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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 1-8940
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PHILIP MORRIS COMPANIES INC.
(Exact name of registrant as specified in its charter)
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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)
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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
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Common Stock, $0.33 1/3 par value New York Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
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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.
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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.
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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
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* References to the Company's competitive ranking in its various businesses
are based on sales data or, in the case of cigarettes and beer, shipments,
unless otherwise indicated.
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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
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(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
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+ Data presented in this table differ in some cases from data discussed above
due to rounding differences.
* Source: Management Science Associates.
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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.
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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
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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
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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
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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
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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