................ Finland Oy Kraft Freia Marabou Finland AB ......................... Finland Packaged Food & Beverage Co., Inc. ........................ Delaware Perdue Trademark Subsidiary, Inc. ......................... Delaware Phenix Leasing Corporation ................................ Delaware 3 STATE OR COUNTRY OF NAME ORGANIZATION ---- ------------ Phenix Management Corporation ............................. Delaware Philip Morris Asia Limited ................................ Hong Kong Philip Morris Belgium S.A. ................................ Belgium P.M. Beverage Holdings, Inc. .............................. Delaware Philip Morris Brasil S.A. ................................. Delaware Philip Morris Capital Corporation ......................... Delaware Philip Morris Capital (Ireland) Limited ................... Ireland Philip Morris Corporate Services Inc. ..................... Delaware Philip Morris Europe S.A. ................................. Switzerland Philip Morris Finance Europe B.V. ......................... Netherlands Philip Morris G.m.b.H. .................................... Germany Philip Morris Holland B.V. ................................ Netherlands Philip Morris Incorporated ................................ Virginia Philip Morris International Finance Corporation ........... Delaware Philip Morris International Inc. .......................... Delaware Philip Morris Izhora ...................................... Russia Philip Morris Kabushiki Kaisha ............................ Japan Philip Morris Korea C.H. .................................. Korea Philip Morris Latin America Inc. .......................... Delaware Philip Morris Limited ..................................... Australia Philip Morris (Malaysia) Sdn. Bhd. ........................ Malaysia Philip Morris Management Corp. ............................ New York Philip Morris Mexico S.A. de C.V. ......................... Mexico Philip Morris Products Inc. ............................... Virginia Philip Morris Overseas Limited ............................ Delaware Philip Morris Polska S.A. ................................. Poland Philip Morris Romania S.R.L. .............................. Romania Philip Morris SA, Philip Morris Sabanci Pazarlama ve Satis A.S. ................................................ Turkey Philip Morris Sales Inc. .................................. Delaware Philip Morris Sdn. Bhd. ................................... Brunei Philip Morris Services India Inc. ......................... Delaware Philip Morris Singapore Pte. Ltd. ......................... Singapore Philip Morris World Trade S.A. ............................ Switzerland PHILSA Philip Morris Sabanci Sigara ve Tutunculuk Sanayi ve Ticaret, A.S. .......................................... Turkey Pietro Negroni Limited .................................... United Kingdom Pietro Negroni S.A. ....................................... Switzerland PMCC Investors No. 1 Corporation .......................... Delaware PMCC Investors No. 2 Corporation .......................... Delaware PMCC Investors No. 3 Corporation .......................... Delaware PMCC Investors No. 4 Corporation .......................... Delaware PMCC Leasing Corporation .................................. Delaware Porta Pack Corporation .................................... Delaware Premierfoods Corporation .................................. Taiwan P.T. Kraft Ultrajaya Indonesia ............................ Indonesia Riespri, S.A. ............................................. Spain Roskill Cartage and Storage Limited ....................... New Zealand Rye Ventures, Inc. ........................................ Delaware San Dionisio Realty Corporation ........................... Philippines SB Leasing Inc. ........................................... Delaware Seven Seas Foods, Inc. .................................... Delaware Shipyard Brewing Company LLC .............................. Maine 4 STATE OR COUNTRY OF NAME ORGANIZATION ---- ------------ Suchard Limited ........................................... United Kingdom Suchard Schokolade Ges. mbH Bludenz ....................... Austria Superior AgResource, Inc. ................................. Delaware Tabacalera Centroamericana S.A. ........................... Guatemala Tabacalera Costarricense S.A. ............................. Costa Rica Tabak A.S. ................................................ Czech Republic Tabaqueira - Empresa Industrial de Tabacos, S.A. .......... Portugal Taloca AG ................................................. Switzerland Taloca Ltda. .............................................. Brazil UAB Philip Morris Lietuva ................................. Lithuania Vict. Th. Engwall & Co., Inc. ............................. Delaware Votesor BV ................................................ Netherlands Wolverine Investment Corp. ................................ Delaware 5 EX-23 6 CONSENT OF INDEPENDENT ACCOUNTANT EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in Post-Effective Amendment No. 13 to the registration statement of Philip Morris Companies Inc. (the "Company") on Form S-14 (File No. 2-96149) and in the Company's registration statements on Form S-3 (File No. 333-35143) and Form S-8 (File Nos. 333-28631, 333-20747, 333-16127, 33-1479, 33-1480, 33-10218, 33-13210, 33-14561, 33-17870, 33-37115, 33-38781, 33-39162, 33-40110, 33-48781, 33-59109, 33-63975 and 33-63977) of our reports dated January 25, 1999, on our audits of the consolidated financial statements and financial statement schedule of the Company as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which reports are included or incorporated by reference in this Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP New York, New York March 17, 1999 EX-24 7 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his/her true and lawful attorney, for him/her and in his/her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and seal this 24th day of February, 1999. /s/ ELIZABETH E. BAILEY ----------------------- Elizabeth E. Bailey POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his/her true and lawful attorney, for him/her and in his/her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and seal this 24th day of February, 1999. /s/ MURRAY H. BRING ------------------- Murray H. Bring POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his/her true and lawful attorney, for him/her and in his/her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and seal this 24th day of February, 1999. /s/ HAROLD BROWN ---------------- Harold Brown POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his/her true and lawful attorney, for him/her and in his/her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and seal this 24th day of February, 1999. /s/ WILLIAM H. DONALDSON ------------------------ William H. Donaldson POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his/her true and lawful attorney, for him/her and in his/her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and seal this 24th day of February, 1999. /s/ JANE EVANS -------------- Jane Evans POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his/her true and lawful attorney, for him/her and in his/her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and seal this 24th day of February, 1999. /s/ ROBERT E.R. HUNTLEY ----------------------- Robert E.R. Huntley POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his/her true and lawful attorney, for him/her and in his/her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and seal this 24th day of February, 1999. /s/ RUPERT MURDOCH ------------------ Rupert Murdoch POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day of March, 1999. /s/ JOHN D. NICHOLS ------------------- John D. Nichols POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his/her true and lawful attorney, for him/her and in his/her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and seal this 24th day of February, 1999. /s/ LUCIO A. NOTO ----------------- Lucio A. Noto POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day of March, 1999. /s/ RICHARD D. PARSONS ---------------------- Richard D. Parsons POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his/her true and lawful attorney, for him/her and in his/her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and seal this 24th day of February, 1999. /s/ JOHN S. REED ---------------- John S. Reed POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his/her true and lawful attorney, for him/her and in his/her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and seal this 24th day of February, 1999. /s/ CARLOS SLIM HELU -------------------- Carlos Slim Helu POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Murray H. Bring and Louis C. Camilleri, or any one or more of them, his/her true and lawful attorney, for him/her and in his/her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 1998 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these presents. IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and seal this 24th day of February, 1999. /s/ STEPHEN M. WOLF ------------------- Stephen M. Wolf EX-99.1 8 PENDING LITIGATION EXHIBIT 99.1 CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS As described in Item 3 of this Annual Report on Form 10-K and Note 16 to the Company's consolidated financial statements included as Exhibit 13 hereto, 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 three 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, and (iii) health care cost recovery cases brought by governmental and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking. Governmental plaintiffs have included local, state and certain foreign governmental entities. Non-governmental plaintiffs in these cases include union health and welfare trust funds, Blue Cross/Blue Shield groups, health maintenance organizations, hospitals, native American tribes, taxpayers and others. The following lists the pending claims included in the latter two of these categories and certain other pending claims. Certain developments in these cases since October 1, 1998, are also described. Prior developments in these cases are described in the Company's Quarterly Reports on Form 10-Q. SMOKING AND HEALTH LITIGATION The following lists the smoking and health class actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates, including Philip Morris International, as of March 1, 1999, and describes certain developments since October 1, 1998. ENGLE, ET AL. V. R.J. REYNOLDS TOBACCO CO., ET AL., CIRCUIT COURT, DADE COUNTY, FLORIDA, FILED MAY 5, 1994. The trial is currently underway. GRANIER, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, LOUISIANA, FILED SEPTEMBER 26, 1994. 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. 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. SCOTT, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., DISTRICT COURT, ORLEANS PARISH, LOUISIANA, FILED MAY 24, 1996. In November 1998, the intermediate appellate court 1 affirmed the trial court's certification of the medical monitoring class. In February 1999, the Louisiana Supreme Court declined to hear defendants' appeal of the class certification ruling. FROSINA, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPREME COURT, NEW YORK COUNTY, NEW YORK, FILED JUNE 19, 1996. REED, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, DISTRICT OF COLUMBIA, FILED JUNE 21, 1996. BARNES (formerly ARCH), ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, PENNSYLVANIA, FILED AUGUST 8, 1996. In November 1998, the appellate court upheld the trial court's decertification of the class and dismissal of the case. LYONS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, ALABAMA, FILED AUGUST 8, 1996. BLAYLOCK (formerly HOLMES and formerly CROZIER) V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT, MONTGOMERY COUNTY, ALABAMA, FILED AUGUST 8, 1996. In March 1999, the court dismissed this case without prejudice. CHAMBERLAIN, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, OHIO, FILED AUGUST 14, 1996. THOMPSON, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES DISTRICT COURT, MINNESOTA, FILED SEPTEMBER 4, 1996. PERRY/CHAMPION, ET AL. V. AMERICAN TOBACCO CO., INC., ET AL., CIRCUIT COURT FOR COFFEE COUNTY, TENNESSEE, AT MANCHESTER, 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. HANSEN, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, ARKANSAS, FILED NOVEMBER 4, 1996. MCCUNE, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT OF KANAWHA COUNTY, WEST VIRGINIA, FILED JANUARY 31, 1997. MUNCY (formerly INGLE and formerly WOODS), ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT, MCDOWELL COUNTY, WEST VIRGINIA, FILED FEBRUARY 4, 1997. EMIG (formerly GREEN), ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, KANSAS, FILED FEBRUARY 6, 1997. In December 1998, the court denied plaintiffs' motion for class certification. PETERSON, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, 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. 2 SELCER, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, NEVADA, FILED MARCH 3, 1997. INSOLIA, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT, WISCONSIN, FILED APRIL 21, 1997. In December 1998, the court denied plaintiffs' motion for class certification. GEIGER, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPREME COURT, QUEENS COUNTY, NEW YORK, FILED APRIL 30, 1997. COLE, ET AL. V. THE TOBACCO INSTITUTE, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, TEXAS, TEXARKANA DIVISION, FILED MAY 5, 1997. COSENTINO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, MIDDLESEX COUNTY, NEW JERSEY, FILED MAY 21, 1997. In October 1998, the trial court denied plaintiffs' motion for class certification. CLAY, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, ILLINOIS, BENTON DIVISION, FILED MAY 22, 1997. ANDERSON, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, TENNESSEE, FILED MAY 23, 1997. TAYLOR, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., CIRCUIT COURT, WAYNE COUNTY, MICHIGAN, FILED MAY 23, 1997. LYONS, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, GEORGIA, FILED MAY 27, 1997. In December 1998, plaintiffs voluntarily dismissed this case without prejudice. KIRSTEIN (formerly ENRIGHT), ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT, MIDDLESEX COUNTY, NEW JERSEY, FILED MAY 28, 1997. In October 1998, the court denied plaintiffs' motion for class certification. TEPPER, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, MIDDLESEX COUNTY, NEW JERSEY, FILED MAY 28, 1997. In October 1998, the court denied plaintiffs' motion for class certification. BROWN, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT, SAN DIEGO COUNTY, CALIFORNIA, FILED JUNE 10, 1997. LIPPINCOTT, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., SUPERIOR COURT, MIDDLESEX COUNTY, NEW JERSEY, FILED JUNE 13, 1997. In October 1998, the court denied plaintiffs' motion for class certification. BRAMMER, ET AL. V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, IOWA, FILED JUNE 20, 1997. KNOWLES, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, LOUISIANA, FILED JUNE 30, 1997. In December 1998, plaintiffs voluntarily dismissed this case without prejudice. DALEY, ET AL. V. AMERICAN BRANDS, INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED JULY 7, 1997. 3 PISCITELLO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, MIDDLESEX COUNTY, NEW JERSEY, FILED JULY 28, 1997. In October 1998, the court denied plaintiffs' motion for class certification. DASILVA, ET AL. V. NIGERIAN TOBACCO COMPANY, ET AL., HIGH COURT OF LAGOS STATE, NIGERIA, FILED SEPTEMBER 8, 1997. BUSH, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, TEXAS, FILED SEPTEMBER 10, 1997. NWANZE, ET AL. V. PHILIP MORRIS COMPANIES INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED SEPTEMBER 29, 1997. BADILLO, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, NEVADA, FILED OCTOBER 8, 1997. NEWBORN, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT, TENNESSEE, FILED OCTOBER 9, 1997. YOUNG, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIVIL DISTRICT COURT, ORLEANS PARISH, STATE OF LOUISIANA, FILED NOVEMBER 12, 1997. AKSAMIT, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES DISTRICT COURT, SOUTH CAROLINA, FILED NOVEMBER 20, 1997. DIENNO, ET AL. V. LIGGETT GROUP, INC., ET AL., UNITED STATES DISTRICT COURT, NEVADA, FILED DECEMBER 22, 1997. In December 1998, this case was consolidated with the BADILLO case mentioned above. 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. NATIONAL ASSOCIATION FOR ASSISTANCE TO CONSUMERS AND WORKERS V. SOUZA CRUZ S.A. AND PHILIP MORRIS BRASIL S.A., THE FIFTH COURT OF BANKRUPTCIES AND REORGANIZATIONS OF THE CAPITAL DISTRICT OF THE STATE OF RIO DE JANEIRO, BRAZIL, FILED MARCH 16, 1998. BASIK (formerly MENDYS), ET AL. V. LORILLARD TOBACCO COMPANY, ET AL., CIRCUIT COURT OF COOK COUNTY, 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. CHRISTENSEN, ET AL. V. PHILIP MORRIS COMPANIES INC., ET AL., UNITED STATES DISTRICT COURT, NEVADA, FILED APRIL 3, 1998. AVALLONE, ET AL. V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., NEW JERSEY SUPERIOR COURT, ATLANTIC COUNTY LAW DIVISION, FILED APRIL 23, 1998. 4 COLLIER, ET AL. V. PHILIP MORRIS INCORPORATED, UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT OF MISSISSIPPI, FILED MAY 26, 1998. In March 1999, plaintiffs filed a motion to voluntarily dismiss this case without prejudice. CLEARY, ET AL. V. PM INC., ET AL., CIRCUIT COURT, COOK COUNTY ILLINOIS, COUNTY LAW DEPARTMENT, LAW DIVISION, FILED JUNE 3, 1998. VAUGHAN, ET AL. V. PHILIP MORRIS INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT OF VIRGINIA, FILED JULY 30, 1998. CREEKMORE, ET AL. V. BROWN & WILLIAMSON, ET AL., SUPERIOR COURT OF 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. SMOKERS FOR FAIRNESS, LLC ET AL. V. THE STATE OF CALIFORNIA, ET AL., LOS ANGELES, SUPERIOR COURT, CALIFORNIA, FILED SEPTEMBER 25, 1998. This purported class action is brought on behalf of all California smokers. It purports to allege eight causes of action: two against the State of California and other California public entities, and six against PM Inc. and other tobacco company defendants. Against the state and the other public entities, the first cause of action seeks to prohibit the public entities from concluding any settlements with the tobacco company defendants; the second cause of action seeks a refund of all tobacco taxes the purported class has paid. Against PM Inc. and the other tobacco company defendants, plaintiffs allege causes of action for fraud, violations of the California Consumers Legal Remedies Act, breach of express and implied warranties, strict liability, and violations of the California Unfair Competition Law and False Advertising Law. Plaintiffs seek from the tobacco companies unspecified general damages, special damages, restitution, a permanent and preliminary injunction restraining defendants from committing the acts and offenses alleged in the complaint, and attorneys' fees and costs. SWEENEY, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT, PENNSYLVANIA, FILED OCTOBER 15, 1998. BROWN, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT OF PENNSYLVANIA, FILED OCTOBER 16, 1998. In this case, plaintiffs allege that tobacco companies' "discriminatory targeting of menthol tobacco product sales to Black Americans" violates federal civil rights statutes. GATLIN, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT OF MISSOURI, FILED DECEMBER 21, 1998. JONES, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., CIRCUIT COURT, JACKSON COUNTY, MISSOURI, FILED DECEMBER 22, 1998. 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 March 1, 1999, and describes certain developments since October 1, 1998. Exhibit 99.2 hereto sets forth the status of the Master Settlement Agreement ("MSA")in each of the respective settling jurisdictions. 5 CITY AND COUNTY OF SAN FRANCISCO, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED JUNE 6, 1996. COUNTY OF LOS ANGELES V. R.J. REYNOLDS TOBACCO COMPANY, ET AL., SUPERIOR COURT, SAN DIEGO COUNTY, CALIFORNIA, FILED AUGUST 5, 1996. This case was dismissed with prejudice in December 1998. PEOPLE OF THE STATE OF CALIFORNIA V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT, SAN FRANCISCO COUNTY, CALIFORNIA, FILED SEPTEMBER 5, 1996. CITY OF NEW YORK, ET AL. V. THE TOBACCO INSTITUTE, ET AL., SUPREME COURT, NEW YORK COUNTY, NEW YORK, FILED OCTOBER 17, 1996. In January 1999, the court ruled that the pending motions in this case, including motions to dismiss, were "moot" as this case has been settled as part of the MSA. COUNTY OF ERIE V. THE TOBACCO INSTITUTE, INC., ET AL., SUPREME COURT, ERIE COUNTY, NEW YORK, FILED JANUARY 14, 1997. In February 1999, the court stayed this action until decision of Erie County's appeal of the New York trial court's approval of the MSA or until further order of the court. COUNTY OF COOK V. PHILIP MORRIS, INCORPORATED, ET AL., CIRCUIT COURT, COOK COUNTY, ILLINOIS, FILED APRIL 18, 1997. STATIONARY ENGINEERS LOCAL 39 HEALTH AND WELFARE TRUST FUND V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, CALIFORNIA, FILED APRIL 25, 1997. IRON WORKERS LOCAL UNION NO. 17 INSURANCE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, OHIO, EASTERN DIVISION, FILED MAY 20, 1997. In October 1998, the trial court granted plaintiffs' motion to certify a class consisting of all Ohio labor health and welfare funds and, in February 1999, the Court of Appeals declined to review the trial court's class certification. The trial of this case began on February 22, 1999. NORTHWEST LABORERS-EMPLOYERS HEALTH AND SECURITY TRUST FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT, WASHINGTON, FILED MAY 21, 1997. In December 1998, the court denied defendants' motion for judgment on the pleadings. UNIVERSITY OF SOUTHERN ALABAMA V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, ALABAMA, FILED MAY 23, 1997. In March 1999, the Court of Appeals reversed the trial court's dismissal of this case. CENTRAL LABORERS WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., CIRCUIT COURT FOR THE THIRD JUDICIAL CIRCUIT, MADISON COUNTY, ILLINOIS, FILED MAY 30, 1997. MASSACHUSETTS LABORERS HEALTH AND WELFARE FUND V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, MASSACHUSETTS, FILED JUNE 2, 1997. THE LOWER BRULE SIOUX TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL COURT, LOWER BRULE SIOUX TRIBE, FILED JUNE 4, 1997. 6 HAWAII HEALTH AND WELFARE TRUST FUND FOR OPERATING ENGINEERS V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, HAWAII, FILED JUNE 13, 1997. In January 1999, the court granted defendants' motion to dismiss based on the remoteness doctrine. LABORERS LOCAL 17 HEALTH AND BENEFIT FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED JUNE 19, 1997. THE MUSCOGEE CREEK NATION, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., DISTRICT COURT, MUSCOGEE CREEK NATION, OKMULGEE DISTRICT, FILED JUNE 20, 1997. KENTUCKY LABORERS DISTRICT COUNCIL HEALTH AND WELFARE TRUST FUND, ET AL. V. HILL & KNOWLTON, INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT, KENTUCKY, LOUISVILLE DIVISION, FILED JUNE 20, 1997. OREGON LABORERS -- EMPLOYERS HEALTH AND WELFARE TRUST FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, OREGON, FILED JUNE 20, 1997. UNITED FEDERATION OF TEACHERS WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, NEW YORK, FILED JUNE 25, 1997. LABORERS AND OPERATING ENGINEERS UTILITY AGREEMENT HEALTH AND WELFARE TRUST FUND FOR ARIZONA V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, ARIZONA, FILED JULY 7, 1997. In February 1999, the court granted defendants' motion to dismiss for failure to state a claim. INTERNATIONAL UNION OF OPERATING ENGINEERS, LOCAL 132, HEALTH AND WELFARE FUND V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, WEST VIRGINIA, HUNTINGTON DIVISION, FILED JULY 10, 1997. In January 1999, the court granted plaintiffs' motion to drop its class allegations. RHODE ISLAND LABORERS HEALTH AND WELFARE FUND V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, RHODE ISLAND, FILED JULY 20, 1997. EASTERN STATES HEALTH AND WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., SUPREME COURT, STATE OF NEW YORK, COUNTY OF NEW YORK, FILED JULY 28, 1997. ASBESTOS WORKERS LOCAL 53 HEALTH AND WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, LOUISIANA, FILED AUGUST 15, 1997. STEAMFITTERS LOCAL UNION NO. 420 WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, PENNSYLVANIA, FILED AUGUST 21, 1997. CONSTRUCTION LABORERS OF GREATER ST. LOUIS WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, MISSOURI, FILED SEPTEMBER 2, 1997. THE ARKANSAS CARPENTERS HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, ARKANSAS, FILED SEPTEMBER 4, 1997. WEST VIRGINIA--OHIO VALLEY AREA INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS WELFARE FUND V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, WEST VIRGINIA, FILED SEPTEMBER 11, 1997. 7 TEAMSTERS UNION NO. 142 HEALTH AND WELFARE TRUST FUND AND SHEET METAL WORKERS LOCAL UNION NO. 20 WELFARE AND BENEFIT FUND V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT OF ST. JOSEPH COUNTY, INDIANA, FILED SEPTEMBER 12, 1997. CROW CREEK SIOUX TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL., TRIBAL COURT, CROW CREEK SIOUX TRIBE, FILED SEPTEMBER 14, 1997. PUERTO RICAN ILGWU HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS INC., ET AL., SUPREME COURT, STATE OF NEW YORK, COUNTY OF NEW YORK, FILED SEPTEMBER 17, 1997. NEW JERSEY CARPENTERS' HEALTH FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, NEW JERSEY, FILED SEPTEMBER 25, 1997. NEW MEXICO AND WEST TEXAS MULTI-CRAFT HEALTH AND WELFARE TRUST FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., SECOND JUDICIAL DISTRICT COURT, BERNALILLO COUNTY, NEW MEXICO, FILED OCTOBER 10, 1997. In December 1998, the court dismissed the case with prejudice noting that the "remoteness doctrine was the principle catalyst for this decision." REPUBLIC OF THE MARSHALL ISLANDS V. THE AMERICAN TOBACCO COMPANY, ET AL., HIGH COURT, REPUBLIC OF THE MARSHALL ISLANDS, FILED OCTOBER 20, 1997. In December 1998, the court granted a motion to dismiss for lack of personal jurisdiction with respect to the "holding company" and "unaffiliated" defendants, including the Company, but denied the motion with respect to the "manufacturer" defendants, including PM Inc. and Philip Morris Products Inc. CENTRAL STATES JOINT BOARD V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED OCTOBER 20, 1997. In December 1998, the court granted defendants' motion to dismiss. INTERNATIONAL BROTHERHOOD OF TEAMSTERS, LOCAL 734 V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED OCTOBER 20, 1997. In December 1998, the court granted defendants' motion to dismiss. TEXAS CARPENTERS HEALTH BENEFIT FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, TEXAS, BEAUMONT DIVISION, FILED OCTOBER 31, 1997. 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. B.A.C. LOCAL 32 INSURANCE TRUST FUND, ET AL. V. PHILIP MORRIS, INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, MICHIGAN, FILED NOVEMBER 14, 1997. IBEW LOCAL 25 HEALTH AND BENEFIT FUND V. PHILIP MORRIS, INC., ET AL., SUPREME COURT, STATE OF NEW YORK, COUNTY OF NEW YORK, FILED NOVEMBER 25, 1997. IBEW LOCAL 363 WELFARE FUND V. PHILIP MORRIS, INC., ET AL., SUPREME COURT, STATE OF NEW YORK, COUNTY OF NEW YORK, FILED NOVEMBER 25, 1997. LOCAL 138, 138A AND 138B INTERNATIONAL UNION OF OPERATING ENGINEERS WELFARE FUND V. PHILIP MORRIS, INC., ET AL., SUPREME COURT, STATE OF NEW YORK, COUNTY OF NEW YORK, FILED NOVEMBER 25, 1997. 8 LOCAL 840, INTERNATIONAL BROTHERHOOD OF TEAMSTERS HEALTH AND INSURANCE FUND V. PHILIP MORRIS, INC., ET AL., SUPREME COURT, STATE OF NEW YORK, COUNTY OF NEW YORK, FILED NOVEMBER 25, 1997. LONG ISLAND REGIONAL COUNCIL OF CARPENTERS WELFARE FUND V. PHILIP MORRIS, INC., SUPREME COURT, STATE OF NEW YORK, COUNTY OF NEW YORK, FILED NOVEMBER 25, 1997. DAY CARE COUNCIL - LOCAL 205 D.C. 1707 WELFARE FUND V. PHILIP MORRIS, INC., ET AL., SUPREME COURT, STATE OF NEW YORK, COUNTY OF NEW YORK, FILED DECEMBER 8, 1997. LOCAL 1199 HOME CARE INDUSTRY BENEFIT FUND V. PHILIP MORRIS, INC., ET AL., SUPREME COURT, STATE OF NEW YORK, COUNTY OF NEW YORK, FILED DECEMBER 8, 1997. 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. MASON, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, TEXAS, FILED DECEMBER 23, 1997. In January 1999, the court denied defendants' motion to dismiss for failure to state a claim. OPERATING ENGINEERS LOCAL 324 HEALTH CARE FUND, ET AL. V. PHILIP MORRIS, INC., ET AL., CIRCUIT COURT, WAYNE COUNTY, MICHIGAN, FILED DECEMBER 30, 1997. In February 1999, the court granted defendants' motion to dismiss. CARPENTERS & JOINERS WELFARE FUND, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, MINNESOTA, FILED DECEMBER 31, 1997. 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 court granted defendants' motion to dismiss as to plaintiffs' antitrust claim, but otherwise denied the motion. WOODS, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, MIDDLE DISTRICT, NORTH CAROLINA, FILED FEBRUARY 13, 1998. NATIONAL ASBESTOS WORKERS MEDICAL FUND, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK, FILED FEBRUARY 27, 1998. In October 1998, the court denied defendants' motion to dismiss. MILWAUKEE CARPENTERS, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., CIRCUIT COURT, MILWAUKEE COUNTY, WISCONSIN, FILED MARCH 4, 1998. GROUP HEALTH PLAN, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, MINNESOTA, FILED MARCH 11, 1998. 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. GREAT LAKES SALES & MARKETING, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL. (FORMERLY WILLIAMS & DRAKE COMPANY, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL.), UNITED STATES DISTRICT COURT, WESTERN DISTRICT, PENNSYLVANIA, FILED MARCH 23, 1998. In December 1998, the court dismissed this case with prejudice. 9 CONWED CORPORATION AND LEUCADIA, INC. V. RJ REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT, MINNESOTA, FILED APRIL 9, 1998. IN RE TOBACCO CASES II, SUPERIOR COURT FOR THE STATE OF CALIFORNIA, JUDICIAL COUNCIL COORDINATION PROCEEDING NO. 4042. The court in this case has consolidated 30 previously filed cases, including 25 health care cost recovery actions filed by unions. ARKANSAS BLUE CROSS AND BLUE SHIELD, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT, ILLINOIS, FILED APRIL 29, 1998. 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 February 1999, the court denied certain defendants' motions to dismiss for failure to state a claim and failure to join necessary parties. REGENCE BLUESHIELD, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT, WASHINGTON, FILED APRIL 29, 1998. In January 1999, the court granted certain defendants' motion to dismiss for failure to state a claim, holding that plaintiffs do not have standing to bring the action because the alleged injuries are not distinct and separate from the alleged injuries to the health care plan members and are, therefore, too remote. SISSETON-WAHPETON SIOUX TRIBE V. PHILIP MORRIS INCORPORATED, ET AL., TRIBAL COURT OF THE SISSETON-WAHPETON SIOUX TRIBE, FILED MAY 8, 1998. STANDING ROCK SIOUX TRIBE V. PHILIP MORRIS INCORPORATED, ET AL., TRIBAL COURT OF THE STANDING ROCK SIOUX INDIAN RESERVATION, FILED MAY 8, 1998. In March 1999, the court denied defendants' motion to dismiss. THE REPUBLIC OF GUATEMALA V. THE TOBACCO INSTITUTE, INC., ET AL., UNITED STATES DISTRICT COURT, DISTRICT OF COLUMBIA, FILED MAY 11, 1998. UTAH LABORERS' HEALTH AND WELFARE FUND, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED STATES DISTRICT COURT, UTAH, FILED JUNE 13, 1998. 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. MICHAEL H. HOLLAND, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, DISTRICT OF COLUMBIA, FILED JULY 9, 1998. CONTRACTORS, LABORERS, TEAMSTERS & ENGINEERS HEALTH & WELFARE PLAN V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, NEBRASKA, FILED AUGUST 11, 1998. In February 1999, the court granted defendants' motion to dismiss for failure to state a claim. THE REPUBLIC OF PANAMA V. THE AMERICAN TOBACCO COMPANY, INC., ET AL., UNITED STATES DISTRICT COURT, EASTERN DISTRICT, LOUISIANA, FILED SEPTEMBER 11, 1998. KUPAT HOLIM CLALIT V. PHILIP MORRIS, INC., ET AL., JERUSALEM DISTRICT COURT, ISRAEL, FILED SEPTEMBER 28, 1998. CITY OF ST. LOUIS V. AMERICAN TOBACCO, ET AL., CIRCUIT COURT OF THE CITY OF ST. LOUIS, MISSOURI, FILED NOVEMBER 23, 1998. 10 COUNTY OF ST. LOUIS V. AMERICAN TOBACCO, ET AL., CIRCUIT COURT OF ST. LOUIS, MISSOURI, FILED DECEMBER 3, 1998. ALLEGHENY GENERAL HOSPITAL, ET AL. V. PHILIP MORRIS, INC., ET AL., UNITED STATES DISTRICT COURT, WESTERN DISTRICT, PENNSYLVANIA, FILED DECEMBER 10, 1998. THE REPUBLIC OF NICARAGUA V. LIGGETT GROUP, INC., ET AL., UNITED STATES DISTRICT COURT, PUERTO RICO, FILED DECEMBER 10, 1998. THE REPUBLIC OF BOLIVIA V. PHILIP MORRIS COMPANIES INC., ET AL., UNITED STATES DISTRICT COURT, DISTRICT OF COLUMBIA, FILED JANUARY 20, 1999. In March 1999, the United States District Court for the Southern District of Texas transferred this case to the United States District Court for the District of Columbia. THE REPUBLIC OF VENEZUELA V. PHILIP MORRIS COMPANIES INC., ET AL., CIRCUIT COURT OF THE ELEVENTH JUDICIAL CIRCUIT, MIAMI-DADE COUNTY, FLORIDA, FILED JANUARY 27, 1999. THE KINGDOM OF THAILAND V. TOBACCO INSTITUTE, ET AL., UNITED STATES DISTRICT COURT, SOUTHERN DISTRICT, TEXAS, FILED JANUARY 29, 1999. CERTAIN OTHER ACTIONS The following lists certain other actions pending against the Company and/or various subsidiaries and others. The "National Cheese Exchange" cases referenced below are described in Note 16 to the Company's consolidated financial statements, and the other categories of cases are described in Item 3 of this Annual Report on Form 10-K. NATIONAL CHEESE EXCHANGE CASES o CONSOLIDATED ACTION o SERVAIS, ET AL. V. KRAFT FOODS, INC. AND THE NATIONAL CHEESE EXCHANGE, INC., CIRCUIT COURT OF DANE COUNTY, WISCONSIN, FILED MAY 5, 1997. o DODSON, ET AL. V. KRAFT FOODS, INC., ET AL., CIRCUIT COURT OF DANE COUNTY, WISCONSIN, FILED JULY 1, 1997. o NOLL, ET AL. V. KRAFT FOODS, INC., ET AL., CIRCUIT COURT OF DANE COUNTY, WISCONSIN, FILED JULY 11, 1997. o VINCENT, ET AL. V. KRAFT FOODS, INC., CIRCUIT COURT OF COOK COUNTY, ILLINOIS, FILED OCTOBER 27, 1997. In December 1998, the court granted defendant's motion to dismiss. o KNEVELBOARD DAIRIES, ET AL. V. KRAFT FOODS, INC., ET AL., UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA, FILED APRIL 14, 1998. In December 1998, the court granted defendants' motion to dismiss. 11 ASBESTOS CONTRIBUTION CASES o RAYMARK INDUSTRIES, INC. V. R. J. REYNOLDS TOBACCO COMPANY, ET AL., CIRCUIT COURT, FOURTH JUDICIAL CIRCUIT, DUVAL COUNTY, FLORIDA, FILED SEPTEMBER 15, 1997. o RAYMARK INDUSTRIES, INC. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF GEORGIA, ATLANTA DIVISION, FILED SEPTEMBER 15, 1997. o FIBREBOARD CORPORATION AND OWENS CORNING V. THE AMERICAN TOBACCO COMPANY, ET AL., SUPERIOR COURT OF ALAMEDA COUNTY, CALIFORNIA, FILED DECEMBER 11, 1997. o KEENE CREDITORS TRUST V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., SUPREME COURT OF NEW YORK COUNTY, NEW YORK, FILED DECEMBER 19, 1997. o ROBERT A. FALISE, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, FILED DECEMBER 31, 1997. o H. K. PORTER COMPANY, INC. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK, FILED DECEMBER 31, 1997. o RAYMARK INDUSTRIES, INC. V. R. J. REYNOLDS TOBACCO COMPANY, ET. AL., CIRCUIT COURT, FOURTH JUDICIAL CIRCUIT, DUVAL COUNTY, FLORIDA, FILED DECEMBER 31, 1997. o RAYMARK INDUSTRIES, INC. V. THE AMERICAN TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK, FILED JANUARY 30, 1998. o EZELL THOMAS (AS TO ALL DEFENDANTS) AND OWENS CORNING (AS TO ALL TOBACCO DEFENDANTS ONLY) V. R. J. REYNOLDS TOBACCO COMPANY, ET AL., CIRCUIT COURT OF JEFFERSON COUNTY, MISSISSIPPI, FILED AUGUST 30, 1998. o THE SEIBELS BRUCE GROUP, INC. V. R. J. REYNOLDS TOBACCO COMPANY, ET AL., UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA, FILED DECEMBER 30, 1998. PROPOSITION 65 CASES o THE PEOPLE OF THE STATE OF CALIFORNIA, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., SUPERIOR COURT OF LOS ANGELES COUNTY, CALIFORNIA, FILED JULY 14, 1998. o THE PEOPLE OF THE STATE OF CALIFORNIA, ET AL. V. BROWN & WILLIAMSON TOBACCO CORPORATION, ET AL., SUPERIOR COURT OF SAN FRANCISCO COUNTY, CALIFORNIA, FILED JULY 28, 1998. In March 1998, the court coordinated this case with IN RE TOBACCO CASES II discussed above. MARLBORO LIGHT/ULTRA LIGHT CASES o HOGUE, ET AL. V. PHILIP MORRIS COMPANIES, INC. AND PHILIP MORRIS, INC., UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF FLORIDA, FILED JUNE 30, 1998. 12 o CUMMIS, ET AL. V. PHILIP MORRIS COMPANIES, INC. AND PHILIP MORRIS, INC., SUPERIOR COURT, MIDDLESEX COUNTY, NEW JERSEY, FILED JULY 9, 1998. o MCNAMARA, ET AL. V. PHILIP MORRIS COMPANIES, INC. AND PHILIP MORRIS, INC., UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA, FILED JULY 16, 1998. o ASPINALL, ET AL. V. PHILIP MORRIS COMPANIES, INC. AND PHILIP MORRIS INCORPORATED, UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS, FILED NOVEMBER 24, 1998. o RUSSELL, ET AL. V. PHILIP MORRIS INCORPORATED AND PHILIP MORRIS COMPANIES, INC., UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TENNESSEE, FILED NOVEMBER 24, 1998. o MCCLURE, ET AL. V. PHILIP MORRIS COMPANIES INC. AND PHILIP MORRIS INCORPORATED, CIRCUIT COURT OF DAVIDSON COUNTY, TENNESSEE, FILED JANUARY 19, 1999. MSA-RELATED CASES o HISE, ET AL. V. PHILIP MORRIS INCORPORATED, ET AL., UNITED DISTRICT COURT FOR THE NORTHERN DISTRICT OF OKLAHOMA, FILED DECEMBER 15, 1998. o FORCES ACTION PROJECT, LLC, ET AL., V. THE STATE OF CALIFORNIA, ET. AL., UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA, FILED JANUARY 23, 1999. o FLOYD V. STATE OF WISCONSIN, ET AL., CIRCUIT COURT OF MILWAUKEE COUNTY, WISCONSIN, FILED FEBRUARY 10, 1999. RETAIL LEADERS CASE o R.J. REYNOLDS TOBACCO COMPANY V. PHILIP MORRIS INCORPORATED, UNITED STATES DISTRICT COURT, MIDDLE DISTRICT OF NORTH CAROLINA, FILED MARCH 12, 1999. 13 EX-99.2 9 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 37 of those jurisdictions. Interventions and/or challenges to the MSA (or appeals thereof) are pending in 11 jurisdictions. In addition, as described in Item 3 of this Annual Report on Form 10-K 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 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 HAWAII X IDAHO X X ILLINOIS X X INDIANA X X
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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 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
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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 WISCONSIN X X WYOMING X X
3 EX-99.3 10 TRIAL SCHEDULE EXHIBIT 99.3 TRIAL SCHEDULE FOR CERTAIN CASES Set forth below is a list of smoking and health class actions, health care cost recovery actions, Proposition 65 actions and asbestos contribution actions currently scheduled for trial through 2000 against PM Inc. and, in some cases, the Company. Trial dates, however, are subject to change.
CASE TYPE OF ACTION TRIAL DATE ---- -------------- ---------- Engle, et al. v. R.J. Reynolds Tobacco Smoking and Health Class Action In Progress Co., et al. Iron Workers Local Union No. 17 Health Care Cost Recovery Action In Progress Insurance Fund, et al. v. Philip Morris, Inc., et al. The People of the State of California, Proposition 65 Action June 28, 1999 et al. v. Brown & Williamson Tobacco Corporation, et al. Clay, et al. v. The American Tobacco Smoking and Health Class Action August 1999 Company, Inc., et al. Specific Date to be Set Northwest Laborers-Employers Health and Health Care Cost Recovery Action September 7, 1999 Security Trust Fund, et al. v. Philip Morris, Inc., et al. Robert A. Falise, et al. v. The Asbestos Contribution Action November 18, 1999 American Tobacco Company, et. al. Blue Cross and Blue Shield of New Health Care Cost Recovery Action January 10, 2000 Jersey, Inc., et al. v. Philip Morris, Incorporated, et al. Richardson, et al. v. Philip Morris Smoking and Health Class February 4, 2000 Incorporated, et al. Action Thomas and Owens Corning v. R.J. Asbestos Contribution Action February 14, 2000 Reynolds Tobacco Company, et al. Carpenters & Joiners Welfare Fund, et Health Care Cost Recovery Action March 1, 2000 al. v. Philip Morris Incorporated, et al.
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CASE TYPE OF ACTION TRIAL DATE ---- -------------- ---------- Conwed Corporation and Leucadia, Inc. Health Care Cost Recovery Action March 1, 2000 v. RJ Reynolds Tobacco Company, et al. Group Health Plan, et al. v. Philip Health Care Cost Recovery Action March 1, 2000 Morris, Inc., et al. Thompson, et al. v. American Tobacco Smoking and Health Class Action March 1, 2000 Company, Inc., et al. West Virginia--Ohio Valley Area Health Care Cost Recovery March 7, 2000 International Brotherhood of Electrical Action Workers Welfare Fund v. The American Tobacco Company, et al. National Asbestos Workers Medical Fund, Health Care Cost Recovery Action April 5, 2000 et al. v. Philip Morris Incorporated, et al. West Virginia Laborers' Pension Fund, Health Care Cost Recovery June 6, 2000 et al. v. Philip Morris, Inc., et al. Action
Below is a schedule setting forth by month the number of individual smoking and health cases against PM Inc. and, in one case, the Company, that are currently scheduled for trial through the end of the year 2000.
1999 2000 - ---- ---- May (2) March (1) June (2) April (1) September (1) May (1) October (1) September (1)
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