SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8940
Virginia 13-3260245
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Park Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (917) 663-5000
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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, and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )
At April 30, 2001, there were 2,199,658,085 shares outstanding of the registrant's common stock, par value $0.33 1/3 per share.
PHILIP MORRIS COMPANIES INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets at
March 31, 2001 and December 31, 2000 3 - 4
Condensed Consolidated Statements of Earnings for the
Three Months Ended March 31, 2001 and 2000 5
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 2000 and the
Three Months Ended March 31, 2001 6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2001 and 2000 7 - 8
Notes to Condensed Consolidated Financial Statements 9 - 25
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 26 - 41
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 42
Item 4. Submission of Matters to a Vote of Security Holders. 42 - 43
Item 6. Exhibits and Reports on Form 8-K. 43
Signature 44
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
March 31, December 31,
2001 2000
------- -------
ASSETS
Consumer products
Cash and cash equivalents $ 426 $ 937
Receivables (less allowances of
$196 and $199) 5,148 5,019
Inventories:
Leaf tobacco 3,683 3,749
Other raw materials 1,987 1,721
Finished product 3,355 3,295
------- -------
9,025 8,765
Other current assets 2,007 2,517
------- -------
Total current assets 16,606 17,238
Property, plant and equipment, at cost 25,104 24,906
Less accumulated depreciation 9,845 9,603
------- -------
15,259 15,303
Goodwill and other intangible assets
(less accumulated amortization of
$6,606 and $6,319) 33,159 33,090
Assets held for sale 221 276
Other assets 5,891 4,758
------- -------
Total consumer products assets 71,136 70,665
Financial services
Finance assets, net 8,156 8,118
Other assets 206 284
------- -------
Total financial services assets 8,362 8,402
------- -------
TOTAL ASSETS $79,498 $79,067
======= =======
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See notes to condensed consolidated financial statements.
Continued
Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except per share data)
(Unaudited)
March 31, December 31,
2001 2000
-------- --------
LIABILITIES
Consumer products
Short-term borrowings $ 5,274 $ 3,166
Current portion of long-term debt 5,515 5,775
Accounts payable 2,847 3,787
Accrued marketing 2,930 3,082
Accrued taxes, except income taxes 1,721 1,436
Employment costs 758 1,317
Accrued settlement charges 1,869 2,724
Other accrued liabilities 4,398 2,572
Income taxes 812 914
Dividends payable 1,175 1,176
-------- --------
Total current liabilities 27,299 25,949
Long-term debt 17,817 18,255
Deferred income taxes 1,705 1,827
Accrued postretirement health care costs 3,308 3,287
Other liabilities 7,209 7,317
-------- --------
Total consumer products liabilities 57,338 56,635
Financial services
Short-term borrowings 959 1,027
Long-term debt 895 899
Deferred income taxes 4,831 4,838
Other liabilities 645 663
-------- --------
Total financial services liabilities 7,330 7,427
-------- --------
Total liabilities 64,668 64,062
Contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, par value $0.33 1/3 per share
(2,805,961,317 shares issued) 935 935
Earnings reinvested in the business 34,055 33,481
Accumulated other comprehensive losses (including
currency translation of $3,041 and $2,864) (3,095) (2,950)
-------- --------
31,895 31,466
Less cost of repurchased stock
(604,113,628 and 597,064,937 shares) (17,065) (16,461)
-------- --------
Total stockholders' equity 14,830 15,005
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 79,498 $ 79,067
======== ========
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See notes to condensed consolidated financial statements.
Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
For the Three Months Ended
March 31,
-----------------------------
2001 2000
-------- --------
Operating revenues $ 22,359 $ 20,040
Cost of sales 8,225 7,303
Excise taxes on products 4,377 4,450
-------- --------
Gross profit 9,757 8,287
Marketing, administration and research costs 6,172 4,663
Amortization of goodwill 253 146
-------- --------
Operating income 3,332 3,478
Interest and other debt expense, net 451 185
-------- --------
Earnings before income taxes 2,881 3,293
Provision for income taxes 1,095 1,284
-------- --------
Earnings before cumulative effect of accounting change 1,786 2,009
Cumulative effect of accounting change (6)
-------- --------
Net earnings $ 1,780 $ 2,009
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Per share data:
Basic earnings per share before cumulative effect of
accounting change $ 0.81 $ 0.87
Cumulative effect of accounting change
-------- --------
Basic earnings per share $ 0.81 $ 0.87
======== ========
Diluted earnings per share before cumulative effect of
accounting change $ 0.80 $ 0.87
Cumulative effect of accounting change
-------- --------
Diluted earnings per share $ 0.80 $ 0.87
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Dividends declared $ 0.53 $ 0.48
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See notes to condensed consolidated financial statements.
Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 2000 and the Three Months Ended March 31, 2001
(in millions of dollars, except per share data)
(Unaudited)
Accumulated Other
Comprehensive Losses
Earnings ----------------------------- Total
Reinvested Currency Cost of Stock-
Common in the Translation Repurchased holders'
Stock Business Adjustments Other Total Stock Equity
----- ------- ------- ------ ------- -------- -------
Balances, January 1, 2000 $ 935 $29,556 $(2,056) $ (52) $(2,108) $(13,078) $15,305
Comprehensive earnings:
Net earnings 8,510 8,510
Other comprehensive losses,
net of income taxes:
Currency translation adjustments (808) (808) (808)
Additional minimum pension liability (34) (34) (34)
-------
Total other comprehensive losses (842)
-------
Total comprehensive earnings 7,668
-------
Exercise of stock options and
issuance of other stock awards (37) 217 180
Cash dividends
declared ($2.02 per share) (4,548) (4,548)
Stock repurchased (3,600) (3,600)
----- ------- ------- ------ ------- -------- -------
Balances, December 31, 2000 935 33,481 (2,864) (86) (2,950) (16,461) 15,005
Comprehensive earnings:
Net earnings 1,780 1,780
Other comprehensive losses,
net of income taxes:
Currency translation adjustments (177) (177) (177)
Change in fair value of derivatives
accounted for as hedges 32 32 32
-------
Total other comprehensive losses (145)
-------
Total comprehensive earnings 1,635
-------
Exercise of stock options and
issuance of other stock awards (36) 396 360
Cash dividends
declared ($0.53 per share) (1,170) (1,170)
Stock repurchased (1,000) (1,000)
----- ------- ------- ------ ------- -------- -------
Balances, March 31, 2001 $ 935 $34,055 $(3,041) $ (54) $(3,095) $(17,065) $14,830
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Total comprehensive earnings, which represents net earnings partially offset by currency translation adjustments, were $1,815 million in the first quarter of 2000.
See notes to condensed consolidated financial statements.
Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
For the Three Months Ended
March 31,
---------------------------
2001 2000
------- -------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $ 1,741 $ 1,972
- Financial services 39 37
------- -------
Net earnings 1,780 2,009
Adjustments to reconcile net earnings to
operating cash flows:
Consumer products
Cumulative effect of accounting change 6
Depreciation and amortization 588 428
Deferred income tax provision 479 27
Litigation related expense 500
Loss on sale of a North American food factory 29
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (220) (399)
Inventories (219) 281
Accounts payable (952) (841)
Income taxes (22) 845
Accrued liabilities and other current assets (1,448) 866
Other (77) 12
Financial services
Deferred income tax benefit (7) (20)
Other 120 135
------- -------
Net cash provided by operating activities 557 3,343
------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures (320) (305)
Purchases of businesses, net of acquired cash (255) (358)
Proceeds from sale of a business 32
Other 26 15
Financial services
Investments in finance assets (155) (142)
Proceeds from finance assets 70 7
------- -------
Net cash used in investing activities (634) (751)
------- -------
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See notes to condensed consolidated financial statements.
Continued
Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
For the Three Months Ended
March 31,
---------------------------
2001 2000
------- -------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net issuance (repayment) of short-term borrowings $ 2,195 $ (461)
Long-term debt proceeds 15 12
Long-term debt repaid (783) (1,332)
Financial services
Net (repayment) issuance of short-term borrowings (68) 452
Repurchase of common stock (986) (916)
Dividends paid (1,171) (1,125)
Issuance of common stock 351 5
Other (11) 7
------- -------
Net cash used in financing activities (458) (3,358)
------- -------
Effect of exchange rate changes on cash and
cash equivalents 24 (108)
------- -------
Cash and cash equivalents:
Decrease (511) (874)
Balance at beginning of period 937 5,100
------- -------
Balance at end of period $ 426 $ 4,226
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See notes to condensed consolidated financial statements.
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies:
The interim condensed consolidated financial statements of Philip Morris Companies Inc. (the "Company") are unaudited. It is the opinion of the Company's management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. For interim reporting purposes, certain expenses are charged to results of operations as a percentage of sales. Operating revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year.
These statements should be read in conjunction with the consolidated financial statements and related notes which appear in the Company's Annual Report to Stockholders and which are incorporated by reference into the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form 10-K").
Balance sheet accounts are segregated by two broad types of businesses. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordance with respective industry practices.
Note 2. Recently Adopted Accounting Standards:
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment, Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS No. 133"). These standards require that all derivative financial instruments be recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Changes in the fair value of derivatives will be recorded each period in earnings or accumulated other comprehensive losses, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive losses will be included in earnings in the periods in which earnings are affected by the hedged item. As of January 1, 2001, the adoption of these new standards resulted in a cumulative effect of an accounting change that reduced net earnings by $6 million, net of income taxes of $3 million and decreased accumulated other comprehensive losses by $15 million, net of income taxes of $8 million.
The Company operates internationally, with manufacturing and sales facilities in various locations around the world and utilizes certain financial instruments to manage its foreign currency, commodity and interest rate exposures, primarily related to forecasted transactions. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction will not occur, the gain or loss would be recognized in earnings currently. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company does not engage in trading or other speculative use of financial instruments.
The Company uses forward contracts and options to mitigate its exposure to changes in foreign currency exchange rates on third-party and intercompany forecasted transactions. The primary currencies to which the Company is exposed include the Japanese yen, Swiss franc and the Euro. When using options as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. The change in a foreign
Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements
(Unaudited)
currency option's time value is reported each period in interest and other debt expense, net on the Company's consolidated statement of earnings. The effective portion of unrealized gains and losses associated with forward contracts and the intrinsic value of option contracts are deferred as a component of accumulated other comprehensive losses until the underlying hedged transactions are reported on the Company's consolidated statement of earnings.
The Company uses commodity forward contracts, as cash flow hedges, to procure raw materials, primarily coffee, cocoa, sugar, milk, cheese, wheat, corn and, beginning in 2000, energy. Commodity futures and options are also used to hedge the price of certain commodities, primarily coffee and cocoa. In general, commodity forward contracts qualify for the normal purchase exception under SFAS 133 and are, therefore, not subject to the provisions of the statement. When using a commodity option as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. The change in a commodity option's time value is reported in cost of sales in the Company's consolidated statement of earnings. The effective portion of unrealized gains and losses on commodity futures contracts and options is deferred as a component of accumulated other comprehensive losses and is recognized as a component of cost of sales in the Company's consolidated statement of earnings when the related inventory is sold.
The Company uses foreign currency swaps to mitigate its exposure to changes in foreign currency exchange rates related to foreign denominated debt. These swaps convert fixed-rate foreign denominated debt to fixed-rate debt denominated in the functional currency of the issuing entity. Foreign currency swap agreements are accounted for as cash flow hedges.
The Company also uses certain foreign denominated debt instruments as net investment hedges of foreign operations. As of March 31, 2001, gains of $4 million, net of income taxes of $2 million, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive losses within currency translation adjustments.
During the quarter ended March 31, 2001, ineffectiveness related to cash flow hedges was not material. The Company is hedging forecasted transactions for periods not exceeding the next twelve months and expects all amounts reported in accumulated other comprehensive losses to be reclassified to the consolidated statement of earnings within that time frame.
During the quarter ended March 31, 2001, accumulated other comprehensive losses decreased by $17 million, which represented gains of $47 million due to hedging transactions, which were offset by $30 million reclassified from accumulated other comprehensive losses to the consolidated statement of earnings.
Note 3. Acquisitions and Divestitures:
Nabisco:
On December 11, 2000, the Company acquired all of the outstanding shares of Nabisco Holdings Corp. ("Nabisco") for $55 per share in cash. The acquisition has been accounted for as a purchase. Nabisco's balance sheet has been consolidated with the Company's balance sheet since December 31, 2000 and, beginning January 1, 2001, Nabisco's earnings have been included in the consolidated operating results of the Company.
Had the acquisition of Nabisco occurred on January 1, 2000, pro forma operating revenues, net earnings, basic earnings per share and diluted earnings per share would have been as follows:
Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the Three Months Ended
(in millions, except per share data) March 31, 2000
----------
Operating revenues $ 21,932
==========
Net earnings $ 1,858
==========
Basic earnings per share $ 0.80
==========
Diluted earnings per share $ 0.80
==========
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The pro forma results do not give effect to any synergies expected to result from the merger of Nabisco's operations with those of Kraft Foods Inc. ("Kraft"). Accordingly, the pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been consummated on January 1, 2000, nor are they necessarily indicative of future consolidated results.
The excess of the purchase price over the estimated fair value of the net assets purchased was approximately $16.8 billion and will be amortized over 40 years by the straight-line method. The allocation of excess purchase price is based upon preliminary estimates and assumptions and is subject to revision when appraisals and integration plans have been finalized. Accordingly, revisions to the allocation, which may be significant, will be reported in a future period as increases or decreases to amounts reported as goodwill, other intangible assets (including trade names), deferred income taxes and amortization of goodwill.
Kraft plans to sell a number of Nabisco businesses that do not align strategically with its operations, including Nabisco's Canadian grocery business. Accordingly, the estimated selling prices of these businesses, less costs of disposal, plus the estimated results of operations through the sales dates, are shown as assets held for sale on the Company's condensed consolidated balance sheets and total $221 million at March 31, 2001. Assets held for sale decreased by $55 million as of March 31, 2001, due primarily to a revision of estimated proceeds from the sales of these businesses. During 2001, Kraft will finalize the Nabisco acquisition balance sheet, including the completion of fair value appraisals of Nabisco's assets. During this process, Kraft will also finalize its plans to integrate the operations of Nabisco. Kraft anticipates closing a number of Nabisco manufacturing facilities. Charges to close these facilities, estimated to be in a range of $500 million to $600 million, will be recorded as adjustments to excess purchase price when plans are finalized and announced to employees.
The integration of Nabisco's operations may result in the closure of several Kraft facilities. During the first quarter of 2001, Kraft sold a North American food factory which resulted in a pre-tax loss of $29 million. Kraft estimates that the closure of Kraft facilities could result in aggregate charges to the 2001 consolidated statements of earnings in the range of $200 million to $300 million. These charges will be recorded when the integration plans have been finalized and announced to employees.
Other Acquisitions and Divestitures:
During the first quarter of 2001, Kraft Foods International, Inc. purchased coffee businesses in Romania and Morocco and announced the acquisition of a coffee business in Bulgaria. The aggregate cost of these acquisitions will be approximately $80 million. In addition, the Company increased its interest in its Argentine tobacco subsidiary for an aggregate cost of $220 million. The operating results of these businesses were not material to the consolidated operating results of the Company.
Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements
(Unaudited)
During 2000, Kraft purchased the outstanding common stock of Balance Bar Co., a maker of energy and nutrition snack products. In a separate transaction, Kraft also acquired Boca Burger, Inc., a privately held manufacturer and marketer of soy-based meat alternatives. The total cost of these acquisitions was $358 million. The operating results of these businesses were not material to the consolidated operating results in any of the periods presented.
During 2000, Kraft Foods North America and Kraft Foods International sold several small international and domestic food businesses. The operating results of businesses divested were not material to consolidated operating results in any of the periods presented.
Note 4. Earnings per Share:
Basic and diluted earnings per share ("EPS") were calculated using the following:
For the Three Months Ended
March 31,
---------------------------
2001 2000
------- -------
(in millions)
Earnings before cumulative effect of accounting change $ 1,786 $ 2,009
Cumulative effect of accounting change (6)
------- -------
Net earnings $ 1,780 $ 2,009
======= =======
Weighted average shares for basic EPS 2,201 2,315
Plus incremental shares from conversions:
Restricted stock and stock rights 6 2
Stock options 22 1
------- -------
Weighted average shares for diluted EPS 2,229 2,318
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For the first quarter of 2000, options on 119.4 million shares of common stock were excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive. The number of shares excluded from the 2001 calculation was not material.
Note 5. Segment Reporting:
The Company's products include cigarettes, food (consisting principally of a wide variety of snacks, beverages, cheese, grocery products and convenient meals) and beer. A subsidiary of the Company, Philip Morris Capital Corporation, invests in leveraged and direct finance leases, other tax-oriented financing transactions and third-party financings. These products and services constitute the Company's segments of domestic tobacco, international tobacco, North American food, international food, beer and financial services.
The Company's management reviews operating companies income to evaluate segment performance and allocate resources. Operating companies income for the segments excludes general corporate expenses, minority interest and amortization of goodwill. Interest and other debt expense, net, and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by the Company's management. During the fourth quarter of 2000, managerial responsibility for the Company's food operations in Mexico and Puerto Rico was transferred
Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements
(Unaudited)
from the international food segment to the North American food segment. Accordingly, all prior period amounts have been reclassified to reflect the transfer.
Reportable segment data were as follows:
For the Three Months Ended
March 31,
-----------------------------
2001 2000
-------- --------
Operating revenues: (in millions)
Domestic tobacco $ 5,922 $ 5,446
International tobacco 6,979 6,998
North American food 6,282 4,534
International food 2,085 1,926
Beer 991 1,044
Financial services 100 92
-------- --------
Total operating revenues $ 22,359 $ 20,040
======== ========
Operating companies income:
Domestic tobacco $ 702 $ 1,116
International tobacco 1,558 1,431
North American food 1,143 913
International food 239 200
Beer 124 153
Financial services 64 58
-------- --------
Total operating companies income 3,830 3,871
Amortization of goodwill (253) (146)
General corporate expenses (210) (215)
Minority interest (35) (32)
-------- --------
Total operating income 3,332 3,478
Interest and other debt expense, net (451) (185)
-------- --------
Total earnings before income taxes $ 2,881 $ 3,293
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As discussed in Note 6. Contingencies, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among Philip Morris Incorporated ("PM Inc."), certain other defendants and the plaintiffs that provides that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. will place $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. PM Inc. will also place an additional $500 million into a separate interest-bearing escrow account which, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, the Company has recorded a $500 million pre-tax charge in the consolidated statement of earnings for the quarter ended March 31, 2001. Interest income on the $1.2 billion escrow account will be recorded as earned in the Company's consolidated statement of earnings.
During the first quarter of 2001, the Company sold a North American food factory which resulted in a pre-tax loss of $29 million.
Note 6. Contingencies:
Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc., and Philip Morris International Inc. ("PMI"), the Company's international tobacco subsidiary, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer
Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements
(Unaudited)
protection, antitrust, tax, patent infringement, employment matters, claims for contribution and claims of competitors and distributors.
Overview of Tobacco-Related Litigation
Types and Number of Cases
Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases primarily alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking and suits by foreign governments seeking to recover damages for taxes lost as a result of the allegedly illegal importation of cigarettes into their jurisdictions. Damages claimed in some of the smoking and health class actions, health care cost recovery cases and other tobacco-related litigation range into the billions of dollars. In July 2000, a jury in a Florida smoking and health class action returned a punitive damages award of approximately $74 billion against PM Inc. (See discussion of the Engle case below.) Plaintiffs' theories of recovery and the defenses raised in the smoking and health and health care cost recovery cases are discussed below. Exhibit 99.1 hereto lists the smoking and health class actions, health care cost recovery and certain other actions pending as of May 1, 2001, and discusses certain developments in such cases since February 15, 2001.
As of May 1, 2001, there were approximately 1,500 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM Inc. and, in some instances, the Company, compared with approximately 390 such cases on May 1, 2000, and approximately 485 such cases on May 1, 1999. Approximately 1,200 of these cases are pending before a single West Virginia state court in a consolidated proceeding. An estimated 13 of the individual cases involve allegations of various personal injuries allegedly related to exposure to environmental tobacco smoke ("ETS"). In addition, approximately 3,040 additional individual cases are pending in Florida by current and former flight attendants claiming personal injuries allegedly related to ETS. The flight attendants allege that they are members of an ETS smoking and health class action which was settled in 1997. The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages.
As of May 1, 2001, there were an estimated 31 smoking and health purported 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 40 such cases on May 1, 2000, and approximately 60 such cases on May 1, 1999. Some of these actions purport to constitute statewide class actions and were filed after May 1996, when the United States Court of Appeals for the Fifth Circuit, in the Castano case, reversed a federal district court's certification of a purported nationwide class action on behalf of persons who were allegedly "addicted" to tobacco products.
As of May 1, 2001, (excluding the cases covered by the 1998 Master Settlement Agreement discussed below), there were an estimated 50 health care cost recovery actions, including the suit discussed below under "Federal Government's Lawsuit" filed by the United States government, pending in the United States against PM Inc. and in some instances, the Company, compared with approximately 50 such cases pending on May 1, 2000,
Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements
(Unaudited)
and 100 such cases on May 1, 1999. In addition, health care cost recovery actions are pending in Israel, the Marshall Islands, the Province of British Columbia, Canada and France (in a case brought by a local agency of the French social security health insurance system).
There are also a number of other tobacco-related actions pending outside the
United States against PMI and its affiliates and subsidiaries, including an
estimated 60 smoking and health cases brought on behalf of individuals
(Argentina (40), Brazil (11), Canada (1), Hong Kong (1), Ireland (1), Israel
(1), Italy (2), Japan (1), the Philippines (1), and Spain (1)), compared with
approximately 50 such cases on May 1, 2000 and 35 such cases on May 1, 1999. In
addition, there are 11 smoking and health putative class actions pending outside
the United States (Brazil (2), Canada (4), Israel (2), and Spain (3)), compared
with 10 such cases on May 1, 2000.
Federal Government's Lawsuit
In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia against various cigarette manufacturers and others, including the Company and PM Inc., asserting claims under three federal statutes, the Medical Care Recovery Act ("MCRA"), the Medicare Secondary Payer ("MSP") provisions of the Social Security Act and the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The lawsuit seeks to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants' fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans' health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleges that such costs total more than $20 billion annually. It also seeks various types of equitable and declaratory relief, including disgorgement, an injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal government's future costs of providing health care resulting from defendants' alleged past tortious and wrongful conduct. The Company and PM Inc. moved to dismiss this lawsuit on numerous grounds, including that the statutes invoked by the government do not provide a basis for the relief sought. In September 2000, the trial court dismissed the government's MCRA and MSP claims, but permitted discovery to proceed on the government's claims for equitable relief under RICO. In October 2000, the government moved for reconsideration of the trial court's order to the extent that it dismissed the MCRA claims for health care costs paid pursuant to government health benefit programs other than Medicare and the Federal Employees Health Benefits Act. The motion remains pending. In February 2001, the government filed an amended complaint attempting to replead the MSP claim. In March 2001, the Company and PM Inc. moved to dismiss the amended MSP claim. Oral argument on the motion is scheduled for June 2001. In addition, in February 2001, two Native American tribes moved for permission to intervene and file a class action complaint on behalf of federally recognized Native American tribes seeking to recover costs spent on providing health care to tribal members. The motion remains pending. Trial is scheduled for July 2003, although trial dates are subject to change. The Company and PM Inc. believe that they have a number of valid defenses to the lawsuit and will continue to vigorously defend it.
Recent Industry Trial Results
During the last two years, several jury verdicts have been returned in tobacco-related litigation. In July 2000, the jury in the Engle smoking and health class action in Florida returned a verdict assessing punitive damages totaling approximately $145 billion against all defendants in the case, including approximately $74 billion against PM Inc. (See "Engle Trial," below.)
In April 2001, a Florida jury returned a verdict in favor of defendants, including PM Inc., in an individual smoking and health case brought by a flight attendant claiming personal injuries from ETS. Plaintiff has filed post-trial motions challenging the jury's verdict. In March 2001, a Texas jury returned a verdict in favor of defendant in an individual smoking and health case against another cigarette manufacturer. In February 2001, a
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South Carolina jury returned a verdict in favor of defendant in an individual smoking and health case against another cigarette manufacturer. In January 2001, a mistrial was declared in a case in New York in which an asbestos manufacturers' personal injury settlement trust sought contribution or reimbursement from cigarette manufacturers, including PM Inc., 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. In January 2001, a New York jury returned a verdict in favor of defendants, including PM Inc., in an individual smoking and health case.
In October 2000, a Florida jury awarded plaintiff in an individual smoking and health case $200,000 in compensatory damages against another cigarette manufacturer. In December 2000, the trial court vacated the jury's verdict and granted defendant's motion for a new trial; plaintiff and defendant have appealed. In July 2000, a Mississippi jury returned a verdict in favor of defendant in an individual smoking and health case. Plaintiffs' post-trial motions challenging the verdict are currently pending. In June 2000, a New York jury returned a verdict in favor of all defendants, including PM Inc., in another individual smoking and health case, and plaintiffs have appealed the verdict. In March 2000, a California jury awarded a former smoker with lung cancer $1.72 million in compensatory damages against PM Inc. and another cigarette manufacturer, and $10 million in punitive damages against PM Inc. as well as an additional $10 million against the other defendant. PM Inc. is appealing the verdict and damages award.
In July 1999, a Louisiana jury returned a verdict in favor of defendants in an individual smoking and health case against another cigarette manufacturer. In June 1999, a Mississippi jury returned a verdict in favor of defendants, including PM Inc., in an action brought on behalf of an individual who died allegedly as a result of exposure to ETS. In May 1999, a Missouri jury returned a verdict in favor of defendant in an individual smoking and health case against another cigarette manufacturer. Also in May 1999, a Tennessee jury returned a verdict in favor of defendants, including PM Inc., in two of three individual smoking and health cases consolidated for trial. In the third case (not involving PM Inc.), the jury found liability against defendants and apportioned fault equally between plaintiff and defendants. Under Tennessee's system of modified comparative fault, because the jury found plaintiff's fault equal to that of defendants', recovery was not permitted.
In March 1999, an Oregon jury awarded the estate of a deceased smoker $800,000 in actual damages, $21,500 in medical expenses and $79.5 million in punitive damages against PM Inc. In February 1999, a California jury awarded a former smoker $1.5 million in compensatory damages and $50 million in punitive damages against PM Inc. The punitive damages awards in the Oregon and California actions have been reduced to $32 million and $25 million, respectively. PM Inc. is appealing the verdicts and the damages awards in these cases.
In March 1999, a jury returned a verdict in favor of defendants, including PM Inc., in a union health care cost recovery action brought on behalf of approximately 114 employer-employee trust funds in Ohio.
In December 1999, a French court, in an action brought on behalf of a deceased smoker, found that another cigarette manufacturer had a duty to warn him about risks associated with smoking prior to 1976, when the French government required warning labels on cigarette packs, and failed to do so. The court did not determine causation or liability, which shall be considered in future proceedings. Neither the Company nor its affiliates are parties to this action.
Engle Trial
Verdicts have been returned and judgment has been entered against PM Inc. and other defendants in the first two phases of this three-phase smoking and health class action trial in Florida. The class consists of all Florida residents and citizens, and their survivors, "who have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarettes that contain nicotine."
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In July 1999, the jury returned a verdict against defendants in phase one of the trial concerning certain issues determined by the trial court to be "common" to the causes of action of the plaintiff class. Among other things, the jury found that smoking cigarettes causes 20 diseases or medical conditions, that cigarettes are addictive or dependence-producing, defective and unreasonably dangerous, that defendants made materially false statements with the intention of misleading smokers, that defendants concealed or omitted material information concerning the health effects and/or the addictive nature of smoking cigarettes, and that defendants were negligent and engaged in extreme and outrageous conduct or acted with reckless disregard with the intent to inflict emotional distress.
During phase two of the trial, the claims of three of the named plaintiffs were adjudicated in a consolidated trial before the same jury that returned the verdict in phase one. In April 2000, the jury determined liability against the defendants and awarded $12.7 million in compensatory damages to the three named plaintiffs.
In July 2000, the same jury returned a verdict assessing punitive damages on a
lump sum basis for the entire class totaling approximately $145 billion against
the various defendants in the case, including approximately $74 billion
severally against PM Inc. PM Inc. believes that the punitive damages award was
determined improperly and that it should ultimately be set aside on any one of
numerous grounds. Included among these grounds are the following: under
applicable law, (i) defendants are entitled to have liability and damages for
each plaintiff tried by the same jury, an impossibility due to the jury's
dismissal; (ii) punitive damages cannot be assessed before the jury determines
entitlement to, and the amount of, compensatory damages for all class members;
(iii) punitive damages must bear a reasonable relationship to compensatory
damages, a determination that cannot be made before compensatory damages are
assessed for all class members; and (iv) punitive damages can "punish" but
cannot "destroy" the defendant. In March 2000, at the request of the Florida
legislature, the Attorney General of Florida issued an advisory legal opinion
stating that "Florida law is clear that compensatory damages must be determined
prior to an award of punitive damages" in cases such as Engle. As noted above,
compensatory damages for all but three members of the class have not been
determined.
Following the verdict in the second phase of the trial, the jury was dismissed, notwithstanding that liability and compensatory damages for all but three class members have not yet been determined. According to the trial plan, phase three of the trial will address other class members' claims, including issues of specific causation, reliance, affirmative defenses and other individual-specific issues regarding entitlement to damages, in individual trials before separate juries.
It is unclear how the trial plan will be further implemented. The trial plan provides that the punitive damages award should be standard as to each class member and acknowledges that the actual size of the class will not be known until the last class member's case has withstood appeal, i.e., the punitive damages amount would be divided equally among those plaintiffs who, in addition to the successful phase two plaintiffs, are ultimately successful in phase three of the trial and in any appeal.
Following the jury's punitive damages verdict in July 2000, defendants removed the case to federal district court following the intervention application of a union health fund that raised federal issues in the case. In November 2000, the federal district court remanded the case to state court on the grounds that the removal was premature.
The trial judge in the state court, without a hearing, then immediately denied the defendants' post-trial motions and entered judgment on the compensatory and punitive damages awarded by the jury. PM Inc. and the Company believe that the entry of judgment by the trial court is unconstitutional and violates Florida law. PM Inc. has filed an appeal with respect to the entry of judgment, class certification and numerous other reversible errors that have occurred during the trial. PM Inc. has also posted a $100 million bond to stay execution of the judgment with
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respect to the $74 billion in punitive damages that has been awarded against it. The bond was posted pursuant to legislation that was enacted in Florida in May 2000 that limits the size of the bond that must be posted in order to stay execution of a judgment for punitive damages in a certified class action to no more than $100 million, regardless of the amount of punitive damages ("bond cap legislation").
Plaintiffs have previously indicated that they believe the bond cap legislation is unconstitutional and might seek to challenge the $100 million bond. If the bond were found to be invalid, it would be commercially impossible for PM Inc. to post a bond in the full amount of the judgment and, absent appellate relief, PM Inc. would not be able to stay any attempted execution of the judgment in Florida. PM Inc. and the Company will take all appropriate steps to seek to prevent this worst-case scenario from occurring. On May 7, 2001, the trial court approved a stipulation (the "Stipulation") among PM Inc., certain other defendants, plaintiffs and the plaintiff class that provides that execution or enforcement of the punitive damages component of the Engle judgment will remain stayed against PM Inc. and the other participating defendants through the completion of all judicial review. As a result of the Stipulation and in addition to the $100 million bond it previously posted, PM Inc. will place $1.2 billion into an interest-bearing escrow account. Should PM Inc. prevail in its appeal of the case, both amounts are to be returned to PM Inc. PM Inc. will also place an additional $500 million into a separate interest-bearing escrow account for the benefit of the Engle class. If PM Inc. prevails in its appeal, this amount will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. In connection with the Stipulation, the Company has recorded a $500 million pre-tax charge in the consolidated statement of earnings for the quarter ended March 31, 2001.
In other developments, in August 1999, the trial judge denied a motion filed by PM Inc. and other defendants to disqualify the judge. The motion asserted, among other things, that the trial judge was required to disqualify himself because he is a former smoker who has a serious medical condition of a type that the plaintiffs claim, and the jury has found, is caused by smoking, making him financially interested in the result of the case and, under plaintiffs' theory of the case, a member of the plaintiff class. The Third District Court of Appeals denied defendants' petition to disqualify the trial judge. In January 2000, defendants filed a petition for a writ of certiorari to the United States Supreme Court requesting that it review the issue of the trial judge's disqualification, and in May 2000 the writ of certiorari was denied.
PM Inc. and the Company remain of the view that the Engle case should not have been certified as a class action. The certification is inconsistent with the overwhelming majority of federal and state court decisions that have held that mass smoking and health claims are inappropriate for class treatment. As indicated above, PM Inc. has filed an appeal challenging the class certification and the compensatory and punitive damages awards, as well as numerous other reversible errors that it believes occurred during the trial to date.
Pending and Upcoming Trials
Trial is currently underway in New York in a health care cost recovery action in which PM Inc. is a defendant. Trials are also currently underway in California and New Jersey in two individual smoking and health cases in which PM Inc. is a defendant.
In June 2001, trials are scheduled to begin in Florida in an individual smoking and health case in which PM Inc. is a defendant; in Louisiana in a smoking and health class action in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs and in which PM Inc. is a defendant; and in Mississippi in an asbestos contribution action in which PM Inc. is a defendant. In addition, trials are scheduled to begin in Florida in June in two individual cases brought by flight attendants claiming personal injuries from ETS and in which PM Inc. is a defendant.
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As set forth in Exhibit 99.2 hereto, additional cases against PM Inc. and, in some instances, the Company, are scheduled for trial through the end of 2002, including one health care cost recovery action; two purported smoking and health class actions and a purported Lights/Ultra Lights class action (discussed below); and an estimated 25 individual smoking and health cases, including a consolidated trial of approximately 1,200 individual smoking and health cases scheduled to begin in March 2002 in West Virginia. In addition, excluding the cases discussed above to date, approximately 20 cases involving flight attendants' claims for personal injuries from ETS are currently scheduled for trial during 2001. Cases against other tobacco companies are also scheduled for trial through the end of 2001. Trial dates, however, are subject to change.
Litigation Settlements
In November 1998, PM Inc. and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the "MSA") with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM Inc. and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the "State Settlement Agreements") and an ETS smoking and health class action brought on behalf of airline flight attendants. The State Settlement Agreements and certain ancillary agreements are filed as exhibits to various of the Company's reports filed with the Securities and Exchange Commission, and such agreements and the ETS settlement are discussed in detail therein. The MSA has received final judicial approval in all 52 settling jurisdictions.
The State Settlement Agreements require that the domestic tobacco industry make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional amounts as follows: 2001 through 2003, $250 million each year. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its share of domestic cigarette shipments in the year preceding that in which the payment is due. Accordingly, PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped.
The State Settlement Agreements also include provisions, discussed below in Management's Discussion and Analysis of Financial Condition and Results of Operations, relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions.
As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quota-holders. To that end, four of the major domestic tobacco product manufacturers, including PM Inc., and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (in 2001, $400 million; 2002 through 2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM Inc. records its portion of these payments as part of cost of sales as product is shipped.
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The State Settlement Agreements have materially adversely affected the volumes of PM Inc. and the Company; the Company believes that they may materially adversely affect the business, volumes, results of operations, cash flows or financial position of PM Inc. and the Company in future periods. The degree of the adverse impact will depend, among other things, on the rates of decline in United States cigarette sales in the premium and discount segments, PM Inc.'s share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements. Manufacturers representing almost all domestic shipments in 1998 have agreed to become subject to the terms of the MSA.
Certain litigation described in Exhibit 99.1 has arisen challenging the validity of the MSA and alleging violations of antitrust laws.
Smoking and Health Litigation
Plaintiffs' allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state RICO statutes. In certain of these cases, plaintiffs claim that cigarette smoking exacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.
In May 1996, the United States Court of Appeals for the Fifth Circuit held in the Castano case that a class consisting of all "addicted" smokers nationwide did not meet the standards and requirements of the federal rules governing class actions. Since this class decertification, lawyers for plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise "addiction" claims similar to those raised in the Castano case and, in many cases, claims of physical injury as well. As of May 1, 2001, smoking and health putative class actions were pending in Alabama, California, Florida, Hawaii, Illinois, Indiana, Iowa, Louisiana, Michigan, Missouri, Nevada, New Mexico, New York, North Carolina, Pennsylvania, Tennessee, Texas, Utah and West Virginia, as well as in Australia, Brazil, Canada and Israel. Class certification has been denied or reversed by courts in 24 smoking and health class actions involving PM Inc. in Arkansas, the District of Columbia, Illinois (2), Kansas, Louisiana, Maryland, Michigan, Minnesota, New Jersey (6), New York (2), Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin, while classes remain certified in the Engle case in Florida (discussed above), two cases in California and in cases in Louisiana and West Virginia in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs for class members. Some of the decisions denying or granting the plaintiffs' motions for class certification are on appeal. In May 1999, the United States Supreme Court declined to review the decision of the United States Court of Appeals for the Third Circuit affirming a lower court's decertification of a class.
Health Care Cost Recovery Litigation
In certain pending proceedings, domestic and foreign governmental entities and non-governmental plaintiffs, including union health and welfare funds ("unions"), Native American tribes, insurers and self-insurers such as
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Blue Cross and Blue Shield Plans, hospitals, taxpayers and others, are seeking reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other 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. Certain of the health care cost recovery cases purport to be brought on behalf of a class of plaintiffs.
The claims asserted in the health care cost recovery actions include the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health care costs allegedly attributable to smoking, the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state RICO statutes.
Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit and 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.
Although there have been some decisions to the contrary to date, most lower courts that have decided motions in these cases have dismissed all or most of the claims against the industry. In addition, seven federal circuit courts of appeals, the Second, Third, Fifth, Seventh, Eighth, Ninth and Eleventh circuits, as well as the Tennessee intermediate appellate court, relying primarily on grounds that plaintiffs' claims were too remote, have affirmed dismissals of, or reversed trial courts that had refused to dismiss, health care cost recovery actions. In January 2000, the United States Supreme Court refused to consider plaintiffs' appeals from the cases decided by the courts of appeals for the Second, Third and Ninth circuits.
Excluding cases covered by the MSA, as of May 1, 2001, there were an estimated 50 health care cost recovery cases pending in the United States against PM Inc. and in some instances, the Company, including the case filed by the United States government, which is discussed above under "Federal Government's Lawsuit."
The cases pending in the United States include actions brought by Belize, Bolivia, Guatemala, Honduras, Nicaragua, the Province of Ontario, Canada, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, seven Brazilian states and a group of Argentine health plans. The actions brought by Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela and five Brazilian states were consolidated for pre-trial purposes and transferred to the United States District Court for the District of Columbia. The court has remanded the cases of Venezuela, Ecuador and two Brazilian states to state court in Florida, and defendants have appealed. The district court has dismissed the cases brought by Guatemala, Nicaragua, Ukraine, the Province of Ontario and plaintiffs have appealed the dismissals. In January 2001, the Superior Court of the District of Columbia dismissed the suit brought by the Argentine health plans and plaintiffs have appealed. In addition to cases brought in the United States, health care
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cost recovery actions have also been brought in Israel, the Marshall Islands, the Province of British Columbia, Canada and France, and other entities have stated that they are considering filing such actions.
In addition, in March 1999, in the first health care cost recovery case to go to trial, the jury returned a verdict in favor of defendants on all counts. Trial is currently underway in New York in a health care cost recovery action brought by a Blue Cross and Blue Shield plan in which PM Inc. is a defendant.
Certain Other Tobacco-Related Litigation
Asbestos Contribution Cases: As of May 1, 2001, an estimated 23 suits were pending on behalf of former asbestos manufacturers, asbestos manufacturers' personal injury settlement trusts and an insurance company against domestic tobacco manufacturers, including PM Inc. These cases seek, among other things, contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages. The aggregate amounts claimed in these cases range into the billions of dollars. In January 2001, a mistrial was declared in an asbestos contribution case in New York.
Lights/Ultra Lights Cases: As of May 1, 2001, there were nine putative class actions pending against PM Inc. and the Company, in Arizona, Florida, Illinois, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania and Tennessee, on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. These cases allege, in connection with the use of the term "Lights" and/or "Ultra Lights," among other things, deceptive and unfair trade practices and unjust enrichment, and seek injunctive and equitable relief, including restitution. In February 2001, an Illinois state court granted plaintiff's motion for class certification, and trial in this case is scheduled for May 2002. During the first quarter of 2001, plaintiffs voluntarily dismissed cases in state court in Florida and New York.
Retail Leaders Case: Three domestic tobacco manufacturers have filed suit against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that became available to retailers in October 1998. The complaint alleges that this retail merchandising program is exclusionary, creates an unreasonable restraint of trade and constitutes unlawful monopolization. In addition to an injunction, plaintiffs seek unspecified treble damages, attorneys' fees, costs and interest. In June 1999, the court issued a preliminary injunction enjoining PM Inc. from prohibiting retail outlets that participate in the program at one of the levels from installing competitive permanent signage in any section of the "industry fixture" that displays or holds packages of cigarettes manufactured by a firm other than PM Inc., or requiring those outlets to allocate a percentage of cigarette-related permanent signage to PM Inc. greater than PM Inc.'s market share. The court also enjoined PM Inc. from prohibiting retailers participating in the program from advertising or conducting promotional programs of cigarette manufacturers other than PM Inc. The preliminary injunction does not affect any other aspect of the Retail Leaders program. During the first quarter of 2001, two plaintiffs moved for an order to show cause why PM Inc. should not be held in contempt of court for allegedly violating the provision of the court's preliminary injunction enjoining PM Inc. from precluding retailers from advertising or conducting promotional programs for competitors. This motion was denied in May 2001.
Vending Machine Case: Plaintiffs, who began their case as a purported nationwide class of cigarette vending machine operators, allege that PM Inc. has violated the Robinson-Patman Act in connection with its promotional and merchandising programs available to retail stores and not available to cigarette vending machine operators. Plaintiffs request actual damages, treble damages, injunctive relief, attorneys' fees and costs, and other unspecified relief. In June 1999, the court denied plaintiffs' motion for a preliminary injunction. Plaintiffs have withdrawn their request for class action status. Trial on the claims of ten plaintiffs, which was set for November 2000, has been continued without a new trial date being set, and the court heard PM Inc.'s motion for summary
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judgment on those claims in November 2000. The claims of remaining plaintiffs have been stayed pending disposition of the ten claims previously scheduled for trial.
Tobacco Price Cases: As of May 1, 2001, there were 39 putative class actions pending against PM Inc. and other domestic tobacco manufacturers as well as, in certain instances, the Company and PMI alleging that the defendants conspired to fix cigarette prices in violation of antitrust laws. Seven of the putative class actions were filed in various federal district courts by direct purchasers of tobacco products and the remaining 32 were filed in 15 states and the District of Columbia by retail purchasers of tobacco products. The seven federal class actions have been consolidated; in November 2000, the court hearing the consolidated cases granted in part and denied in part defendants' motion to dismiss and to strike portions of the consolidated complaint. The court has ordered the provisional certification of a class of plaintiffs who made direct purchases between February 1996 and February 2000. In March, defendants filed a motion to dismiss the fraudulent concealment allegations in the complaint. The cases are listed in Exhibit 99.1.
Tobacco Growers' Case: In February 2000, a suit was filed on behalf of a purported class of tobacco growers and quota-holders and amended complaints were filed in May 2000 and in August 2000. The second amended complaint alleges that cigarette manufacturers, including PM Inc., violated antitrust laws by bid-rigging and allocating purchases at tobacco auctions and by conspiring to undermine the tobacco quota and price-support system administered by the federal government. In October 2000, defendants filed motions to dismiss the amended complaint and to transfer the case, and plaintiffs filed a motion for class certification. In November 2000, the court granted defendants' motion to transfer the case to the United States District Court for the Middle District of North Carolina. In December 2000, plaintiffs served a motion for leave to file a third amended complaint to add tobacco leaf buyers as defendants. This motion was granted and the additional parties were served in February 2001.
Cigarette Importation Cases: As of May 1, 2001, the European Community, various Departments of Colombia and Ecuador had filed suits in the United States against the Company and certain of its subsidiaries, including PM Inc. and PMI, and other cigarette manufacturers and their affiliates, alleging that defendants sold to distributors cigarettes that would be illegally imported into the plaintiff jurisdictions in an effort to evade taxes. The claims asserted in these cases include negligence, negligent misrepresentation, fraud, unjust enrichment, violations of RICO and its state-law equivalents and conspiracy. Plaintiffs in these cases seek actual damages, treble damages and undisclosed injunctive relief. In January 2001, the Company and certain subsidiaries moved to dismiss the complaints filed in the European Community and Colombia cases on the grounds of lack of standing, failure to join indispensable parties, and failure to state a claim for relief.
Consolidated Putative Punitive Damages Cases: In September 2000, a putative class action was filed in the federal district court in the Eastern District of New York that purports to consolidate punitive damages claims in ten tobacco-related actions currently pending in the federal district court in the Eastern Districts of New York and Pennsylvania. In November 2000, the court hearing this case indicated that, in its view, it appears likely that plaintiffs will be able to demonstrate a basis for certification of an opt-out compensatory damages class and a non-opt-out punitive damages class. In December 2000, plaintiffs served a motion for leave to file an amended complaint and a motion for class certification. A hearing on plaintiffs' motion for class certification was held in March 2001.
Certain Other Actions
National Cheese Exchange Cases: Since 1996, seven putative class actions have been filed by various dairy farmers alleging that Kraft, its subsidiaries and others engaged in a conspiracy to fix and depress the prices of bulk cheese and milk through their trading activity on the National Cheese Exchange. Plaintiffs seek injunctive
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and equitable relief and unspecified treble damages. Two of the actions were voluntarily dismissed by plaintiffs after class certification was denied. Three cases were consolidated in state court in Wisconsin, and in November 1999, the court granted Kraft's motion for summary judgment. The plaintiffs' appeal is now pending before the Wisconsin Court of Appeals. Kraft's motions to dismiss were granted in the cases pending in Illinois state court and in the United States District Court for the Central District of California. Appellate courts have reversed and remanded both cases for further proceedings. No classes have been certified in any of the cases.
Italian Tax Matters: One hundred eighty-eight tax assessments alleging the nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1995 and income taxes for the years 1987 to 1995) have been served upon certain affiliates of the Company. The aggregate amount of alleged unpaid taxes assessed to date is the Italian lira equivalent of $2.1 billion. In addition, the Italian lira equivalent of $3.1 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 184 of the assessments. The decisions to overturn 163 assessments have been appealed by the tax authorities to the regional appellate court in Milan. To date, the regional appellate court has rejected 51 of the appeals filed by the tax authorities. The tax authorities have appealed 35 of the 51 decisions of the regional appellate court to the Italian Supreme Court. Six of the 51 decisions were not appealed and are now final. The remaining 10 decisions are expected to be appealed as well. In a separate proceeding in October 1997, a Naples court dismissed charges of criminal association against certain present and former officers and directors of affiliates of the Company, but permitted tax evasion and related charges to remain pending. In February 1998, the criminal court in Naples determined that jurisdiction was not proper, and the case file was transmitted to the public prosecutor in Milan. In December 2000, the Milan prosecutor took certain procedural steps that may indicate his intention to recommend that charges be pursued against certain of these present and former officers and directors. The Company, its affiliates and the officers and directors who are subject to the proceedings believe they have complied with applicable Italian tax laws and are vigorously contesting the pending assessments and proceedings.
It is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries. Litigation is subject to many uncertainties. Unfavorable verdicts awarding compensatory and punitive damages have been returned in the Engle smoking and health class action trial, and judgment has been entered against PM Inc. It is possible that additional cases could be decided unfavorably and that there could be further adverse developments in the Engle case. Three individual smoking and health cases in which PM Inc. is a defendant have been decided unfavorably at the trial court level and are in the process of being appealed. An unfavorable outcome or settlement of a pending smoking and health or health care cost recovery case could encourage the commencement of additional similar litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending litigation. The present legislative and litigation environment is substantially uncertain, and it is possible that the Company's business, volume, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal or state tobacco legislation. The Company and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to all litigation pending against it, as well as valid bases for appeal of adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, the Company and its subsidiaries may
Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements
(Unaudited)
enter into discussions in an attempt to settle particular cases if they believe it is in the best interests of the Company's stockholders to do so.
Note 7. Recently Issued Accounting Pronouncements:
The Emerging Issues Task Force ("EITF") issued EITF No. 00-14, "Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the recognition, measurement and statement of earnings classification for certain sales incentives and will be effective in the first quarter of 2002. As a result, certain items previously included in cost of sales and in marketing, administration and research costs on the consolidated statement of earnings will be recorded as a reduction of operating revenues. The Company has determined that the impact of adoption or subsequent application of EITF Issue No. 00-14 will not have a material effect on its consolidated financial position or results of operations. Upon adoption, prior period amounts, which are not expected to be significant, will be reclassified to conform with the new requirements. In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services." EITF Issue No. 00-25 requires that certain expenses included in marketing, administration and research costs be recorded as a reduction of operating revenues and will be effective in the first quarter of 2002. The Company is currently in the process of determining the impact of EITF Issue No. 00-25.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated Operating Results
For the Three Months Ended March 31,
Operating Revenues
--------------------------
(in millions)
2001 2000
-------- --------
Domestic tobacco $ 5,922 $ 5,446
International tobacco 6,979 6,998
North American food 6,282 4,534
International food 2,085 1,926
Beer 991 1,044
Financial services 100 92
-------- --------
Operating revenues $ 22,359 $ 20,040
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Operating Income
--------------------------
(in millions)
2001 2000
-------- --------
Domestic tobacco $ 702 $ 1,116
International tobacco 1,558 1,431
North American food 1,143 913
International food 239 200
Beer 124 153
Financial services 64 58
-------- --------
Operating companies income 3,830 3,871
Amortization of goodwill (253) (146)
General corporate expenses (210) (215)
Minority interest (35) (32)
-------- --------
Operating income $ 3,332 $ 3,478
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Results of Operations for the first quarter of 2001
Operating revenues for the first quarter of 2001 increased $2.3 billion (11.6%) over 2000, due primarily to the Company's acquisition of Nabisco Holdings Corp. ("Nabisco") and higher domestic tobacco revenues. The operating revenue comparison for the first quarter was affected by approximately $225 million of incremental sales made during the fourth quarter of 1999, as the Company's customers planned for potential business failures related to the Century Date Change ("CDC"). These incremental CDC sales would have normally been made during the first quarter of 2000. Including the incremental CDC revenues in the first quarter of 2000, and excluding the revenues of businesses divested since the beginning of 2000, operating revenues for the first quarter of 2001 increased $2.2 billion (10.8%) over the first quarter of 2000. However, operating revenues would have increased 1.6% over the first quarter of 2000 had the acquisition of Nabisco occurred on January 1, 2000.
Operating income for the first quarter of 2001 decreased $146 million (4.2%) from the comparable 2000 period. The operating income comparison was affected by the following unusual items:
- Litigation Related Expense - As discussed in Note 6. Contingencies, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among Philip Morris Incorporated ("PM Inc."), certain other defendants and the plaintiffs that provides that the execution or enforcement of the punitive
damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. will place $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. PM Inc. will also place an additional $500 million into a separate interest-bearing escrow account which, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, the Company has recorded a $500 million pre-tax charge in the consolidated statement of earnings for the quarter ended March 31, 2001. Interest income on the $1.2 billion escrow account will be recorded as earned in the Company's consolidated statement of earnings.
- Sale of Food Factory - The Company sold a North American food factory during the first quarter of 2001 resulting in a pre-tax loss of $29 million, that was recorded in the North American food segment. The integration of Nabisco into Kraft may result in the closure of additional Kraft facilities. The Company estimates that these closures could result in aggregate charges of $200 million to $300 million, which will be recorded as expense in the Company's consolidated statements of earnings in the period when plans are finalized and announced to employees.
The operating income comparison was also affected by approximately $100 million of operating income from the previously mentioned incremental CDC sales. Including the incremental CDC income in 2000 and excluding the 2001 litigation related expense and pre-tax loss on the sale of a North American food factory and the results from operations divested since the beginning of 2000, operating income for the first quarter of 2001 increased $296 million (8.3%) over the first quarter of 2000, due primarily to higher operating income from the Company's food and tobacco operations, partially offset by higher goodwill amortization relating to the acquisition of Nabisco. However, operating income would have increased 6.2% had the acquisition of Nabisco occurred on January 1, 2000.
Operating companies income, which is defined as operating income before general corporate expenses, minority interest and amortization of goodwill, decreased $41 million (1.1%) from the first quarter of 2000, due primarily to the 2001 litigation related expense, partially offset by higher operating income from the Company's tobacco operations, the Nabisco acquisition and higher volume in the Kraft food businesses. Including the impact of the incremental CDC income in 2000 and excluding the 2001 litigation related expense and pre-tax loss on the sale of a North American food factory and the results from operations divested since the beginning of 2000, operating companies income increased $401 million (10.1%). However, operating companies income would have increased 5.4% had the acquisition of Nabisco occurred on January 1, 2000, due primarily to higher results from the Company's tobacco and food operations.
Currency movements have decreased operating revenues by $583 million ($346 million, after excluding the impact of currency movements on excise taxes), and operating companies income by $106 million from the first quarter of 2000. Declines in operating revenues and operating companies income are due to the strength of the U.S. dollar against the Euro and certain Central and Eastern European and Asian currencies. Although the Company cannot predict future movements in currency rates, strengthening of the U.S. dollar, primarily against the Euro, if sustained during the remainder of 2001, could continue to have an unfavorable impact on operating revenues and operating companies income comparisons with 2000.
Interest and other debt expense, net, increased $266 million in the first quarter of 2001 over $185 million in the first quarter of 2000. This increase was due primarily to higher average debt outstanding during the first quarter of 2001, related to the acquisition of Nabisco.
During 2001, the Company's effective tax rate decreased by 1.0 percentage points to 38.0% as the tax rate on foreign operations is expected to be 2.0 percentage points lower than the U.S. statutory rate, versus a 1.0 percentage point difference in 2000. This change primarily reflects the reversal in 2001 of previously accrued taxes for certain foreign jurisdictions where the Company is receiving favorable closings of audits by taxing
authorities. Since it is impossible to plan for such audit results, this type of favorability is not anticipated in 2002.
Diluted and basic earnings per share ("EPS") after the cumulative effect of an accounting change, which were $0.80 and $0.81, respectively, for the first quarter of 2001, decreased by 8.0% and 6.9%, respectively, from the first quarter of 2000. Net earnings of $1.8 billion for the first quarter of 2001 decreased $229 million (11.4%) from the comparable period of 2000. After adjusting for the effect of incremental CDC income and excluding the litigation related expense and loss on the sale of a North American food factory, net earnings increased 2.2% to $2.1 billion, diluted EPS increased 6.7% to $0.95 and basic EPS increased 7.9% to $0.96. However, net earnings, diluted EPS, and basic EPS would have increased 10.6%, 15.9% and 15.7%, respectively, had the acquisition of Nabisco occurred on January 1, 2000.
Euro
Twelve of the fifteen member countries of the European Union have established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency -- the Euro. Beginning in January 2002, new Euro-denominated currency (bills and coins) will be issued, and legacy currencies will be withdrawn from circulation. The Company's operating subsidiaries affected by the Euro conversion have established and, where required, implemented plans to address the systems and business issues raised by the Euro currency conversion. These issues include, among others: (1) the need to adapt computer and other business systems and equipment to accommodate Euro-denominated transactions; and (2) the competitive impact of cross-border price transparency, which may make it more difficult for businesses to charge different prices for the same products on a country-by-country basis, particularly once the Euro currency is issued in 2002. The Euro conversion has not had, and the Company currently anticipates that it will not have, a material adverse impact on its financial condition or results of operations.
Operating Results by Business Segment
Tobacco
Business Environment
The tobacco industry, both in the United States and abroad, has faced, and continues to face, a number of issues that may adversely affect the business, volume, results of operations, cash flows and financial position of PM Inc., PMI and the Company.
These issues, some of which are more fully discussed below, include pending and threatened smoking and health litigation and certain jury verdicts against PM Inc., including a $74 billion punitive damages verdict in the Engle smoking and health class action case discussed in Note 6. Contingencies ("Note 6"); the civil lawsuit filed by the United States federal government against various cigarette manufacturers and others discussed in Note 6; legislation or other governmental action seeking to ascribe to the industry responsibility and liability for the adverse health effects associated with both smoking and exposure to ETS; price increases in the United States related to the settlement of certain tobacco litigation; actual and proposed excise tax increases; diversion into the United States market of products intended for sale outside the United States; foreign and United States governmental investigations into illegal cigarette imports; actual and proposed requirements regarding the use and disclosure of cigarette ingredients and other proprietary information; governmental and private bans and restrictions on smoking; actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States; actual and proposed restrictions affecting tobacco manufacturing, marketing, advertising and sales outside the United States; actual and proposed legislation in Congress, the state of New York and other jurisdictions inside and outside the United States to require the establishment of fire-safety standards for cigarettes; the diminishing social acceptance of smoking and increased pressure from tobacco
control advocates and unfavorable press reports; and other tobacco legislation that may be considered by Congress, the states and other jurisdictions inside and outside the United States.
Excise Taxes: Cigarettes are subject to substantial federal, state and local excise taxes in the United States and to similar taxes in most foreign markets. The United States federal excise tax on cigarettes is currently $0.34 per pack of 20 cigarettes and is scheduled to increase to $0.39 per pack on January 1, 2002. In general, excise taxes and other taxes on cigarettes have been increasing. These taxes vary considerably and, when combined with sales taxes, local taxes and the current federal excise tax, may be as high as $1.88 per pack in a given locality in the United States. Congress has considered significant increases in the federal excise tax or other payments from tobacco manufacturers, and increases in excise and other cigarette-related taxes have been proposed at the state and local levels and in many jurisdictions outside the United States.
In the opinion of PM Inc. and PMI, increases in excise and similar taxes have had an adverse impact on sales of cigarettes. Any future increases, the extent of which cannot be predicted, could result in volume declines for the cigarette industry, including PM Inc. and PMI, and might cause sales to shift from the premium segment to the discount segment.
Federal Trade Commission ("FTC"): In September 1997, the FTC issued a request for public comment on its proposed revision of its "tar" and nicotine test methodology and reporting procedures established by a 1970 voluntary agreement among domestic cigarette manufacturers. In February 1998, PM Inc. and three other domestic cigarette manufacturers filed comments on the proposed revisions. In November 1998, the FTC wrote to the Department of Health and Human Services 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. The Department has not yet published its recommendations.
Food and Drug Administration ("FDA") Regulations: In August 1996, the FDA promulgated regulations asserting jurisdiction over cigarettes as "drugs" or "medical devices" under the provisions of the Food, Drug and Cosmetic Act ("FDCA"). The regulations, which included severe restrictions on the distribution, marketing and advertising of cigarettes, and would have required the industry to comply with a wide range of labeling, reporting, record-keeping, manufacturing and other requirements, were declared invalid by the United States Supreme Court in March 2000. The Company has stated that while it continues to oppose FDA regulation over cigarettes as "drugs" or "medical devices" under the provisions of FDCA, it would support new legislation that would provide for reasonable regulation by the FDA of cigarettes as cigarettes. Currently, there are several bills pending in Congress that, if enacted, would give the FDA authority to regulate tobacco products. The bills take a variety of approaches to the issue of the FDA's proposed regulation of tobacco products ranging from codification of the original FDA regulations under the "drug" and "medical device" provisions of the FDCA to the creation of provisions that would apply uniquely to tobacco products. All of the pending legislation could result in substantial federal regulation of the design, performance, manufacture and marketing of cigarettes. The ultimate outcome of the pending bills cannot be predicted.
Ingredient Laws: Jurisdictions inside and outside the United States have enacted or proposed legislation that would require cigarette manufacturers to disclose the ingredients used in the manufacture of cigarettes. In the United States, the Commonwealth of Massachusetts has enacted legislation to require cigarette manufacturers to report the flavorings and other ingredients used in each brand-style of cigarettes sold in the Commonwealth. Cigarette manufacturers sued to have the statute declared unconstitutional, arguing that it could result in the public disclosure of valuable proprietary information. In September 2000, the district court granted the plaintiffs' motion for summary judgment and permanently enjoined the defendants from requiring cigarette manufacturers to disclose brand-specific information on ingredients in their products. Defendants have appealed the district court's ruling. The ultimate outcome of this lawsuit cannot be predicted. Similar legislation has been enacted or proposed in other states and in jurisdictions outside the United States, including the European Union. Some jurisdictions have enacted or proposed legislation that would require the submission of toxicological information about ingredients and would permit governments to prohibit their use.
Health Effects of Smoking and Exposure to ETS: Reports with respect to the health risks of cigarette smoking have been publicized for many years, and the sale, promotion and use of cigarettes continue to be subject to increasing governmental regulation. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports linking cigarette smoking with a broad range of health hazards, including various types of cancer, coronary heart disease and chronic lung disease, and recommending various governmental measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994 reports focus upon the addictive nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, the economic and regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particularly the addictive nature of cigarette smoking during adolescence.
Studies with respect to the health risks of ETS to nonsmokers (including lung cancer, respiratory and coronary illnesses, and other conditions) have also received significant publicity. In 1986, the Surgeon General of the United States and the National Academy of Sciences reported that nonsmokers were at increased risk of lung cancer and respiratory illness due to ETS. Since then, a number of government agencies around the world have concluded that ETS causes disease -- including lung cancer and heart disease -- in nonsmokers.
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 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 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 that will best serve the public interest.
In 1999, PM Inc. and PMI established web sites that include, among other things, views of public health authorities on smoking, disease causation in smokers, addiction and ETS. In October 2000, the sites were updated to reflect PM Inc.'s and PMI's agreement with the overwhelming medical and scientific consensus that cigarette smoking is addictive, and causes lung cancer, heart disease, emphysema and other serious diseases in smokers. Consistent with the Company's position set forth in its October 1997 submission to the United States Senate Judiciary Committee (discussed above), the web sites advise smokers and those considering smoking to rely on the messages of public health authorities in making all smoking-related decisions. The sites further PM Inc.'s and PMI's efforts to implement this position.
The sites also state that PM Inc. and PMI recognize and accept that many people have health concerns regarding ETS. In addition, because of concerns relating to conditions such as asthma and respiratory infections, PM Inc. and PMI believe that particular care should be exercised where children are concerned, and that smokers who have children -- particularly young ones -- should seek to minimize their exposure to ETS.
The World Health Organization's Framework Convention for Tobacco Control: The World Health Organization has begun negotiations regarding a proposed Framework Convention for Tobacco Control. The proposed treaty would require signatory nations to enact legislation that would require, among other things, specific actions to prevent youth smoking; restrict tobacco product marketing; inform the public about the health consequences of smoking and the benefits of quitting; regulate the content of tobacco products; impose new package warning requirements including the use of pictorial or graphic images; eliminate cigarette smuggling and counterfeit cigarettes; restrict smoking in public places; increase and harmonize cigarette excise taxes; abolish duty-free tobacco sales; and permit and encourage litigation against tobacco product manufacturers. PM Inc. and PMI have stated that they would support a treaty that member states could consider for ratification, based on the following four principles: (1) smoking-related decisions should be made on the basis of a consistent public health message; (2) effective measures should be taken to prevent minors from smoking; (3) the right of adults to choose
to smoke should be preserved; and (4) all manufacturers of tobacco products should compete on a level playing field. The outcome of the treaty negotiations cannot be predicted.
Other Legislative Initiatives: In recent years, various members of the United States Congress have introduced legislation, some of which has been the subject of hearings or floor debate, that would subject cigarettes to various regulations under the Department of Health and Human Services or regulation under the Consumer Products Safety Act, establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities, further restrict the advertising of cigarettes, require additional warnings, including graphic warnings, on packages and in advertising, eliminate or reduce the tax deductibility of tobacco advertising, provide that the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act not be used as a defense against liability under state statutory or common law, and allow state and local governments to restrict the sale and distribution of cigarettes. Legislative initiatives affecting the regulation of the tobacco industry have also been considered in a number of jurisdictions outside the United States. The European Union has issued a directive on tobacco product regulation that would, among other things, reduce maximum permitted levels of tar, nicotine and carbon monoxide yields, require manufacturers to disclose ingredients and toxicological data on ingredients, require health warnings to cover 30% of the front of a pack of cigarettes and 40% of the back, and prohibit the use on packaging of product descriptions (such as texts, names, trademarks and figurative or other signs) suggesting that a particular tobacco product is less harmful than others. Tobacco control legislation addressing the manufacture, marketing and sale of tobacco products has been proposed in numerous other jurisdictions.
In August 2000, New York State enacted legislation that requires the State's Office of Fire Prevention and Control to promulgate by January 1, 2003 fire-safety standards for cigarettes sold in New York. The legislation requires that cigarettes sold in New York stop burning within a time period to be specified by the standards or meet other performance standards set by the Office of Fire Prevention and Control. All cigarettes sold in New York will be required to meet the established standards within 180 days after the standards are promulgated. It is not possible to predict the impact of this law on PM Inc. until the standards are published. Similar legislation is being considered in other states and localities and at the federal level, as well as in jurisdictions outside the United States.
It is not possible to predict what, if any, additional foreign or domestic governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or to the tobacco industry generally. However, if any or all of the foregoing were to be implemented, the business, volume, results of operations, cash flows and financial position of PM Inc., PMI and the Company could be materially adversely affected.
Governmental Investigations: PMI and its subsidiary, Philip Morris Duty Free Inc., have received subpoenas requesting documents in connection with an investigation by Canadian authorities into allegations of contraband shipments of cigarettes manufactured in Canada in the early 1990s. In April 2001, the subpoenas were quashed by the United States District Court for the Northern District of New York. However, new subpoenas may be served. While the outcome of this investigation cannot be predicted, PMI and Philip Morris Duty Free Inc. believe they have acted lawfully.
Tobacco-Related Litigation: There is substantial litigation pending related to tobacco products in the United States and certain foreign jurisdictions, including the Engle class action case in Florida, in which PM Inc. is a defendant, and a civil health care cost recovery action filed by the United States Department of Justice in September 1999 against domestic tobacco manufacturers and others, including the Company and PM Inc. (See Note 6 for a discussion of such litigation.)
State Settlement Agreements: As discussed in Note 6, during 1997 and 1998, PM Inc. and other major domestic tobacco product manufacturers entered into agreements with states and various United States jurisdictions settling asserted and unasserted health care cost recovery and other claims. These settlements provide for substantial
annual payments. They also place numerous restrictions on the tobacco industry's conduct of its business operations, including restrictions on the advertising and marketing of cigarettes. Among these are restrictions or prohibitions on the following: targeting youth; use of cartoon characters; use of brand name sponsorships and brand name non-tobacco products; outdoor and transit brand advertising; payments for product placement; and free sampling. In addition, the settlement agreements require companies to affirm corporate principles to reduce underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry's ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.
Operating Results
For the Three Months Ended March 31,
----------------------------------------------
Operating
Operating Revenues Companies Income
------------------ ------------------
(in millions)
2001 2000 2001 2000
-------- -------- -------- --------
Domestic tobacco $ 5,922 $ 5,446 $ 702 $ 1,116
International tobacco 6,979 6,998 1,558 1,431
-------- -------- -------- --------
Total tobacco $ 12,901 $ 12,444 $ 2,260 $ 2,547
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|
Domestic tobacco. During the first quarter of 2001, PM Inc.'s operating revenues increased $476 million (8.7%) over the comparable 2000 period, due primarily to higher pricing ($595 million), partially offset by lower volume ($127 million).
Operating companies income for the first quarter of 2001 decreased $414 million (37.1%) from the comparable 2000 period, due primarily to the 2001 litigation related expense ($500 million), higher marketing, administration and research costs ($259 million, primarily marketing) and lower volume ($97 million), partially offset by price increases, net of cost increases ($424 million).
Shipment volume for the domestic tobacco industry during the first quarter of 2001 decreased to 98.5 billion units, a 3.7% decrease from the first quarter of 2000. PM Inc.'s shipment volume for the first quarter of 2001 was 51.6 billion units, a decrease of 2.3% from the comparable 2000 period. However, after adjusting for changes in trade inventories and other factors, PM Inc. estimates that industry volume declined by 1.0% to 2.0%.
For the first quarter of 2001, PM Inc.'s shipment market share was 52.4%, an increase of 0.8 share points over the comparable period of 2000 due to continued share gains by its premium brands Marlboro, Parliament and Virginia Slims. Marlboro shipment volume decreased 363 million units (0.9%) from the first quarter of 2000 to 39.3 billion units for a 39.9% share of the total industry, an increase of 1.1 share points over the comparable period of 2000. Contributing to this share growth were shipments of Marlboro Milds, which were introduced nationally in April 2000.
Based on shipments, the premium segment accounted for approximately 74.6% of the domestic cigarette industry volume in the first quarter of 2001, an increase of 0.7 share points over the comparable period of 2000. In the premium segment, PM Inc.'s volume decreased 0.8% during the first quarter of 2001, compared with a 2.8% decrease for the industry, resulting in a premium segment share of 62.9%, an increase of 1.2 share points over the first quarter of 2000.
In the discount segment, PM Inc.'s shipments decreased 13.2% to 5.4 billion units in the first quarter of 2001, compared with an industry decrease of 6.3%, resulting in a discount segment share of 21.4%, a decrease of 1.7 share points from the comparable period of 2000. Basic shipment volume for the first quarter of 2001 was down 5.9% to 4.8 billion units, for a 4.9% share of the industry, down 0.1 share points compared to the 2000 period.
According to consumer purchase data from Information Resources Inc./Capstone, PM Inc.'s share of cigarettes sold at retail grew 0.4 share points to 50.9% for the first quarter of 2001. The first quarter of 2001 retail share for Marlboro increased 1.0 share point to 38.0%.
In April 2001, PM Inc. announced a price increase of $7.00 per thousand cigarettes on its domestic premium and discount brands. This followed price increases of $7.00 per thousand in December 2000, $3.00 per thousand in July 2000 and $6.50 per thousand in January 2000. Each $1.00 per thousand increase by PM Inc. equates to a $0.02 increase in the price to wholesalers of each pack of twenty cigarettes.
PM Inc. cannot predict future changes or rates of change in domestic tobacco industry volume, the relative sizes of the premium and discount segments or in PM Inc.'s shipments, shipment market share or retail market share; however, it believes that PM Inc.'s shipments may be materially adversely affected by price increases including those related to tobacco litigation settlements and, if enacted, by increased excise taxes or other tobacco legislation discussed under "Tobacco--Business Environment" above.
International tobacco. During the first quarter of 2001, international tobacco operating revenues, including excise taxes, decreased $19 million (0.3%) from the first quarter of 2000. Excluding excise taxes, operating revenues increased $16 million (0.4%), due primarily to price increases ($81 million), the shift in CDC revenues ($97 million) and higher volume, partially offset by unfavorable currency movements and unfavorable mix.
Operating companies income for the first quarter of 2001 increased $127 million (8.9%) over the comparable 2000 period, due primarily to price increases and favorable costs ($125 million), the shift of CDC income ($59 million), lower fixed manufacturing expenses ($21 million) and higher volume, partially offset by unfavorable currency movements ($86 million) and unfavorable mix. Adjusting for the shift in CDC income, operating companies income of $1,558 million for the first quarter of 2001 increased 4.6% over $1,490 million for the comparable period of 2000.
PMI's volume for the first quarter of 2001 of 179.7 billion units increased 8.7 billion units (5.1%) over the first quarter of 2000. Adjusting for the shift in CDC volume, (the basis of presentation for all following PMI volume disclosures), PMI's volume of 179.7 billion units for the first quarter of 2001 increased 4.5 billion units (2.6%) over the comparable 2000 period, despite unfavorable comparisons with 2000 that included one less trading day in 2001 and distortions in trade purchasing patterns in a number of markets, such as France, Switzerland, the United Kingdom, Poland, the Czech and Slovak Republics, Kazakhstan and Brazil. Volume advanced in a number of important markets, including Italy, Spain, Russia, Ukraine, Japan, Indonesia, Korea and Mexico. PMI recorded market share gains in most of its major markets. Volume and share in Germany were lower due to a significant decline in the vending segment, which disproportionately affected volume due to PMI's large share in that segment, and the growth of trade brands. Volume declined in the Baltics and Kazakhstan due to intense competition in the low price segment. Volume declined in the Philippines, reflecting difficult economic conditions. In Latin America, volume declined due principally to Argentina and Brazil. In Argentina, the total cigarette industry declined due to the weak economy. International volume for Marlboro increased 0.7%, as higher volumes in Indonesia, Italy, Japan, Korea, Mexico, Russia, Spain, Turkey and Ukraine were partially offset by the previously mentioned trade purchasing distortions as well as weakness in Germany and Argentina.
During the first quarter of 2001, the Company increased its interest in its Argentine tobacco subsidiary for an aggregate cost of $220 million, the operating results of which were not material to the consolidated operating results of the Company.
Food
Business Environment
Kraft is the largest branded food and beverage company headquartered in the United States. A wide variety of snacks, beverages, cheese, grocery products and convenient meals are manufactured and marketed in the United States, Canada and Mexico by Kraft's direct subsidiary, Kraft Foods North America, Inc. ("Kraft Foods North America"). Subsidiaries and affiliates of Kraft Foods International, Inc. ("Kraft Foods International"), an indirect subsidiary of Kraft, manufacture and market a wide variety of snacks, beverages, cheese, grocery products and convenient meals in Europe, the Middle East and Africa, as well as the Latin America and Asia Pacific regions. Kraft Foods North America and Kraft Foods International are subject to fluctuating commodity costs, currency movements and competitive challenges in various product categories and markets, including a trend toward increasing consolidation in the retail trade and changing consumer preferences. To confront these challenges, Kraft continues to take steps to build the value of its brands with new product and marketing initiatives, to improve its food business portfolio and to reduce costs.
Fluctuations in commodity costs can cause retail price volatility, intensify price competition and influence consumer and trade buying patterns. The North American and international food businesses are subject to fluctuating commodity costs, particularly dairy, coffee bean and cocoa. Dairy commodity costs on average have been slightly higher than the levels seen in 2000. Cocoa bean prices have also been higher, while coffee bean prices have been lower than 2000.
During the latter part of 2000 and into 2001, energy costs rose in response to higher prices charged for oil and natural gas. However, this increase in energy costs did not have a material adverse effect on operating results.
On December 11, 2000, Kraft acquired all of the outstanding shares of Nabisco for $55 per share in cash. The acquisition has been accounted for as a purchase. Nabisco's balance sheet has been consolidated with the Company's balance sheet since December 31, 2000 and, beginning January 1, 2001, Nabisco's earnings have been included in the consolidated operating results of the Company.
The excess of the purchase price over the estimated fair value of the net assets purchased was approximately $16.8 billion and will be amortized over 40 years by the straight-line method. The allocation of excess purchase price is based upon preliminary estimates and assumptions and is subject to revision when appraisals and integration plans have been finalized. Accordingly, revisions to the allocation, which may be significant, will be reported in a future period as increases or decreases to amounts reported as goodwill, other intangible assets (including trade names), deferred income taxes and amortization of goodwill.
Kraft plans to sell a number of Nabisco businesses that do not align strategically with its operations, including Nabisco's Canadian grocery business. Accordingly, the estimated selling prices of these businesses less costs of disposal plus the estimated results of operations through the sales dates, are shown as assets held for sale on the Company's condensed consolidated balance sheets and total $221 million at March 31, 2001. Assets held for sale decreased by $55 million as of March 31, 2001, due primarily to a revision of estimated proceeds from the sales of these businesses. During 2001, Kraft will finalize the Nabisco acquisition balance sheet, including the completion of fair value appraisals of Nabisco's assets. During this process, Kraft will also finalize its plans to integrate the operations of Nabisco. Kraft anticipates closing a number of Nabisco manufacturing facilities. Charges to close these facilities, estimated to be in a range of $500 million to $600 million, will be recorded as adjustments to excess purchase price when plans are finalized and announced to employees.
The integration of Nabisco's operations may result in the closure of several Kraft facilities. During the first quarter of 2001, Kraft sold a North American food factory which resulted in a pre-tax loss of $29 million. Kraft estimates that the closure of Kraft facilities could result in aggregate charges to the 2001 consolidated statements of earnings in the range of $200 million to $300 million. These charges will be recorded when the integration plans have been finalized and announced to employees.
During the first quarter of 2001, Kraft filed a registration statement with the Securities and Exchange Commission for the planned initial public offering ("IPO") of its global food business. If completed as
anticipated, the IPO proceeds will be used to retire a portion of the debt incurred as a result of the acquisition of Nabisco.
During the first quarter of 2001, Kraft Foods International purchased coffee businesses in Romania and Morocco and announced the acquisition of a coffee company in Bulgaria. The aggregate cost of these acquisitions will be approximately $80 million. The operating results of these businesses were not material to the consolidated operating results of the Company.
During 2000, Kraft purchased the outstanding common stock of Balance Bar Co., a maker of energy and nutrition snack products. In a separate transaction, Kraft also acquired Boca Burger, Inc., a privately held manufacturer and marketer of soy-based meat alternatives. The total cost of these acquisitions was $358 million. The operating results of these businesses were not material to the consolidated operating results in any of the periods presented.
During 2000, Kraft Foods North America and Kraft Foods International sold several small international and domestic food businesses. The operating results of businesses divested were not material to consolidated operating results in any of the periods presented.
Operating Results
For the Three Months Ended March 31,
----------------------------------------------
Operating
Operating Revenues Companies Income
------------------ -----------------
(in millions)
2001 2000 2001 2000
------ ------ ------ ------
North American food $6,282 $4,534 $1,143 $ 913
International food 2,085 1,926 239 200
------ ------ ------ ------
Total food $8,367 $6,460 $1,382 $1,113
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North American food. During the first quarter of 2001, operating revenues increased $1.7 billion (38.6%) from the first quarter of 2000, due primarily to the acquisition of Nabisco ($1.6 billion), higher volume ($131 million), and the shift in CDC revenues ($71 million), partially offset by unfavorable product mix ($68 million) and unfavorable currency exchange rates. Adjusting for the shift in CDC revenues and excluding businesses divested since the beginning of 2000, operating revenues increased 36.6%. However, operating revenues would have increased 2.1% had the acquisition of Nabisco occurred on January 1, 2000.
Operating companies income for the first quarter of 2001 increased $230 million (25.2%) from the comparable period of 2000, primarily reflecting the acquisition of Nabisco ($211 million), higher volume ($76 million), higher margins ($58 million, driven by lower manufacturing and commodity-related costs) and the shift in CDC income ($27 million), partially offset by higher marketing, administration and research costs ($78 million, the majority of which related to higher marketing expenses), the pre-tax loss on the sale of a North American food factory ($29 million) and unfavorable product mix ($24 million). Adjusting for the shift in CDC income and excluding the pre-tax loss on the sale of a North American food factory and the impact of businesses divested since the beginning of 2000, operating companies income of $1,172 million for the first quarter of 2001 increased 25.1% over $937 million in the first quarter of 2000. However, operating companies income would have increased 6.5% had the acquisition of Nabisco occurred on January 1, 2000.
Volume for 2001 increased 37.3% over 2000. Excluding the impact of divested businesses and adjusting for the shift in volume related to the CDC, volume increased 35.2% due primarily to the acquisition of Nabisco. In addition, had the acquisition of Nabisco occurred on January 1, 2000 (the basis of presentation of all following Kraft Foods North America volume comparisons), volume would have increased 3.3%. In Cheese, Meals and Enhancers, volume increased due primarily to higher volume in dinners, rice, salad dressings and cream cheese, partially offset by lower food service business, lower processed cheese shipments and the discontinuation of
lower-margin, non-branded cheese products. Volume also increased in Biscuits, Snacks and Confectionery, driven primarily by new biscuit and confectionery products, partially offset by lower shipments of salty snacks. Volume gains were achieved in Beverages, Desserts and Cereals, driven primarily from the strength of ready-to-drink beverages and coffee. In Oscar Mayer and Pizza, volume increased due primarily to hot dogs, bacon, luncheon meats, soy-based meat alternatives and frozen pizza, partially offset by lower shipments of lunch combinations. Lower lunch combinations volume was due primarily to the timing of shipments.
International food. Operating revenues for the first quarter of 2001 increased $159 million (8.3%) over the first quarter of 2000. Adjusting for the shift in CDC revenues and excluding the operating revenues of divested businesses since the beginning of 2000, operating revenues increased $179 million (9.4%), due primarily to the acquisition of Nabisco ($287 million) and higher volume ($31 million), partially offset by unfavorable currency movements ($157 million). However, operating revenues would have decreased 4.4% from the comparable 2000 period had the acquisition of Nabisco occurred on January 1, 2000, due primarily to unfavorable currency movements.
Operating companies income for the first quarter of 2001 increased $39 million (19.5%) from the first quarter of 2000. Adjusting for the shift in CDC income and excluding the operating companies income of divested businesses since the beginning of 2000, operating companies income increased $34 million (16.6%), due primarily to the acquisition of Nabisco ($18 million), higher volume ($22 million) and lower marketing, administration and research costs ($15 million), partially offset by unfavorable currency ($18 million). However, operating companies income would have increased 8.6% had the acquisition of Nabisco occurred on January 1, 2000.
Volume for the first quarter of 2001 increased 38.0% over 2000. Excluding the impact of divested businesses and adjusting for the shift in volume related to the CDC, volume increased 37.8% due primarily to the acquisition of Nabisco. However, volume would have increased 3.3% had the acquisition of Nabisco occurred on January 1, 2000.
In Europe, Middle East and Africa, volume increased slightly over the first quarter of 2000, as gains in the developing markets of Central and Eastern Europe and growth in many Western European markets were mostly offset by lower volume in Germany and lower canned meats volume in Italy. In beverages, coffee volume was lower due to Germany, which was affected by reduced trade purchases in anticipation of lower coffee prices. Snacks volume increased, driven by confectionery and salty snacks. Cheese volume grew, driven primarily by cream cheese in Italy, Belgium and Spain and process cheese in the United Kingdom and Spain. In grocery, lower ketchup volume in Germany was partially offset by higher spoonable dressing sales in Spain and Greece.
Volume increased in the Latin American and Asia Pacific regions driven by gains across most categories. Beverages volume increased due primarily to refreshment beverages volume growth, including powdered soft drinks in Brazil, China, the Philippines and Argentina and juice concentrate in Brazil. Snacks volume increased, driven primarily by higher biscuit volume in Brazil and China. In confectionery, volume grew in Asia Pacific due to chewy candy in China and Southeast Asia. Cheese volume increased driven primarily by cream cheese in Australia, Japan and the Caribbean, and process cheese in Australia and the Philippines. Grocery volume was higher, due primarily to higher shipments of spoonable dressings in the Philippines.
Beer
Operating Results
Three Months Ended March 31
Miller's operating revenues for the first quarter of 2001 decreased $53 million (5.1%) from the first quarter of 2000. Excluding the operating revenues of businesses divested since the beginning of 2000, operating revenues
decreased $25 million (2.5%), due primarily to lower volume ($51 million), partially offset by higher pricing ($28 million). Operating companies income for the first quarter of 2001 decreased $29 million (19.0%) from the first quarter of 2000. Excluding the operating companies income of businesses divested since the beginning of 2000, operating companies income decreased by $28 million (18.4%), due primarily to lower volume ($23 million) and higher marketing, administration and research costs ($15 million, primarily marketing expenses), partially offset by higher pricing ($14 million).
Miller's domestic shipment volume of 9.4 million barrels for the first quarter of 2001 decreased 7.5% from the comparable 2000 period, partially reflecting Miller's continuing efforts to reduce distributor inventories. Excluding the impact of businesses divested since the beginning of 2000, total domestic shipment volume was down 5.3%. Domestic shipments of premium/near-premium brands decreased across most brands from 2000. Domestic shipments of below-premium products also decreased on lower shipments across most brands. Excluding the impact of businesses divested since the beginning of 2000, total wholesalers' sales to retailers decreased 6.3% from the comparable 2000 period, reflecting lower retail sales of Miller Lite, Miller Genuine Draft, Miller High Life, Icehouse and Milwaukee's Best.
Financial Services
Philip Morris Capital Corporation's ("PMCC") financial services operating revenues and operating companies income for the first quarter of 2001 increased $8 million (8.7%) and $6 million (10.3%), respectively, over the comparable 2000 period. These increases were due primarily to new leasing and structured finance investments.
Financial Review
Net Cash Provided by Operating Activities
During the first quarter of 2001, net cash provided by operating activities was $557 million compared with $3.3 billion in the comparable 2000 period. The decrease was due primarily to the timing of payments for tobacco litigation settlement agreements and an increase in inventories.
Net Cash Used in Investing Activities
During the first quarter of 2001, net cash used in investing activities was $634 million, down from $751 million in 2000. The decrease primarily reflects less cash used for acquisitions. During the first quarter of 2000, the Company purchased Boca Burger, Inc. and Balance Bar Co. for an aggregate purchase price of $358 million. During the first quarter of 2001, the Company purchased an additional interest in an Argentine tobacco subsidiary and coffee businesses in Romania and Morocco for an aggregate cost of $255 million.
Net Cash Used in Financing Activities
During 2001, net cash of $458 million was used in financing activities, compared with $3.4 billion used in financing activities during 2000. This difference was due primarily to net proceeds from the issuance of debt of $1.4 billion for the first three months of 2001, compared with net debt repayments of $1.3 billion in 2000.
Debt and Liquidity
The Company's total debt (consumer products and financial services) was $30.5 billion and $29.1 billion at March 31, 2001 and December 31, 2000, respectively. Total consumer products debt was $28.6 billion and $27.2 billion at March 31, 2001 and December 31, 2000, respectively. At March 31, 2001 and December 31, 2000, the Company's ratio of consumer products debt to total equity was 1.93 and 1.81, respectively. The ratio of total debt to total equity was 2.05 and 1.94 at March 31, 2001 and December 31, 2000, respectively. In 2001,
Kraft plans to undertake an IPO of less than 20% of its common stock. If completed as anticipated, the IPO proceeds will be used to retire a portion of the debt incurred to acquire Nabisco.
The Company and its subsidiaries maintain credit facilities with a number of lending institutions, amounting to approximately $19.1 billion. Certain of these facilities, used to support commercial paper borrowings, are available for acquisitions and other corporate purposes and require the maintenance of a fixed charges coverage ratio. The Company's credit facilities include a $9.0 billion, 364-day revolving credit facility, entered into in October 2000, in connection with the acquisition of Nabisco, and a term revolving credit facility for $8.0 billion. The term revolving credit facility expires in October 2002 and enables the Company to reclassify short-term debt on a long-term basis. At March 31, 2001, $7.0 billion of short-term borrowings that the Company intends to refinance were reclassified as long-term debt. The Company may continue to refinance long-term and short-term debt from time to time. The nature and amount of the Company's long-term and short-term debt and the proportionate amount of each can be expected to vary as a result of future business requirements, market conditions and other factors.
As discussed in Note 6. Contingencies, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among PM Inc., certain other defendants and the plaintiffs that provides that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. will place $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. PM Inc. will also place an additional $500 million into a separate interest-bearing escrow account which, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, the Company has recorded a $500 million pre-tax charge in the consolidated statement of earnings for the quarter ended March 31, 2001. The $1.2 billion escrow account has been included in the March 31, 2001 consolidated balance sheet as an increase to other assets and a corresponding increase to other accrued liabilities. Interest income on the $1.2 billion escrow account will be recorded as earned in the Company's consolidated statement of earnings. The Company expects to use additional short-term borrowings to fund the $1.7 billion of total payments into the escrow accounts.
As discussed in Note 6, PM Inc., along with other domestic tobacco companies, has entered into tobacco litigation settlement agreements that require the domestic tobacco industry to make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as an additional $250 million each year from 2001 through 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its share of domestic cigarette shipments in the year preceding that in which the payment is due. Accordingly, PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped.
As part of the Master Settlement Agreement ("MSA"), the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quota-holders. To that end, four of the major domestic tobacco product manufacturers, including PM Inc., and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (in 2001, $400 million; 2002 through 2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM Inc. records its portion of these payments as part of cost of sales as product is shipped.
As discussed above under "Tobacco -- Business Environment," the present legislative and litigation environment is substantially uncertain and could result in material adverse consequences for the business, financial condition, cash flows or results of operations of the Company, PM Inc. and PMI.
Equity and Dividends
During the first quarter of 2001 and 2000, the Company repurchased 21.5 million and 45.2 million shares, respectively, of its common stock at a cost of $1.0 billion and $921 million, respectively. During the first quarter of 2001, the Company completed its previously announced three-year $8 billion dollar share repurchase program and announced a new three-year $10 billion dollar share repurchase program. At March 31, 2001, cumulative repurchases under the $10 billion authority totaled 6.5 million shares at an aggregate cost of $301 million.
Dividends paid in the first quarter of 2001 and 2000 were $1.2 billion and $1.1 billion, respectively. During the third quarter of 2000, the Company's Board of Directors approved a 10.4% increase in the current quarterly dividend rate to $0.53 per share. As a result, the present annualized dividend rate is $2.12 per share.
Market Risk
The Company is exposed to market risk, primarily related to foreign exchange rates, commodity prices and interest rates. These exposures are actively monitored by management. To manage these exposures, the Company enters into a variety of derivative financial instruments. The Company's objective is to reduce, where it is deemed appropriate to do so, fluctuations in earnings and cash flows associated with changes in interest rates, foreign currency rates and commodity prices. It is the Company's policy and practice to use derivative financial instruments only to the extent necessary to manage exposures. Since the Company uses currency rate-sensitive, commodity price-sensitive and interest rate-sensitive instruments to hedge a certain portion of its existing and forecasted transactions, the Company expects that any loss in value for the hedge instruments generally would be offset by increases in the value of the underlying transactions. The Company does not use derivative financial instruments for speculative purposes.
Foreign exchange rates. The Company is exposed to foreign exchange movements, primarily in European, Japanese and other Asian and Latin American currencies. Consequently, it enters into various contracts, which change in value as foreign currency exchange rates fluctuate, to preserve the value of commitments and forecasted transactions. The Company uses foreign currency option and forward contracts to hedge certain transaction exposures and forecasted foreign currency cash flows. The Company also enters into short-term foreign currency swap contracts, primarily to hedge intercompany transactions denominated in foreign currencies. At March 31, 2001 and December 31, 2000, the Company had option and forward foreign currency exchange contracts, principally for the Japanese yen, the Euro, the British pound and the Swiss franc with an aggregate notional amount of $2.8 billion and $5.8 billion, respectively, for both the purchase and/or sale of foreign currencies.
The Company also seeks to protect its foreign currency net asset exposure, primarily the Swiss franc, through the use of foreign-currency denominated debt or currency swap agreements. At March 31, 2001 and December 31, 2000, the notional amounts of currency swap agreements aggregated $2.2 billion and $2.3 billion, respectively.
Commodities. The Company is exposed to price risk related to forecasted purchases of certain commodities used as raw materials by the Company's food businesses. Accordingly, the Company enters into commodity future, forward and option contracts to manage fluctuations in prices of forecasted purchases, primarily cheese, coffee, cocoa, milk, sugar, wheat, corn and, beginning in 2000, energy. At March 31, 2001 and December 31, 2000, the Company had net long commodity positions of $601 million and $617 million, respectively. Unrealized gains or losses on net commodity positions were immaterial at March 31, 2001 and December 31, 2000.
Interest rates. The Company manages its exposure to interest rate risk through the proportion of fixed rate debt and variable rate debt in its total debt portfolio. To manage this mix, the Company may enter into interest rate swap agreements, in which it exchanges the periodic payments, based on a notional amount and agreed-upon fixed and variable interest rates. At March 31, 2001, the Company had interest rate swap agreements which converted $102 million of fixed rate debt to variable rate debt of which $29 million will mature in 2003 and $73 million will mature in 2004.
Use of the above-mentioned derivative financial instruments has not had a material impact on the Company's financial position at March 31, 2001 and December 31, 2000, or the Company's results of operations for the three months ended March 31, 2001 or the year ended December 31, 2000.
Contingencies
See Note 6 to the Condensed Consolidated Financial Statements for a discussion of contingencies.
New Accounting Standards
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment, Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS No. 133"). These standards require that all derivative financial instruments be recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Changes in the fair value of derivatives will be recorded each period in earnings or accumulated other comprehensive losses, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive losses will be included in earnings in the periods in which earnings are affected by the hedged item. As of January 1, 2001, the adoption of these new standards resulted in a cumulative effect of an accounting change that reduced net earnings by $6 million, net of income taxes of $3 million and decreased accumulated other comprehensive losses by $15 million, net of income taxes of $8 million.
During the quarter ended March 31, 2001, accumulated other comprehensive losses decreased by $17 million, which represented gains of $47 million due to hedging transactions, which were offset by $30 million reclassified from accumulated other comprehensive losses to the consolidated statement of earnings.
The Emerging Issues Task Force ("EITF") issued EITF No. 00-14, "Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the recognition, measurement and statement of earnings classification for certain sales incentives and will be effective in the first quarter of 2002. As a result, certain items previously included in cost of sales and in marketing, administration and research costs on the consolidated statement of earnings will be recorded as a reduction of operating revenues. The Company has determined that the impact of adoption or subsequent application of EITF Issue No. 00-14 will not have a material effect on its consolidated financial position or results of operations. Upon adoption, prior period amounts, which are not expected to be significant, will be reclassified to conform to the new requirements. In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services." EITF Issue No. 00-25 requires that certain expenses included in marketing, administration and research costs be recorded as a reduction of operating revenues and will be effective in the first quarter of 2002. The Company is currently in the process of determining the impact of EITF Issue No. 00-25.
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to stockholders. One can identify these forward-looking statements by use of words such as "strategy," "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals," "targets" and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results and outcomes to differ materially from those contained in any forward-looking statement made by or on behalf of the Company; any such statement is qualified by reference to the following cautionary statements.
The tobacco industry continues to be subject to health concerns relating to the use of tobacco products and exposure to ETS, legislation, including actual and potential excise tax increases, increasing marketing and regulatory restrictions, governmental regulation, privately imposed smoking restrictions, governmental and grand jury investigations, litigation, including risks associated with adverse jury and judicial determinations, courts reaching conclusions at variance with the Company's understanding of applicable law, bonding requirements and the absence of adequate appellate remedies to get timely relief from any of the foregoing, and the effects of price increases related to concluded tobacco litigation settlements and excise tax increases on consumption rates. Each of the Company's consumer products subsidiaries is subject to intense competition, changes in consumer preferences, the effects of changing prices for its raw materials and local economic conditions. Their results are dependent upon their continued ability to promote brand equity successfully, to anticipate and respond to new consumer trends, to develop new products and markets and to broaden brand portfolios, in order to compete effectively with lower priced products in a consolidating environment at the retail and manufacturing levels, and to improve productivity. In addition, PMI, Kraft Foods International and Kraft Foods North America are subject to the effects of foreign economies and the related shifts in consumer preferences and currency movements. Developments in any of these areas, which are more fully described above and which descriptions are incorporated into this section by reference, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 6. Contingencies, of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for a discussion of legal proceedings pending against the Company and its subsidiaries. See also Exhibits 99.1 and 99.2 to this report.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's annual meeting of stockholders was held in Richmond, Virginia on April 26, 2001. 1,784,368,694 shares of Common Stock, 80.9% of outstanding shares, were represented in person or by proxy.
The following thirteen directors were elected to a one-year term expiring in 2002:
Number of Shares
---------------------------------
For Withheld
-------------- -----------
Elizabeth E. Bailey 1,774,687,994 9,680,700
Geoffrey C. Bible 1,775,059,179 9,309,515
Harold Brown 1,773,970,113 10,398,581
Jane Evans 1,742,626,529 41,742,165
J. Dudley Fishburn 1,774,807,727 9,560,967
Robert E. R. Huntley 1,774,367,367 10,001,327
Billie Jean King 1,771,129,608 13,239,086
Rupert Murdoch 1,694,538,247 89,830,447
John D. Nichols 1,774,500,740 9,867,954
Lucio A. Noto 1,775,078,346 9,290,348
John S. Reed 1,774,428,762 9,939,932
Carlos Slim Helu 1,743,723,352 40,645,342
Stephen M. Wolf 1,774,505,129 9,863,565
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The selection of PricewaterhouseCoopers LLP as independent accountants was approved: 1,762,690,283 shares voted in favor; 11,364,409 shares voted against and 10,314,002 shares abstained (including broker non-votes).
The six stockholder proposals were defeated:
Stockholder Proposal 1 - Environmental Tobacco Smoke: 100,585,391 shares voted in favor; 1,415,034,352 shares voted against and 268,748,951 shares abstained (including broker non-votes).
Stockholder Proposal 2 - Ensuring That Tobacco Ads Are Not Youth-Friendly:
120,639,693 shares voted in favor; 1,417,985,172 shares voted against and
245,743,829 shares abstained (including broker non-votes).
Stockholder Proposal 3 - Phase Out Genetically Engineered Food: 42,030,536 shares voted in favor; 1,487,399,428 shares voted against and 254,938,730 shares abstained (including broker non-votes).
Stockholder Proposal 4 - Stop Funding Smoking Related Research Using Live Animals: 32,574,410 shares voted in favor; 1,456,515,176 shares voted against and 295,279,108 shares abstained (including broker non-votes).
Stockholder Proposal 5 - Inform Consumers About the Risks of Smoking: 87,417,120 shares voted in favor; 1,411,580,169 shares voted against and 285,371,405 shares abstained (including broker non-votes).
Stockholder Proposal 6 - Global Human Rights Standards: 92,552,654 shares voted in favor; 1,404,636,918 shares voted against and 287,179,122 shares abstained (including broker non-votes).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
12 Statement regarding computation of ratios of earnings to fixed charges.
99.1 Certain Pending Litigation Matters and Recent Developments.
99.2 Trial Schedule for Certain Cases.
(b) Reports on Form 8-K. The Registrant filed (i) a Current Report on Form 8-K on January 31, 2001 containing the Registrant's consolidated financial statements for the year ended December 31, 2000; (ii) a Current Report on Form 8-K/A on February 22, 2001 amending the Current Report on Form 8-K filed on December 22, 2000 related to the acquisition of Nabisco; (iii) a Current Report on Form 8-K on March 16, 2001 covering Item 9 (Regulation FD Disclosure) which related to the filing of a Form S-1 Registration Statement for the planned initial public offering of Kraft Foods Inc. Class A common stock; (iv) a Current Report on Form 8-K on May 2, 2001 covering Item 9 (Regulation FD Disclosure) which related to the filing of Amendment No. 1 to a Form S-1 Registration Statement for the planned initial public offering of Kraft Foods Inc. Class A common stock; (v) a Current Report on Form 8-K on May 8, 2001 covering Item 5 (Other Events) which related to the trial court approval of a Stipulation and Agreed Order Regarding Stay of Execution Pending Review and Related Matters between Philip Morris Incorporated and the plaintiffs and the plaintiff class in the Engle smoking and health class action in Florida; and (vi) a Current Report on Form 8-K on May 11, 2001 covering Item 9 (Regulation FD Disclosure) which related to the filing of Amendment No. 2 to a Form S-1 Registration Statement for the planned initial public offering of Kraft Foods Inc. Class A common stock.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
/s/ LOUIS C. CAMILLERI Louis C. Camilleri, Senior Vice President and Chief Financial Officer May 11, 2001 |
Exhibit 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
Three Months Ended
March 31, 2001
------------------
Earnings before income taxes and cumulative effect
of accounting change $ 2,881
Add (deduct):
Equity in net earnings of less than 50% owned
affiliates (61)
Dividends from less than 50% owned
affiliates 14
Fixed charges 610
Interest capitalized, net of amortization 3
-------
Earnings available for fixed charges $ 3,447
=======
Fixed charges:
Interest incurred:
Consumer products $ 535
Financial services 29
-------
564
Portion of rent expense deemed to represent
interest factor 46
-------
Fixed charges $ 610
=======
Ratio of earnings to fixed charges 5.7
=======
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Exhibit 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
For the Years Ended December 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Earnings before income taxes $ 13,960 $ 12,695 $ 9,087 $ 10,611 $ 10,683
Add (deduct):
Equity in net earnings
of less than 50%
owned affiliates (228) (197) (195) (207) (227)
Dividends from less
than 50% owned
affiliates 70 56 70 138 160
Fixed charges 1,348 1,363 1,386 1,438 1,421
Interest capitalized,
net of amortization 7 (2) (5) (16) 13
-------- -------- -------- -------- --------
Earnings available for
fixed charges $ 15,157 $ 13,915 $ 10,343 $ 11,964 $ 12,050
======== ======== ======== ======== ========
Fixed charges:
Interest incurred:
Consumer products $ 1,087 $ 1,118 $ 1,166 $ 1,224 $ 1,197
Financial services 114 89 77 67 81
-------- -------- -------- -------- --------
1,201 1,207 1,243 1,291 1,278
Portion of rent expense
deemed to represent
interest factor 147 156 143 147 143
-------- -------- -------- -------- --------
Fixed charges $ 1,348 $ 1,363 $ 1,386 $ 1,438 $ 1,421
======== ======== ======== ======== ========
Ratio of earnings to
fixed charges 11.2 10.2 7.5 8.3 8.5
======== ======== ======== ======== ========
|
Exhibit 99.1
CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS
As described in Note 6 of this Report on Form 10-Q, there are legal proceedings covering a wide range of matters pending in various U.S. and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc. and Philip Morris International, and their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost recovery cases brought by governmental and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking and suits by foreign governments seeking to recover damages for taxes lost as a result of the allegedly illegal importation of cigarettes into their jurisdictions. Governmental plaintiffs in the health care cost recovery actions include the federal government, various cities and counties in the United States and certain foreign governmental entities. Non-governmental plaintiffs in these cases include union health and welfare trust funds ("unions"), Native American tribes, insurers and self-insurers, taxpayers and others.
The following lists certain of the pending claims included in these categories and certain other pending claims. Certain developments in these cases since February 15, 2001 are also described.
SMOKING AND HEALTH LITIGATION
The following lists the consolidated individual smoking and health cases as well as smoking and health class actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates, including PMI, as of May 1, 2001, and describes certain developments in these cases since February 15, 2001.
Consolidated Individual Smoking and Health Cases
In Re Tobacco Litigation (Individual Personal Injury cases), Circuit Court of Ohio County, West Virginia, consolidated January 11, 2000. In West Virginia all smoking and health cases alleging personal injury have been transferred to the state's Mass Litigation Panel. The transferred cases include individual cases and putative class actions. A case management order has been issued which provides that all pending individual cases as well as cases filed in or transferred to the court by September 8, 2000 are to be included in a single consolidated trial. Approximately 1,200 individual cases have been filed. The trial court's order provides for the trial to be conducted in two phases. The issues to be tried in phase one are "general liability issues common to all defendants including, if appropriate, defective product theory, negligence theory, warranty theory; and any other theories supported by pretrial development" as well as entitlement to punitive damages and a punitive damages multiplier. Pursuant to the court's order, the individual claims of the plaintiffs whose cases have been consolidated will be tried on an individual basis or "in reasonably sized trial groups" during the second phase of the trial. Trial is scheduled to begin in March 2002.
Flight Attendant Litigation
The settlement agreement entered into in the case of Broin, et al., v. Philip
Morris Companies Inc., et al., permitted members of the purported class to bring
individual suits as to their alleged injuries. As of May 1, 2001, approximately
3,040 of these suits were pending in the Circuit Court of Dade County, Florida
against PM
Exhibit 99.1
Inc. and three other cigarette manufacturers. In October 2000, the court held that the flight attendants will not be required to prove the substantive liability elements of their claims for negligence, strict liability and breach of implied warranty in order to recover damages, if any, other than establishing that the plaintiffs' alleged injuries were caused by their exposure to environmental tobacco smoke and, if so, the amount of damages to be awarded. To date, 20 such cases are scheduled for trial during 2001.
Domestic Class Actions
Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Eleventh Judicial Court, Dade County, Florida, filed May 5, 1994. See Note 6. Contingencies, for a discussion of this case.
Norton, et al. v. RJR Nabisco Holdings Corporation, et al., Superior Court, Madison County, Indiana, filed May 3, 1996.
Richardson, et al. v. Philip Morris Incorporated, et al., Circuit Court, Baltimore City, Maryland, filed May 24, 1996. The court granted plaintiffs' motion for class certification in February 1998 and defendants appealed. In May 2000, the Maryland Court of Appeals reversed the trial court's ruling and ordered the class decertified, and in March 2001, the case was dismissed.
Scott, et al. v. The American Tobacco Company, et al., District Court, Orleans Parish, Louisiana, filed May 24, 1996. Plaintiffs have been granted class certification on behalf of Louisiana cigarette smokers seeking the creation of trust funds to pay the costs of monitoring the medical conditions of members of the purported class and providing them with smoking cessation programs. Trial is scheduled for June 2001.
Connor, et al. v. The American Tobacco Company, et al., Second Judicial District Court, Bernalillo County, New Mexico, filed October 10, 1996.
In Re Tobacco Litigation (Medical Monitoring cases) (formerly McCune, et al. v. The American Tobacco Company, et al.). Circuit Court, West Virginia, filed January 31, 1997. A mistrial was declared in January 2001. In March 2001, the court denied the defendants' motion to decertify the class and scheduled a retrial of the case for September 2001.
Muncie (formerly Ingle and formerly Woods), et al. v. Philip Morris Incorporated, et al., Circuit Court, McDowell County, West Virginia, filed February 4, 1997.
Canter (formerly Peterson), et al. v. The American Tobacco Company, et al., Circuit Court, First Circuit, Hawaii, filed February 6, 1997.
Selcer, et al. v. R.J. Reynolds Tobacco Company, et al., United States District Court, Nevada, filed March 3, 1997. In January 2001, the Nevada Supreme Court found that Nevada common law does not recognize the medical monitoring cause of action sought by plaintiffs. Plaintiff's motion for class certification is currently pending.
Geiger, et al. v. The American Tobacco Company, et al., Supreme Court, Queens County, New York, filed April 30, 1997. In October 1999, plaintiffs appealed the trial court's denial of their class certification motion. In February 2001, the New York Court of Appeals dismissed plaintiffs' motion for leave to appeal the denial of class certification.
Exhibit 99.1
Cole, et al. v. The Tobacco Institute, Inc., et al., United States District Court, Eastern District, Texarkana Division, Texas, filed May 5, 1997. In May 2000, the trial court granted defendants' motion for judgment on the pleadings. Plaintiffs have appealed to the United States Court of Appeals for the Fifth Circuit.
Anderson, et al. v. The American Tobacco Company, Inc., et al., United States District Court, Eastern District, Tennessee, filed May 23, 1997.
Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San Diego County, California, filed June 10, 1997. In April 2000, the court denied plaintiff's initial motion for class certification. In February 2001, the court permitted plaintiffs to file a second motion for class certification. In April 2001, the court granted in part plaintiff's motion for class certification and certified a class comprised of residents of California who smoked at least one of defendants' cigarettes "during the applicable class period" and who were exposed to defendants' marketing and advertising activities in California. Certification was granted as to plaintiff's claims that defendants violated California Business and Professions Code Sections 17200 and 17500. The court denied the motion as to plaintiff's claims under the California Consumer Legal Remedies Act.
Mahoney (formerly Fitz), et al. v. R.J. Reynolds Tobacco Company, et al., United States District Court, Southern District, Iowa, filed June 20, 1997.
Guillory (formerly Denberg), et al. v. American Brands, Inc., et al., United States District Court, Northern District, Illinois, filed July 7, 1997. In March 2001, -class certification was denied, and plaintiffs have sought leave to file an interlocutory appeal.
Nwanze, et al. v. Philip Morris Companies Inc., et al., United States District Court, Southern District, New York, filed September 29, 1997. In June 2000, the court granted defendants' motion to dismiss the complaint for failure to state a claim, and plaintiffs appealed to United States Court of Appeals for the Second Circuit. In April 2001, the Second Circuit affirmed the district court's decision.
Badillo, et al. v. The American Tobacco Company, et al., United States District Court, Nevada, filed October 8,1997. In January 2001, the Nevada Supreme Court found that Nevada common law does not recognize the medical monitoring cause of action sought by plaintiffs.
Young, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed November 12, 1997.
Aksamit, et al. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, South Carolina, filed November 20, 1997. In December 2000, the court denied plaintiffs' motion for class certification. In March 2001, the case was dismissed.
DiEnno v. Liggett Group, Inc., et al., United States District Court, Nevada, filed December 22, 1997. In January 2001, the Nevada Supreme Court found that Nevada common law does not recognize the medical monitoring cause of action sought by plaintiffs.
Jackson, et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, Utah, filed February 13, 1998.
Parsons, et al. v. A C & S, Inc., et al., Circuit Court, Kanawha County, West Virginia, filed February 27, 1998.
Exhibit 99.1
Basik (formerly Mendys), et al. v. Lorillard Tobacco Company, et al., United States District Court, Northern District, Illinois, filed March 17, 1998. In February 2001, the court dismissed the case.
Daniels, et al. v. Philip Morris Companies Inc., et al., Superior Court, San Diego County, California, filed April 2, 1998. In September 2000, the court agreed to reconsider its earlier ruling denying plaintiffs' motion for class certification, and in November 2000, the court granted the plaintiffs' motion for class certification on behalf of minor California residents who smoked at least one cigarette between April 1994 and December 1999. Trial is scheduled for May 2002. Defendants filed a writ with the court of appeals challenging the trial court's class certification ruling and the writ was denied, and defendants have sought interlocutory review by the California Supreme Court.
Christensen, et al. v. Philip Morris Companies Inc., et al., United States District Court, Nevada, filed April 3, 1998. In January 2001, the Nevada Supreme Court found that Nevada common law does not recognize the medical monitoring cause of action sought by plaintiffs.
Avallone, et al. v. The American Tobacco Company, Inc., et al., New Jersey Superior Court, Atlantic County Law Division, New Jersey, filed April 23, 1998. The trial court denied plaintiffs' motion for class certification. Plaintiffs appealed. In April 2000, the appeals court dismissed plaintiffs' appeal. In September 2000, the New Jersey Supreme Court denied plaintiffs' motion for leave to appeal the denial of class certification. In April 2001, the trial court, its own motion, dismissed the case.
Cleary, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed June 3, 1998.
Creekmore, et al. v. Brown & Williamson, et al., Superior Court, Bucombe County, North Carolina, filed July 31, 1998.
Jimenez, et al. v. Brown & Williamson Tobacco Corporation, et al., Second Judicial District Court, County of Bernalillo, New Mexico, filed August 20, 1998.
Brown, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, Pennsylvania, filed October 16, 1998. Plaintiffs allege that tobacco companies' "discriminatory targeting of menthol tobacco product sales to Black Americans" violates federal civil rights statutes. In September 1999, the court granted defendants' motion to dismiss the case, and plaintiffs appealed to the United States Court of Appeals for the Third Circuit.
Cypret (formerly Jones), et al. v. The American Tobacco Company, et al., Circuit Court, Jackson County, Missouri, filed December 22, 1998.
Simon, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed April 9, 1999. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) In November 2000, the court denied plaintiffs' motion for class certification, but indicated its intent to certify a class in Simon, et al., v. Philip Morris Incorporated, et al. (Simon II).
Julian, et al. v. Philip Morris Companies Inc., et al., Circuit Court for Montgomery County, Alabama, filed April 14, 1999.
Decie, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed April 21, 2000. In September 2000, a putative class action was filed which purports to consolidate
Exhibit 99.1
punitive damage claims in this case with nine other pending cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.)
Arnitz, et al. v. Philip Morris Incorporated, et al., Div. H, Circuit Court for the 13th Judicial Circuit, Hillsborough County, Florida, filed July 3, 2000. In March 2001, plaintiff voluntarily dismissed without prejudice the class action allegations in the complaint.
National Tobacco Consumers' Group Number 2 v. Philip Morris Incorporated, et al., United States District Court, Massachusetts, filed July 18, 2000. In March 2001, the court dismissed the case without prejudice.
Ebert, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed August 9, 2000 (not yet served). In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.)
Vandermeulen, et al. v. Philip Morris Companies Inc., et al., United States District Court, Eastern District, Michigan, filed September 18, 2000.
International Class Actions
Caputo (formerly LeTourneau) v. Imperial Tobacco Limited, et al., Ontario Court of Justice, Toronto, Canada, filed January 13, 1995.
The Smoker Health Defense Association, et al. v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., Nineteenth Lower Civil Court of the Central Courts of the Judiciary District of Sao Paulo, Brazil, filed July 25, 1995.
Fortin, et al. v. Imperial Tobacco Ltd., et al., Quebec Superior Court, Canada, filed on or about September 11, 1998.
Conseil Quebecois sur le Tabac v. RJR-Macdonald Inc., et al., Quebec Superior Court, Canada, filed November 20, 1998.
Associacao Cearense' de Defesa da Saude do Fumante e Ex-Fumante (ACEDESFE) v. Philip Morris Brazil, S.A., et al., Third Civil Court of the State of Ceara, Forteleza, Brazil, filed April 12, 1999. In February 2001, the case was dismissed.
Yabin Galidi, et al. v. Dubek Ltd., et al., Tel Aviv-Yaffo Region Court, Israel, filed (but not officially served) July 12, 1999.
Ragoonanan, et al. v. Imperial Tobacco Limited, et al., Superior Court of Justice, Ontario, Canada, filed January 11, 2000.
Yas'ur, et al. v. Dubek Ltd., et al., Tel Aviv-District Court, Israel, filed November 22, 2000 (not yet served).
Asociacion Espanola de Laringectomizados y Multiados de la voz v. Altadis S.A. et al., Court of First Instance No. 5, Section 1, Barcelona, Spain, filed January 3, 2001.
Exhibit 99.1
Asociacion Vallisoletana de Laringectomizados v. Altadis S.A., et al., Court of First Instance, No. 9, Valadolid, Spain, filed on an unknown date during 2001.
HEALTH CARE COST RECOVERY LITIGATION
The following lists the health care cost recovery actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates as of May 1, 2001, and describes certain developments in these cases since February 15, 2001. As discussed in Note 6. Contingencies, in 1998 PM Inc. and certain other United States tobacco product manufacturers entered into a Master Settlement Agreement (the "MSA") settling the health care cost recovery claims of 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas. Settlement agreements settling similar claims had previously been entered into with the states of Mississippi, Florida, Texas and Minnesota. The Company believes that the claims in the city/county, taxpayer and certain of the other health care cost recovery actions listed below are released in whole or in part by the MSA or that recovery in any such actions should be subject to the offset provisions of the MSA.
City/County Cases
County of Cook v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed April 18, 1997. In September 1999, the judge granted in part and denied in part defendants' motion to dismiss the complaint. Dismissed were plaintiff's claims for intentional/negligent breach of special and general duty, performance of another's duty to the public, public nuisance and unjust enrichment/restitution. The counts remaining are for various violations of the Illinois Consumer Fraud Act, violations of the Illinois Antitrust Act, negligence per se and conspiracy. In February 2000, the court denied defendants' motion for summary judgment on the remaining claims. In October 2000, the court granted defendants' motion to dismiss all plaintiffs except Cook County. In December 2000, defendants filed a motion to dismiss the remaining counts in the complaint, and also to certify the court's denial of defendants' summary judgment motion for interlocutory appeal.
City of St. Louis v. American Tobacco, et al., Circuit Court for the City of St. Louis, Missouri, filed November 23, 1998.
County of St. Louis v. American Tobacco, et al., Circuit Court for the City of St. Louis, Missouri, filed December 3, 1998. This case is currently stayed.
County of Wayne v. Philip Morris Incorporated, et al., United States District Court, Eastern District, Michigan, filed December 7, 1999. In August 2000, following arguments on defendants' motion for judgment on the pleadings, the district court certified certain state law questions to the Michigan Supreme Court. The district court has stayed action in the case until defendants' motion is resolved.
Ament, et al. v. Thompson, et al., Circuit Court, Dane County, Wisconsin, filed April 28, 2000.
Lapean, et al., v. Thompson, et al., Circuit Court, Dane County, Wisconsin, filed April 28, 2000.
Department of Justice Case
The United States of America v. Philip Morris Incorporated, et al., United States District Court, Washington, D.C., filed September 22, 1999. See Note 6. Contingencies, for a discussion of this case.
Exhibit 99.1
International Cases
Republic of the Marshall Islands v. The American Tobacco Company, et al., High Court, Republic of the Marshall Islands, filed October 20, 1997. In July 1999, the court denied defendants' motion to dismiss. In February 2001, the court granted certain of defendants' motion for summary judgment, and dismissed all of plaintiffs' claims except its claims related to the Marshall Islands Consumer Protection Act. In April 2001, the trial court denied plaintiffs' motion for reconsideration of its order dismissing most of plaintiff's request to reopen discovery on the issue of damages. Trial of this case is scheduled for September 2001.
The Republic of Panama v. The American Tobacco Company, Inc., United States District Court, District of Columbia, filed September 11, 1998. In July 2000, the United States Court of Appeals for the Fifth Circuit vacated the ruling by the United States District Court for the Eastern District of Louisiana that granted plaintiff's motion to remand the case to the Civil District Court, Orleans Parish, Louisiana. In November 2000, the case was transferred to the Multidistrict Litigation Proceeding pending before the United States District Court for the District of Columbia (see In re Tobacco/Government Health Care Cost Litigation (MDL No. 1279) (the "MDL Proceeding" discussed below)).
Kupat Holim Clalit v. Philip Morris Incorporated, et al., Jerusalem District Court, Israel, filed September 28, 1998.
The Republic of Bolivia v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed January 20, 1999. In February 1999, this case was removed to federal court by defendants and subsequently transferred on the court's own motion to the federal district court for the District of Columbia in March 1999. It is currently pending in the MDL Proceeding discussed below.
The Republic of Venezuela v. Philip Morris Companies Inc., et al., Eleventh Judicial Circuit, Dade County, Florida, filed January 27, 1999. This case was removed to federal court by defendants in February 1999 and subsequently transferred to the MDL Proceeding discussed below. The court hearing the MDL Proceeding remanded the case to Florida state court in June 2000, and defendants have appealed.
The Caisse Primaire d'Assurance Maladie of Saint-Nazaires v. SEITA, et al., Civil Court of Saint-Nazaires, France, filed June 1999.
In re Tobacco/Governmental Health Care Costs Litigation (MDL No. 1279), United
States District Court, District of Columbia, consolidated June 1999. In June
1999, the United States Judicial Panel on Multidistrict Litigation transferred
foreign government health care cost recovery actions brought by Nicaragua,
Venezuela, and Thailand to the District of Columbia for coordinated pretrial
proceedings with two such actions brought by Bolivia and Guatemala already
pending in that court. Subsequently, the resulting proceeding has also included
filed cases brought by the following foreign states: Ukraine, the Brazilian
States of Espirito Santo, Goias, Mato Grosso do Sul, Piaui and Tocantins,
Panama, the Province of Ontario, Canada, Ecuador, the Russian Federation,
Honduras, Tajikistan, and the Kyrgyz Republic. In December 1999, the district
court dismissed the complaint filed by Guatemala; in March 2000, the court
dismissed the complaints filed by Nicaragua and Ukraine; and in August 2000, the
court dismissed the complaint filed by the Province of Ontario. Thailand's case
was voluntarily dismissed. Guatemala, Nicaragua, Ukraine and the Province of
Ontario have appealed to the United States Court of Appeal for the District of
Columbia Circuit. In June and July 2000, the district court remanded the
Venezuela, Goias, Ecuador and Espirito Santo actions to Florida state court and,
defendants have appealed to the United States Court of Appeals for the District
of Columbia Circuit. In March 2001, the Kyrgyz Republic voluntarily dismissed
its case. At present, there are eight cases pending in the MDL Proceeding:
Bolivia, Mato Grosso do Sul, Panama, Russian Federation, Honduras, Tajikistan,
Tocantins and Piaui.
Exhibit 99.1
The State of Rio de Janeiro of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., District Court, Angelina County, Texas, filed July 12, 1999.
The State of Goias of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed October 18, 1999. This case was removed to federal court by defendants in November 1999 and subsequently transferred to the MDL Proceeding discussed above. The court hearing the MDL Proceeding remanded the case to Florida state court in July 2000, and defendants have appealed.
The Republic of Ecuador v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed January 21, 2000. In April 2001, following the court's ruling that it would dismiss the case with prejudice but allow plaintiff time to voluntarily dismiss the case, plaintiff voluntarily dismissed the case without prejudice.
Her Majesty the Queen in Right of Ontario, Canada v. Imperial Tobacco, et al., United States District Court, District of Columbia, filed March 1, 2000. In April 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case to the United States District Court for the District of Columbia and it was dismissed in August 2000. Plaintiffs have appealed the dismissal of the case.
The State of Sao Paulo of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., Civil District Court, Parish of Orleans, Louisiana, filed February 9, 2000. The case was removed to the United States District Court, Eastern District, Louisiana. In May 2000, the case was remanded to Civil District Court, Parish of Orleans, Louisiana and defendants have appealed.
The State of Espirito Santo of the Federal Republic of Brazil v. Brooke Group, et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed February 20, 2000. This case was removed to federal court by defendants in April 2000 and subsequently transferred to the MDL Proceeding discussed above. The court hearing the MDL Proceeding remanded the case to Florida state court in July 2000, and defendants have appealed.
The State of Mato Grosso do Sul, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed July 19, 2000. In August 2000, this case was removed to federal court by defendants, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending.
The Russian Federation v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed on August 25, 2000. In September 2000, this case was removed to federal court by defendants and subsequently transferred to the MDL Proceeding discussed above where it is currently pending.
The Republic of Honduras v. Philip Morris Companies Inc., et al., United States District Court, Southern District of Florida, filed October 5, 2000. In October 2000, this case was transferred to the MDL Proceeding discussed above where it is currently pending.
Exhibit 99.1
The State of Tocantins, Brazil v. The Brooke Group Ltd. Inc., et al., United States District Court, District of Columbia, filed October 24, 2000. In November 2000, this case was removed to federal court by defendants and subsequently transferred to the MDL Proceeding discussed above where it is currently pending.
The State of Piaui, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed December 13, 2000. In January 2001, this case was removed to federal court by defendants and subsequently transferred to the MDL Proceeding discussed above where it is currently pending.
The Kyrgyz Republic v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed January 22, 2001. In March 2001, the parties entered into a stipulation of dismissal without prejudice.
The Republic of Tajikistan v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed January 22, 2001. In February 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending.
Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada filed January 24, 2001.
The Republic of Belize v. Philip Morris Companies Inc., et al., Eleventh Judicial Circuit, Dade County, Florida, filed April 5, 2001.
Union Cases
Central Laborers Welfare Fund, et al. v. Philip Morris Incorporated, et al., Circuit Court, Third Judicial Circuit, Madison County, Illinois, filed May 30, 1997.
Connecticut Pipe Trades Health Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Connecticut, filed July 1, 1997. Plaintiffs voluntarily dismissed the case in September 1998. In April 2000, they filed a motion to reinstate the case. In July 2000, the court reopened this case (now denominated Oberle et al. v. Philip Morris Incorporated, et al.) and permitted plaintiffs to file an amended complaint. The court dismissed the case in March, 2001.
Eastern States Health and Welfare Fund, et al. v. Philip Morris Incorporated, et al., Supreme Court, New York County, State of New York, filed July 28, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiffs have appealed the dismissal.
Operating Engineers Local 12 Health and Welfare Trust Fund, et al. v. American Tobacco, Inc., et al., Superior Court, San Diego County, California, filed September 17, 1997. In March 2000, the court ruled that plaintiffs are not permitted to use California's unfair business practices statute to seek monetary damages for their claims. In April 2000, the plaintiffs voluntarily dismissed the remaining claims with prejudice and appealed certain trial court rulings to the state court of appeals.
Puerto Rican ILGWU Health & Welfare Fund, et al. v. Philip Morris Incorporated, et al., Supreme Court, County of New York, New York, filed September 17, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiffs have appealed the dismissal.
IBEW Local 25 Health and Benefit Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal.
Exhibit 99.1
IBEW Local 363 Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal.
Local 138, 138A and 138B International Union of Operating Engineers Welfare Fund
v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York,
filed November 25, 1997. In March 2000, the court granted defendants' motion for
dismissal. Plaintiff has appealed the dismissal.
Local 840, International Brotherhood of Teamsters Health and Insurance Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, State of New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal.
Long Island Regional Council of Carpenters Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal.
Day Care Council - Local 205 D.C. 1707 Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal.
Local 1199 Home Care Industry Benefit Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal.
Local 1199 National Benefit Fund for Health and Human Services Employees v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal.
Operating Engineers Local 324 Health Care Fund, et al. v. Philip Morris Incorporated, et al., Circuit Court, Wayne County, Michigan, filed December 30, 1997. In February 1999, the court granted defendants' motion for dismissal. Plaintiffs have appealed the dismissal.
Steamfitters Local Union No. 614 Health & Welfare Fund, et al. v. Philip Morris Incorporated, et al., Circuit Court, Thirteenth Judicial District, Tennessee, filed January 7, 1998. In January 1999, the trial court granted in part and denied in part defendants' motion to dismiss. Defendants filed an interlocutory appeal from the partial denial of their motion to dismiss. In September 2000, the Tennessee Court of Appeals, Western Division, held that plaintiffs' claims were too remote to permit recovery. The appellate court remanded the case to the trial court with directions that defendants' motion to dismiss the complaint be granted. In February 2001, the trial court entered an order dismissing the case.
National Asbestos Workers Medical Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed February 27, 1998. The named plaintiffs in this case are eight union trust funds. The district court denied plaintiffs' motion for class certification in September 2000. In October 2000, the plaintiffs petitioned the United States Court of Appeals for the Second Circuit for review of that order. The Second Circuit has not yet announced whether it will accept plaintiffs' petition for review. The district court has also ruled that plaintiffs may proceed to trial with the claims of only one union trust fund, which must be a New York based fund. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending cases. (See Simon, et al. v. Philip Morris
Exhibit 99.1
Incorporated, et al., (Simon II) discussed below.) The district court has granted plaintiffs' motion to include their claims in Simon II and stayed this case pending the resolution of Simon II.
Service Employees International Union Health & Welfare Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed March 19, 1998. In July 1999, the court denied without prejudice the motion of two health and welfare trust funds to intervene in this lawsuit. In December 1999, the court granted in part and denied in part defendants' motion to dismiss. In March 2000, the United States Court of Appeals for the District of Columbia Circuit granted the parties' petitions to appeal the District Court's partial denial of defendants' motion to dismiss. In April 2000, the District of Columbia Circuit consolidated the appeal with Guatemala v. The Tobacco Institute for purposes of oral argument.
S.E.I.U. Local 74 Welfare Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed June 22, 1998. In December 1999, the court granted in part and denied in part defendants' motion to dismiss. In March 2000, the United States Court of Appeals for the District of Columbia Circuit granted the parties' petitions to appeal the district court's partial denial of defendants' motion to dismiss. In April 2000, the District of Columbia Circuit consolidated the appeal with Guatemala v. The Tobacco Institute for purposes of oral argument.
Michael H. Holland, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed July 9, 1998. In December 1999, the court granted in part and denied in part defendants' motion to dismiss. In March 2000, the United States Court of Appeals for the District of Columbia Circuit granted the parties' petitions to appeal the district court's partial denial of defendants' motion to dismiss. In April 2000, the District of Columbia Circuit Appellate Court consolidated the appeal with Guatemala v. The Tobacco Institute for purposes of oral argument.
Sheet Metal Workers Trust Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed August 31, 1999. In December 1999, the court granted in part and denied in part defendants' motion to dismiss. In March 2000, the United States Court of Appeals for the District of Columbia Circuit granted the parties' petitions to appeal the district court's partial denial of defendants' motion to dismiss. In April 2000, the District of Columbia Circuit consolidated the appeal with Guatemala v. The Tobacco Institute for purposes of oral argument.
Bergeron, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed September 29, 1999. In June 2000, the court denied defendants' motion to dismiss the case. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.)
Obra Social de Empleados de la Marina Mercante, et al. v. The American Tobacco Company, et al., Superior Court, Washington, D.C., filed March 8, 2000. In January 2001, the court granted defendants' motion to dismiss. Plaintiffs have appealed the dismissal.
Obra Social del Personnal de la Industrial del Vestido, et al. v. American Tobacco, Superior Court District of Columbia, filed March 23, 2001.
Native American Cases
Crow Creek Sioux Tribe v. The American Tobacco Company, et al., Tribal Court, Crow Creek Sioux, filed September 14, 1997. In January 2000, the court entered a stay of proceedings until July 2001.
Exhibit 99.1
Sisseton-Wahpeton Sioux Tribe v. Philip Morris Incorporated, et al., Tribal Court of the Sisseton-Wahpeton Sioux Tribe, filed May 8, 1998. On December 1, 1999, the appellate court granted defendant's petition for interlocutory appeal from the trial court's order that granted in part and denied in part defendants' motion to dismiss the complaint. The trial and appellate courts have stayed proceedings in this case until there is a ruling on defendants' pending dismissal motion in Acoma Pueblo, et al. v. American Tobacco Company Co., et al. (discussed below).
Standing Rock Sioux Tribe v. American Tobacco Company, et al., Tribal Court of the Standing Rock Sioux Indian Reservation, North Dakota, filed May 8, 1998. In May 2000, the Standing Rock Sioux Supreme Court entered an order affirming the trial court's denial of defendants' motion to dismiss the complaint for lack of subject matter jurisdiction. The trial court has stayed proceedings in this case until there is a ruling on defendants' pending dismissal motion in Acoma Pueblo, et al. v. American Tobacco Company Co., et al. (discussed below).
Acoma Pueblo, et al. v. American Tobacco Co., et al., United States District Court, New Mexico, filed June 16, 1999. In May 2001, plaintiffs served defendants with a motion to amend their complaint to add RICO claims. Defendants' motion to dismiss is pending.
Navajo Nation v. Philip Morris Incorporated, et al., District Court, Window Rock, Arizona, filed August 11, 1999.
The Alabama Coushatta Tribe of Texas v. American Tobacco Co., et al., United States District Court, Eastern District, Texas, filed August 30, 2000.
Insurer and Self-Insurer Cases
Group Health Plan, et al. v. Philip Morris Incorporated, et al., United States District Court, Minnesota, filed March 11, 1998. In April 1999, the court dismissed all claims except the state antitrust and conspiracy claims. In January 2000, the court granted in part defendants' motion to dismiss and certified issues regarding plaintiffs' consumer protection claims to the Minnesota Supreme Court. In January 2001, the Minnesota Supreme Court answered the questions certified by the district court, and subsequently the district court denied the defendants' motion to dismiss.
Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris
Incorporated, et al., United States District Court, Eastern District, New York,
filed April 29, 1998. In September 2000, a putative class action was filed which
purports to consolidate punitive damages claims in this case with nine other
pending cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon
II) discussed below.) In September 2000, the court granted defendants' motion
for partial summary judgment on plaintiffs' claims for pre-judgment interest,
future damages, tax damages, Medicaid/Medicare damages and damages for
violations of the Racketeering Influenced and Corrupt Organizations Act ("RICO")
that occurred prior to the enactment of RICO. The court also determined that
plaintiffs may not proceed on any alleged RICO predicate act other than mail and
wire fraud and, on that basis, denied defendants' related motion for partial
summary judgment as moot. The court severed the claims of one plaintiff, from
those of the remaining plan plaintiffs; trial on that plaintiff's subrogated
RICO claims and direct New York law claims based on alleged fraud. The court
granted defendants' motion for summary judgment based on the statute of
limitations and granted defendants' motion for summary judgment concerning
plaintiffs' RICO claim based on an investment theory. The court denied
defendants' partial summary judgment motion based on preemption as to the claim
of wire and mail fraud RICO predicate violations, denied defendants' partial
summary judgment motion on plaintiffs' subrogation claims, and denied
defendants' motion for summary judgment for failure to offer individualized
proof of subrogation claims. In February 2001, the
Exhibit 99.1
court denied defendants' summary judgment motion for complete dismissal of the state-law claims of the plaintiff whose claims had been severed and the court granted defendants' motion for summary judgment on statute of limitations grounds regarding plaintiffs' state law claims. In March 2001, the court lifted its stay of punitive damages, and indicated that punitive damages would be tried before the same jury in a separate phase if the jury returned a verdict in favor of the plaintiffs on claims for which punitive damages are available. Trial in this case commenced in March 2001 and is currently underway.
RegenceBlueshield, et al. v. Philip Morris Incorporated, et al., United States District Court, Western District, Washington, filed April 29, 1998. In February 2001, the Ninth Circuit Court of Appeals affirmed the trial court's decision dismissing the case. In March 2001, plaintiffs filed a petition for a rehearing and a suggestion for rehearing en banc, both of which were denied in April 2001.
Betriebskrankenkasse Aktiv, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed September 28, 2000. In April 2001, at the request of the parties, the court entered an indefinite stay of the proceedings.
Taxpayer Cases
Coyne, et al. v. The American Tobacco Company, et al., Court of Common Pleas, Cuyahoga County, Ohio, filed September 17, 1996. In December 2000, the court granted defendants' motion to dismiss the case, and the plaintiffs appealed. In March 2001, the appeal was dismissed with prejudice and without costs.
State of Tennessee, et al., ex. rel. Beckom, et al. v. The American Tobacco Company, et al., Chancery Court, Monroe County, Tennessee, filed May 8, 1997. In April 2000, the United States Court of Appeals for the Sixth Circuit affirmed in part the ruling by the United States District Court for the Eastern District of Tennessee that plaintiffs lacked standing to pursue their federal claims. The Sixth Circuit was unable to determine whether any of plaintiffs' state law claims survived. As a result of the ruling the case was remanded to state court for additional proceedings. In August 2000, the state court entered an order dismissing all claims brought on the relation on the State of Tennessee and all plaintiffs' claims brought on behalf of Tennessee taxpayers. Since entry on that order, defendants moved for judgment on the pleadings. In September 2000, plaintiffs filed a motion for leave to amend their complaint.
Temple, et al. v. The State of Tennessee, et al., United States District Court, Middle District, Tennessee, filed February 7, 2000. Plaintiffs contend that defendant the State of Tennessee has no standing to recover the funds paid to it as compensation for the monies it has paid through its TennCare program for individuals allegedly injured by a smoking-related disease. Plaintiffs further seek a declaration that the MSA is unconstitutional. Plaintiffs' amended complaint also includes claims for class certification on behalf of Tennessee smokers.
Other Cases
Perry, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, Tennessee, filed September 30, 1996. In April 2001, the court granted defendants' motion to dismiss the case.
Mason, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed December 23, 1997. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.)
Exhibit 99.1
Association of Washington Public Hospital Districts, et al. v. Philip Morris Incorporated, United States District Court, Western District, Washington, filed March 17, 1999. In February 2001, the Court of Appeals for the Ninth Circuit affirmed the trial court's ruling decision dismissing the case. In March 2001, plaintiffs filed a petition for rehearing and suggestion for rehearing in banc, both of which were denied in April 2001.
A.O. Fox Memorial Hospital et al. v. The American Tobacco Company, et al., Supreme Court, Nassau County, New York, filed March 30, 2000.
County of McHenry, Randolph Hospital District, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed July 13, 2000.
CERTAIN OTHER TOBACCO-RELATED ACTIONS
The following lists certain other tobacco-related litigation pending against the Company and/or various subsidiaries and others as of May 1, 2001, and describes certain developments since February 15, 2001.
Asbestos Contribution Cases
Raymark Industries, Inc. v. R. J. Reynolds Tobacco Company, et al., Circuit Court, Fourth Judicial Circuit, Duval County, Florida, filed September 15, 1997.
Raymark Industries, Inc. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, Northern District, Atlanta Division, Georgia, filed September 15, 1997.
Fibreboard Corporation, et al. v. The American Tobacco Company, et al., Superior Court, Alameda County, California, filed December 11, 1997.
Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al., Supreme Court, New York County, New York, filed December 19, 1997.
Robert A. Falise, et al. v. The American Tobacco Company, et al., United States District Court, Southern District, New York, filed December 31, 1997. In November 1999, the court granted defendant's motion to dismiss, finding no subject matter jurisdiction. Plaintiffs appealed this dismissal to the United States Court of Appeals for the Second Circuit, and defendants cross-appealed the trial court's denial of their motion to dismiss on the merits. Plaintiffs filed a new complaint in November 1999, alleging violations of RICO. In April 2000, defendants filed a petition for writ of mandamus with the Second Circuit, seeking review of the trial court's denial of their motion for summary judgment which was denied in October 2000. Trial in this case began in November 2000. In January 2001, a mistrial was declared after the jurors were unable to reach a verdict. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.)
H. K. Porter Company, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed December 31, 1997. In November 1999, defendants filed a petition for mandamus with the United States Court of Appeals for the Second Circuit, seeking review of the trial court's denial of defendants' motion to dismiss. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with nine other pending (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) In March 2001, the court issued an order staying proceedings in this case until 90 days after the court's resolution of Robert A. Falise, et al. v. The American Tobacco Company, et al.
Exhibit 99.1
Raymark Industries, Inc. v. R. J. Reynolds Tobacco Company, et al., Circuit Court, Fourth Judicial Circuit, Duval County, Florida, filed December 31, 1997.
Raymark Industries, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed January 30, 1998. In September 2000, a putative class action was filed in the United States District Court for the Eastern District of New York which purports to consolidate punitive damages claims in this case with nine other pending cases. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) In April 2001, the court issued an order staying proceedings in this case until 90 days after the lifting of the stay order entered in H.K. Porter Company, Inc. v. The American Tobacco Company.
Owens Corning v. R.J. Reynolds Tobacco Company, et al., United States District Court, Southern District of Mississippi, filed August 30, 1998. Trial is scheduled for June 2001.
UNR Asbestos-Disease Claims Trust v. Brown & Williamson Tobacco Corporation, et al., Supreme Court, New York County, New York, filed March 15, 1999.
Asbestos Claims Management Corporation, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000.
Combustion Engineering, Inc., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000.
Gasket Holdings, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000.
T&N, Ltd., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000.
Uniroyal Holdings, Inc., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000.
A.P. Green Industries, Inc., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000.
A.P. Green Services, Inc., et al. v. RJR Nabisco, Inc., et al., United States District Court, Southern District, Mississippi, filed December 29, 2000.
Asbestos Claims Management Corporation, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Claiborne County, Mississippi, filed April 18, 2000.
Combustion Engineering, Inc., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Claiborne County, Mississippi, filed April 18, 2001.
Gasket Holdings, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Claiborne County, Mississippi, filed April 18, 2001.
T&N, Ltd., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Claiborne County, Mississippi, filed April 18, 2001.
Exhibit 99.1
W.R. Grace & Co. Conn., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed April 24, 2001.
Lights/Ultra Lights Cases
Tirado (formerly Hogue), et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Circuit Court for the 13th Judicial Circuit, Hillsborough County, Florida, filed June 30, 1998. In February 2001, plaintiffs filed a notice of voluntary dismissal.
Gesser (formerly Cummis), et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Middlesex County, New Jersey, filed July 9, 1998.
McNamara, et al. v. Philip Morris Companies, Inc. and Philip Morris Incorporated, Court of Common Pleas, Montgomery County, Pennsylvania, filed July 16, 1998.
Aspinall, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Suffolk County, Massachusetts, filed November 24, 1998.
McClure, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Circuit Court, Davidson County, Tennessee, filed January 19, 1999.
Cocca, et al. v. Philip Morris Incorporated, Superior Court, Maricopa County, Arizona, filed May 13, 1999.
Marrone, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Court of Common Pleas, Medina County, Ohio, filed November 8, 1999.
Miles, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Madison County, Illinois, filed February 10, 2000. Plaintiffs' motion for class certification was granted in February 2001. Trial is scheduled for May 2002.
Puglise, et al. v. Philip Morris Companies Inc., et al., Supreme Court, Brooklyn, New York, filed December 4, 2000. In February 2001, the case was voluntarily dismissed.
Bauer, et al. v. Philip Morris Companies Inc., Circuit Court, City of St. Louis, Missouri, filed February 15, 2000.
Hines, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida, filed February 23, 2001.
Retail Leaders Case
R.J. Reynolds Tobacco Company, et al. v. Philip Morris Incorporated, United States District Court, Middle District, North Carolina, filed March 12, 1999.
Vending Machine Case
Lewis d/b/a B&H Vendors v. Philip Morris Incorporated, United States District Court, Middle District, Tennessee, filed February 3, 1999.
Exhibit 99.1
MSA-Related Cases
The following are cases in which plaintiffs have challenged the validity of the Master Settlement Agreement described in Note 6. Contingencies.
Forces Action Project, LLC, et al. v. The State of California, et al., United States District Court, Northern District, California, filed January 23, 1999. In January 2000, the court granted defendants' motion to dismiss the complaint. Plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit.
A.D. Bedell Wholesale Co. v. Philip Morris Incorporated, et al., United States District Court, Western District, Pennsylvania, filed April 12, 1999. In March 2000, the court granted in part defendants' motion to dismiss the complaint. Thereafter, plaintiffs and Philip Morris stipulated to a dismissal without prejudice of the claim that had not been dismissed by the court. Plaintiffs appealed, and in December 2000, the United States Court of Appeals for the Third Circuit heard oral arguments on the appeal.
A.D. Bedell Company, Inc. v. Philip Morris Incorporated, et al., Supreme Court,
Cattaraugus County, New York, filed October 18, 1999. In November 1999, the
court denied a motion to dismiss the complaint and denied a motion to vacate
the temporary restraining order enjoining Philip Morris from refusing to sell
products to plaintiff. Defendant filed an appeal from the court's denial of
the motion to dismiss and the motion to vacate. In May 2000, the appellate
court granted in part and denied in part defendants' motion to dismiss the
case. The case has been stayed pending resolution of A.D. Bedell Wholesale Co.
v. Philip Morris Incorporated, et al., discussed above.
Table Bluff Reservation (Wiyot Tribe), et al. v. Philip Morris Incorporated, et al., No. C99-02621-NHP, United States District Court, Northern District, California, filed June 2, 1999. On November 12, 1999, the court dismissed the case and plaintiffs have appealed to the United States Court of Appeals for the Ninth Circuit.
PTI, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, California, filed August 13, 1999. In May 2000, the Court dismissed the plaintiffs' claims.
Star Scientific Inc. v. Mark E. Earley, United States District Court, Eastern District, Virginia, filed December 15, 2000. Plaintiff, a cigarette manufacturer, filed a suit against the Commonwealth of Virginia challenging the constitutionality of the MSA and the legislation enacted to enforce it. The Company was not named as a defendant in the suit. In March 2001, the district court entered a final order dismissing the case on the grounds that plaintiff lacked standing to assert the constitutional challenges to the MSA and that the challenge of the qualifying statute failed to state a claim upon which relief can be granted. The time period for plaintiff to appeal the court's ruling has not yet expired.
Tobacco Price Cases
Wholesalers and Other Direct Purchasers: The following are putative class actions filed by tobacco wholesalers/distributors and by smokers, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws.
Buffalo Tobacco Products, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed February 8, 2000. In June 2000, the United States Judicial Panel on Multidistrict
Exhibit 99.1
litigation transferred this case to the United States District Court, Northern District, Georgia. (See In Re: Cigarette Pricing Litigation, MDL No. 1342 discussed below.)
DelSeronne, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Wayne County, Michigan, filed February 8, 2000.
Greer, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco, California, filed February 9, 2000.
Lennon v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed February 9, 2000.
Munoz, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco, California, filed February 9, 2000.
Smith, et al. v. Philip Morris Companies Inc., et al., District Court, Seward County, Kansas, filed February 9, 2000.
Withers, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Jefferson County, Tennessee, filed February 9, 2000.
Gray, M.D., et al. v. Philip Morris Companies Inc., et al., Superior Court, Pima County, Arizona, filed February 11, 2000. In March 2001, the trial court dismissed the case, and plaintiffs have appealed.
Brownstein, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Broward County, Florida, filed February 14, 2000.
Morse v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 14, 2000.
Ulan v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 17, 2000.
Williamson Oil Company, Inc. v. Philip Morris Companies, et al., United States District Court, Northern District, Georgia, filed February 18, 2000.
Shafer v. Philip Morris Companies Inc., et al., District Court, Morton County, North Dakota, filed February 16, 2000.
Sullivan v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 22, 2000.
Teitler v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 22, 2000.
Peirona v. Philip Morris Companies Inc., et al., Superior Court, San Francisco County, California, filed February 28, 2000.
Cusatis v. Philip Morris Companies Inc., et al., Circuit Court, Milwaukee County, Wisconsin, filed February 28, 2000.
Sand v. Philip Morris Companies Inc., et al., Superior Court, Los Angeles, California, filed February 28, 2000.
Exhibit 99.1
Amsterdam Tobacco Corp., et al. v. Philip Morris Companies, et al., filed March 6, 2000. United States District Court, Northern District, Georgia. In June 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case from United States District Court, District of Columbia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342 discussed below.)
Nierman v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 6, 2000.
Sylvester v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 8, 2000.
I. Goldschlack v. Philip Morris Companies Inc., et al., United States District
Court, Eastern District, Pennsylvania, filed March 9, 2000. In June 2000, the
United States Panel on Multidistrict Litigation transferred this case to the
United States District Court, Northern District of Georgia. (See In Re:
Cigarette Antitrust Litigation, MDL 1342 discussed below.)
Suwanee Swifty Stores, Inc., D.I.P. v. Philip Morris Companies Inc., United States District Court, Northern District, Georgia, filed March 14, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In Re: Cigarette Antitrust Litigation, MDL 1342 discussed below.)
Holiday Markets, Inc., et al. v. Philip Morris Companies Inc., United States
District Court, Northern District, Georgia, filed March 17, 2000. In June
2000, the United States Panel on Multidistrict Litigation transferred this case
to the United States District Court, Northern District of Georgia. (See In Re:
Cigarette Antitrust Litigation, MDL 1342 discussed below.)
Taylor, et al. v. Philip Morris Companies Inc., et al., Superior Court, Cumberland County, Maine, filed March 24, 2000.
Romero, et al. v. Philip Morris Companies Inc., et al., First Judicial District Court, Rio Arriba County, New Mexico, filed April 10, 2000.
Belch, et al. v. Philip Morris Companies Inc., et al., Superior Court, Alameda County, California, filed April 11, 2000.
Belmonte, et al. v. R.J. Reynolds, et al., Alameda County Superior Court, California, filed April 11, 2000.
Aguayo, et al. v. R.J. Reynolds, et al., Alameda County Superior Court, California, filed April 11, 2000.
Swanson, et al. (formerly Vetter, et al.) v. Philip Morris Companies Inc., et al., District Court, Hughes County, South Dakota, filed April 18, 2000.
Ludke, et al. v. Philip Morris Companies Inc., et al., District Court, Hennepin County, Minnesota, filed April 20, 2000.
Kissel, et al. (formerly Quickle, et al.) v. Philip Morris Companies Inc., et al., First Judicial Circuit Court, Ohio County, West Virginia, filed May 2, 2000.
Exhibit 99.1
Hartz Foods, et al. v. Philip Morris Companies Inc., et al., United States
District Court, District of Columbia, filed May 10, 2000. In June 2000, the
United States Panel on Multidistrict Litigation transferred this case to the
United States District Court, Northern District of Georgia (See In Re:
Cigarette Antitrust Litigation MDL 1342 discussed below.)
Baker, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 15, 2000.
Campe, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 15, 2000.
Barnes v. Philip Morris Companies Inc., et al., Superior Court, District of Columbia, filed May 18, 2000.
Lau, et al. v. R.J. Reynolds, et al., Alameda County Superior Court, California, filed May 25, 2000.
In Re: Cigarette Antitrust Litigation MDL 1342, Federal Multidistrict Litigation Panel, United States District Court, Northern District, Georgia, Atlanta Division, filed June 7, 2000. (Coordinated litigation of all federal cases.)
Philips, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed June 9, 2000.
Pooler/Unruh, et al. v. R.J. Reynolds, et al., Second Judicial District, Washoe County, Nevada, filed June 9, 2000.
Tobacco Growers' Case
DeLoach, et al. v. Philip Morris Incorporated et al., United States District Court, District of Columbia, filed February 16, 2000. This purported class action alleges that defendants violated antitrust laws by bid rigging at tobacco auctions and by conspiring to undermine the tobacco quota and price support system administered by the federal government. In June 2000, plaintiffs voluntarily dismissed the Company and PMI from the case. The remaining defendants, including PM Inc., filed a motion to dismiss the case. In September 2000, the court granted plaintiffs' motion for leave to file a second amended complaint. In October 2000, defendants filed a motion to dismiss the second amended complaint. In October 2000, plaintiffs filed a motion for a class certification. In November 2000, the court granted defendants' motion to transfer the case to the United States District Court for the Middle District of North Carolina. In December 2000, plaintiffs served a motion for leave to file a third amended complaint to add tobacco leaf buyers as defendants. This motion was granted and the additional parties were served in February 2001.
Cigarette Importation Cases
Department of Amazonas, et al. v. Philip Morris Companies Inc., et al., United States District Court, Eastern District, New York, filed May 19, 2000. In January 2001, defendants moved to dismiss the complaint on the grounds of lack of standing, failure to join indispensable parties, and failure to state a claim upon which relief may be granted.
The Republic of Ecuador v. Philip Morris Incorporated, et al., Circuit Court, Eleventh Judicial Circuit, Miami-Dade County, Florida, filed June 5, 2000.
The European Community v. RJR Nabisco, Inc., et al., United States District Court, Eastern District, New York, filed November 3, 2000. In January 2001, defendants moved to dismiss the complaint on the grounds of
Exhibit 99.1
lack of standing, failure to join indispensable parties, and failure to state a claim upon which relief may be granted.
Consolidated Putative Punitive Damages Cases
Simon, et al. v. Philip Morris Incorporated, et al., (Simon II), United States
District Court, Eastern District, New York, September 6, 2000. In November
2000, the court indicated that it intends to certify a class in this action
which purports to consolidate punitive damages claims in the following ten
actions: Simon, et al. v. Philip Morris Incorporated, et al., United States
District Court, Eastern District, New York; Decie, et al. v. The American
Tobacco Company, et al., United States District Court, Eastern District, New
York; Ebert, et al. v. Philip Morris Incorporated, et al., United States
District Court, Eastern District, New York; National Asbestos Workers Medical
Fund, et al. v. Philip Morris Incorporated, et al., United States District
Court, Eastern District, New York; Bergeron, et al. v. Philip Morris
Incorporated, et al., United States District Court, Eastern District, New York;
Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris
Incorporated, et al., United States District Court, Eastern District, New York;
Mason, et al. v. The American Tobacco Company, et al., United States District
Court, Eastern District, New York; Robert A. Falise, et al. v. The American
Tobacco Company, et al., United States District Court, Southern District, New
York; H. K. Porter Company, Inc. v. The American Tobacco Company, et al., United
States District Court, Eastern District, New York; and Raymark Industries, Inc.
v. The American Tobacco Company, et al., United States District Court, Eastern
District, New York. The court heard argument on plaintiffs' motion for class
certification in March 2001.
CERTAIN OTHER ACTIONS
The following lists certain other actions pending against subsidiaries of the Company and others as of May 1, 2001.
National Cheese Exchange Cases
Consolidated Action: (Servais, et al. v. Kraft Foods, Inc. and the National Cheese Exchange, Inc., Circuit Court, Dane County, Wisconsin, filed May 5, 1997; Dodson, et al. v. Kraft Foods, Inc., et al., Circuit Court, Dane County, Wisconsin, filed July 1, 1997; Noll, et al. v. Kraft Foods, Inc., et al., Circuit Court, Dane County, Wisconsin, filed July 11, 1997).
Vincent, et al. v. Kraft Foods, Inc., Circuit Court, Cook County, Illinois, filed October 27, 1997.
Knevelboard Dairies, et al. v. Kraft Foods, Inc., et al., United States District Court, Central District, California, filed April 14, 1998.
Environmental Matters
State of Missouri v. Kraft Foods, Inc., et al., Circuit Court, Missouri, filed March 14, 2000. In March 2000, the State of Missouri filed a civil enforcement action against Kraft and affiliated companies alleging that from 1995 through 1999 the defendants sent spent weiner casings to a farm site near Columbia, Missouri for reuse. The State claims that this practice violated the Missouri Solid Waste Law and the Missouri Clean Water Law and seeks civil penalties and the removal of the spent casings from the farm site and disposal in a permitted solid waste facility. Kraft filed a motion to dismiss the complaint.
In May 2001, the Attorney General for the State of Ohio notified Kraft Foods North America, Inc. that it may be subject to an enforcement action for alleged violations of the State's water pollution control law at a cottage cheese and sour cream production facility in Farmdale, Ohio. The State alleges that this facility has exceeded its water permit effluent limits and reporting requirements, and has offered to attempt to negotiate a settlement of this matter, and Kraft has accepted the offer to do so.
Exhibit 99.2
TRIAL SCHEDULE FOR CERTAIN CASES
Set forth below is a list of consolidated individual cases smoking and health class actions, health care cost recovery actions, Lights/Ultra Lights and asbestos contribution actions currently scheduled for trial through 2002 against PM Inc. and, in some cases, the Company. Trial dates, however, are subject to change.
Case (Jurisdiction) Type of Action Trial Date ------------------- -------------- ---------- Scott, et al. v. The American Smoking and Health Class Action June 18, 2001 Tobacco Company, et al. (Louisiana) Owens Corning, et al. Asbestos Contribution June 18, 2001 v. R.J. Reynolds Tobacco Company, et al. (Mississippi) In Re Tobacco Litigation Smoking and Health Class Action September 5, 2001 (Medical Monitoring Cases) (West Virginia) Republic of the Marshall Health Care Cost Recovery Action September 10, 2001 Islands v. The American Tobacco Company, et al. (Marshall Islands) In Re Tobacco Litigation Consolidated Individual March 2002 (Individual Personal Injury cases) Smoking and Health Cases (West Virginia) Devin Daniels, et al. v. Smoking and Health Class Action May 14, 2002 Philip Morris Companies Inc., et al. (California) Miles, et al. v. Philip Morris Lights/Ultra Lights Class Action May 2002 Incorporated, et al. (Illinois) |
Exhibit 99.2
Below is a schedule setting forth by month the number of individual smoking and health cases against PM Inc. and, in some cases, the Company that are currently scheduled for trial through the end of the year 2002.
2001 2002 ---- ---- June (1) January (3) July (2) February (6) August (2) April (3) September (3) May (3) October (1) June (2) November (1) July (1) December (1) |