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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8940
Philip Morris Companies Inc.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 13-3260245
- ------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Park Avenue, New York, New York 10017
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (917) 663-5000
--------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
At July 31, 2002, there were 2,113,855,531 shares outstanding of the
registrant's common stock, par value $0.33 1/3 per share.
PHILIP MORRIS COMPANIES INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
June 30, 2002 and December 31, 2001 3 - 4
Condensed Consolidated Statements of Earnings for the
Six Months Ended June 30, 2002 and 2001 5
Three Months Ended June 30, 2002 and 2001 6
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 2001 and the
Six Months Ended June 30, 2002 7
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 8 - 9
Notes to Condensed Consolidated Financial Statements 10 - 27
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 28 - 50
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 51
Item 6. Exhibits and Reports on Form 8-K 51
Signature 52
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
June 30, December 31,
2002 2001
-------- ------------
ASSETS
Consumer products
Cash and cash equivalents $ 1,380 $ 453
Receivables (less allowances of
$159 and $193) 5,567 5,148
Inventories:
Leaf tobacco 3,517 3,827
Other raw materials 2,154 1,909
Finished product 3,416 3,187
------- -------
9,087 8,923
Other current assets 2,119 2,751
------- -------
Total current assets 18,153 17,275
Property, plant and equipment, at cost 26,456 25,625
Less accumulated depreciation 11,066 10,488
------- -------
15,390 15,137
Goodwill and other intangible assets, net 37,879 37,548
Other assets 6,192 6,144
------- -------
Total consumer products assets 77,614 76,104
Financial services
Finance assets, net 8,381 8,691
Other assets 188 173
------- -------
Total financial services assets 8,569 8,864
------- -------
TOTAL ASSETS $86,183 $84,968
======= =======
See notes to condensed consolidated financial statements.
Continued
-3-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except per share data)
(Unaudited)
June 30, December 31,
2002 2001
-------- ------------
LIABILITIES
Consumer products
Short-term borrowings $ 468 $ 997
Current portion of long-term debt 3,213 1,942
Accounts payable 2,878 3,600
Accrued liabilities:
Marketing 2,681 2,794
Taxes, except income taxes 1,958 1,654
Employment costs 916 1,192
Settlement charges 2,853 3,210
Other 2,480 2,480
Income taxes 1,829 1,021
Dividends payable 1,237 1,251
-------- --------
Total current liabilities 20,513 20,141
Long-term debt 16,576 17,159
Deferred income taxes 5,168 5,238
Accrued postretirement health care costs 3,393 3,315
Minority interest 4,198 4,013
Other liabilities 7,941 7,796
-------- --------
Total consumer products liabilities 57,789 57,662
Financial services
Short-term borrowings 512
Long-term debt 2,091 1,492
Deferred income taxes 5,312 5,246
Other liabilities 450 436
-------- --------
Total financial services liabilities 7,853 7,686
-------- --------
Total liabilities 65,642 65,348
Contingencies (Note 8)
STOCKHOLDERS' EQUITY
Common stock, par value $0.33 1/3 per
share (2,805,961,317 shares issued) 935 935
Additional paid-in capital 4,646 4,503
Earnings reinvested in the business 39,773 37,269
Accumulated other comprehensive losses
(including currency translation of
$2,998 and $3,238) (3,265) (3,373)
-------- --------
42,089 39,334
Less cost of repurchased stock
(679,266,327 and 653,458,100 shares) (21,548) (19,714)
-------- --------
Total stockholders' equity 20,541 19,620
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 86,183 $ 84,968
======== ========
See notes to condensed consolidated financial statements.
-4-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
For the Six Months Ended
June 30,
------------------------
2002 2001
------- -------
Net revenues $41,638 $40,748
Cost of sales 17,033 17,131
Excise taxes on products 9,158 8,810
------- -------
Gross profit 15,447 14,807
Marketing, administration and research costs 6,645 6,230
Litigation related expense 500
Amortization of intangibles 4 506
------- -------
Operating income 8,798 7,571
Interest and other debt expense, net 602 889
------- -------
Earnings before income taxes, minority interest and
cumulative effect of accounting change 8,196 6,682
Provision for income taxes 2,909 2,526
------- -------
Earnings before minority interest and cumulative effect of
accounting change 5,287 4,156
Minority interest in earnings 312 82
------- -------
Earnings before cumulative effect of accounting change 4,975 4,074
Cumulative effect of accounting change (6)
------- -------
Net earnings $ 4,975 $ 4,068
======= =======
Per share data:
Basic earnings per share before cumulative effect of
accounting change $ 2.32 $ 1.86
Cumulative effect of accounting change (0.01)
------- -------
Basic earnings per share $ 2.32 $ 1.85
======= =======
Diluted earnings per share before cumulative effect of
accounting change $ 2.30 $ 1.83
Cumulative effect of accounting change
------- -------
Diluted earnings per share $ 2.30 $ 1.83
======= =======
Dividends declared $ 1.16 $ 1.06
======= =======
See notes to condensed consolidated financial statements.
-5-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
For the Three Months Ended
June 30,
--------------------------
2002 2001
------- -------
Net revenues $21,103 $20,789
Cost of sales 8,501 8,761
Excise taxes on products 4,583 4,377
------- -------
Gross profit 8,019 7,651
Marketing, administration and research costs 3,390 3,194
Amortization of intangibles 2 253
------- -------
Operating income 4,627 4,204
Interest and other debt expense, net 309 438
------- -------
Earnings before income taxes and minority interest 4,318 3,766
Provision for income taxes 1,533 1,431
------- -------
Earnings before minority interest 2,785 2,335
Minority interest in earnings 175 47
------- -------
Net earnings $ 2,610 $ 2,288
======= =======
Per share data:
Basic earnings per share $ 1.22 $ 1.04
======= =======
Diluted earnings per share $ 1.21 $ 1.03
======= =======
Dividends declared $ 0.58 $ 0.53
======= =======
See notes to condensed consolidated financial statements.
-6-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 2001 and
the Six Months Ended June 30, 2002
(in millions of dollars, except per share data)
(Unaudited)
Accumulated Other
Comprehensive Losses
-----------------------------
Addi- Earnings Total
tional Reinvested Currency Cost of Stock-
Common Paid-in in the Translation Repurchased holders'
Stock Capital Business Adjustments Other Total Stock Equity
------ ------- ---------- ----------- ----- ------- ----------- -------
Balances, January 1, 2001 $935 $ -- $33,481 $(2,864) $ (86) $(2,950) $(16,461) $15,005
Comprehensive earnings:
Net earnings 8,560 8,560
Other comprehensive losses,
net of income taxes:
Currency translation adjustments (753) (753) (753)
Additional minimum pension liability (89) (89) (89)
Change in fair value of derivatives
accounted for as hedges 33 33 33
-------
Total other comprehensive losses (809)
-------
Total comprehensive earnings 7,751
-------
Exercise of stock options and
issuance of other stock awards 138 70 747 955
Cash dividends
declared ($2.22 per share) (4,842) (4,842)
Stock repurchased (4,000) (4,000)
Sale of Kraft Foods Inc. common stock 4,365 379 7 386 4,751
---- ------ ------- ------- ----- ------- -------- -------
Balances, December 31, 2001 935 4,503 37,269 (3,238) (135) (3,373) (19,714) 19,620
Comprehensive earnings:
Net earnings 4,975 4,975
Other comprehensive earnings,
net of income taxes:
Currency translation adjustments 240 240 240
Additional minimum pension liability (5) (5) (5)
Change in fair value of derivatives
accounted for as hedges (127) (127) (127)
-------
Total other comprehensive earnings 108
-------
Total comprehensive earnings 5,083
-------
Exercise of stock options and
issuance of other stock awards 143 8 513 664
Cash dividends
declared ($1.16 per share) (2,479) (2,479)
Stock repurchased (2,347) (2,347)
---- ------ ------- ------- ----- ------- -------- -------
Balances, June 30, 2002 $935 $4,646 $39,773 $(2,998) $(267) $(3,265) $(21,548) $20,541
==== ====== ======= ======= ===== ======= ======== =======
Total comprehensive earnings, which represent net earnings and the change in
fair value of derivatives accounted for as hedges, partially offset by currency
translation adjustments, were $2,930 million and $1,896 million, respectively,
for the quarters ended June 30, 2002 and 2001, and $3,531 million for the first
six months of 2001.
See notes to condensed consolidated financial statements.
-7-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
For the Six Months Ended
June 30,
------------------------
2002 2001
------- -------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $ 4,869 $ 3,984
- Financial services 106 84
------- -------
Net earnings 4,975 4,068
Adjustments to reconcile net earnings to
operating cash flows:
Consumer products
Cumulative effect of accounting change 6
Depreciation and amortization 664 1,163
Deferred income tax provision 590 296
Loss on sale of a North American food factory and
integration costs 119 29
Voluntary retirement programs 175
Gains on sales of businesses (3) (8)
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (534) (439)
Inventories 118 (54)
Accounts payable (867) (999)
Income taxes 953 884
Accrued liabilities and other current assets (639) (357)
Other (51) (169)
Financial services
Deferred income tax provision 66 103
Other 170 103
------- -------
Net cash provided by operating activities 5,736 4,626
------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures (834) (790)
Purchases of businesses, net of acquired cash (72) (354)
Proceeds from sales of businesses 86 9
Other 48 41
Financial services
Investments in finance assets (113) (305)
Proceeds from finance assets 249 105
------- -------
Net cash used in investing activities (636) (1,294)
------- -------
See notes to condensed consolidated financial statements.
Continued
-8-
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)
For the Six Months Ended
June 30,
------------------------
2002 2001
------- -------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net repayment of short-term borrowings $(3,100) $(7,148)
Long-term debt proceeds 4,536 47
Long-term debt repaid (1,466) (1,287)
Financial services
Net repayment of short-term borrowings (512) (673)
Long-term debt proceeds 440 557
Repurchase of Philip Morris common stock (2,220) (1,971)
Dividends paid on Philip Morris common stock (2,493) (2,342)
Issuance of Philip Morris common stock 651 592
Issuance of Kraft Foods Inc. common stock 8,443
Other (99) (85)
------- -------
Net cash used in financing activities (4,263) (3,867)
------- -------
Effect of exchange rate changes on cash and
cash equivalents 90 (7)
------- -------
Cash and cash equivalents:
Increase (decrease) 927 (542)
Balance at beginning of period 453 937
------- -------
Balance at end of period $ 1,380 $ 395
======= =======
See notes to condensed consolidated financial statements.
-9-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Company Name Change:
In April 2002, the stockholders of Philip Morris Companies Inc. (the "Company")
approved changing the Company's name from Philip Morris Companies Inc. to Altria
Group, Inc. The Company's Board of Directors retains the discretion to effect
the name change, pending the resolution of legal challenges.
Note 2. Accounting Policies:
The interim condensed consolidated financial statements of the Company are
unaudited. It is the opinion of the Company's management that all adjustments
necessary for a fair statement of the interim results presented have been
reflected therein. All such adjustments were of a normal recurring nature. Net
revenues and net earnings for any interim period are not necessarily indicative
of results that may be expected for the entire year.
These statements should be read in conjunction with the consolidated financial
statements and related notes, and management's discussion and analysis of
financial condition and results of operations, which appear in the Company's
Annual Report to Stockholders and which are incorporated by reference into the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 (the
"2001 Form 10-K").
Balance sheet accounts are segregated by two broad types of businesses. Consumer
products assets and liabilities are classified as either current or non-current,
whereas financial services assets and liabilities are unclassified, in
accordance with respective industry practices.
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
Note 3. Recently Adopted Accounting Standards:
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets." As a result, the Company stopped recording the
amortization of goodwill and indefinite life intangible assets as a charge to
earnings as of January 1, 2002. The Company estimates that net earnings and
diluted earnings per share ("EPS") would have been approximately $4.6 billion
and $2.05, respectively, for the six months ended June 30, 2001, and
approximately $2.5 billion and $1.14, respectively, for the three months ended
June 30, 2001, had the provisions of the new standards been applied as of
January 1, 2001. In addition, the Company is required to conduct an annual
review of goodwill and intangible assets for potential impairment. The Company
completed its review and did not have to record a charge to earnings for an
impairment of goodwill or other intangible assets as a result of these new
standards.
At June 30, 2002, goodwill by segment was as follows (in millions):
International tobacco $ 899
North American food 20,655
International food 4,255
Beer 186
-------
Total goodwill $25,995
=======
-10-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Intangible assets as of June 30, 2002 were as follows:
Gross
Carrying Accumulated
Amount Amortization
-------- ------------
(in millions)
Non-amortizable intangible assets $11,855
Amortizable intangible assets 55 $26
------- ---
Total intangible assets $11,910 $26
======= ===
Non-amortizable intangible assets substantially comprise brand names purchased
through the Nabisco acquisition. Amortizable intangible assets consist primarily
of certain trademark licenses and non-compete agreements. The pre-tax
amortization expense for intangible assets during the six months and quarter
ended June 30, 2002 was $4 million and $2 million, respectively. Based upon the
amortizable intangible assets recorded on the balance sheet as of June 30, 2002,
amortization expense for each of the next five years is estimated to be $8
million or less.
The increase in goodwill and other intangible assets, net, at June 30, 2002 from
December 31, 2001 of $331 million is primarily related to currency translation.
Effective January 1, 2002, the Company also adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of." SFAS No. 144 provides updated guidance concerning the
recognition and measurement of an impairment loss for certain types of
long-lived assets, expands the scope of a discontinued operation to include a
component of an entity and eliminates the exemption to consolidation when
control over a subsidiary is likely to be temporary. The adoption of this new
standard did not have a material impact on the Company's financial position,
results of operations or cash flows.
Effective January 1, 2002, the Company adopted Emerging Issues Task Force
("EITF") Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF
Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor's Products." The adoption of EITF Issues No. 00-14
and No. 00-25 resulted in a reduction of revenues of approximately $4.8 billion
and $2.4 billion in the first six months and the second quarter of 2001,
respectively. In addition, the adoption reduced marketing, administration and
research costs in the first six months and the second quarter of 2001 by
approximately $5.2 billion and $2.6 billion, respectively. Cost of sales
increased in the first six months and the second quarter of 2001 by
approximately $307 million and $162 million, respectively, and excise taxes on
products increased by approximately $114 million and $58 million, respectively.
The adoption of these EITF Issues had no impact on net earnings or basic and
diluted EPS.
Note 4. Financial Instruments:
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and its related amendment, SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" (collectively referred to as "SFAS No. 133"). As of January 1, 2001,
the adoption of these new standards resulted in a cumulative effect of an
accounting change that reduced net earnings by $6 million, net of income taxes
of $3 million, and decreased accumulated other comprehensive losses by $15
million, net of income taxes of $8 million.
During the six months and three months ended June 30, 2002 and 2001,
ineffectiveness related to fair value hedges and cash flow hedges was not
material. The Company is hedging forecasted transactions for periods not
exceeding the next nineteen months. At June 30, 2002, the Company estimates
derivative gains of $56 million,
-11-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
net of income taxes, reported in accumulated other comprehensive losses will be
reclassified to the consolidated statement of earnings within the next twelve
months.
Within currency translation adjustments at June 30, 2002 and 2001, the
Company recorded a loss of $113 million, net of income taxes of $60 million,
and a gain of $8 million, net of income taxes of $4 million, respectively,
which represented effective hedges of net investments.
Hedging activity affected accumulated other comprehensive losses, net of income
taxes, as follows:
For the Six Months Ended For the Three Months Ended
June 30, June 30,
------------------------ --------------------------
2002 2001 2002 2001
----- ---- ----- ----
(in millions) (in millions)
Balance at beginning of period $ 33 $ -- $ 75 $ 32
Impact of SFAS No. 133 adoption 15
Derivative losses (gains) transferred to earnings 79 (52) (13) (22)
Change in fair value (206) 33 (156) (14)
----- ---- ----- ----
Balance as of June 30 $ (94) $ (4) $ (94) $ (4)
===== ==== ===== ====
Note 5. Acquisitions and Divestitures:
On May 30, 2002, the Company announced an agreement with South African Breweries
plc ("SAB") to merge Miller Brewing Company ("Miller") into SAB. The transaction
closed on July 9, 2002 and SAB changed its name to SABMiller plc ("SABMiller").
At closing, the Company received 430 million shares of SABMiller valued at
approximately $3.4 billion, based upon a share price of 5.12 British pounds per
share, in exchange for Miller, which had $2.0 billion of existing debt. The
shares in SABMiller owned by the Company resulted in an initial 36% economic
interest in SABMiller and a 24.9% voting interest. The transaction resulted in
a pre-tax gain of approximately $2.6 billion or approximately $1.7 billion
after-tax. The gain will be recorded in the third quarter of 2002. Subsequent
to the sale, the Company's ownership interest in SABMiller will be accounted
for under the equity method, according to which the Company will record its
percentage of SABMiller's net earnings going forward.
During the first quarter of 2002, Kraft Foods International, Inc. ("KFI")
acquired a biscuits company in Australia for an aggregate cost of $62 million.
In addition, during 2002, Kraft Foods North America, Inc. ("KFNA") sold several
small North American food businesses, most of which were previously classified
as businesses held for sale. The net revenues and operating results of the
businesses held for sale, which were not significant, were excluded from the
Company's consolidated statements of earnings and no gain or loss was recognized
on these sales. The aggregate proceeds received from sales of businesses during
the first six months of 2002 were $86 million.
During 2001, Philip Morris International Inc. ("PMI") increased its interest in
an Argentine tobacco company for an aggregate cost of $255 million. In addition,
KFI purchased coffee businesses in Romania, Morocco and Bulgaria.
The operating results of businesses acquired and sold were not material to the
consolidated operating results of the Company in any of the periods presented.
-12-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 6. Earnings Per Share:
Basic and diluted EPS were calculated using the following:
For the Six Months Ended
June 30,
------------------------
2002 2001
------ ------
(in millions)
Earnings before cumulative effect of accounting change $4,975 $4,074
Cumulative effect of accounting change (6)
------ ------
Net earnings $4,975 $4,068
====== ======
Weighted average shares for basic EPS 2,140 2,196
Plus incremental shares from assumed conversions:
Restricted stock and stock rights 2 6
Stock options 23 24
------ ------
Weighted average shares for diluted EPS 2,165 2,226
====== ======
For the Three Months Ended
June 30,
--------------------------
2002 2001
------ ------
(in millions)
Net earnings $2,610 $2,288
====== ======
Weighted average shares for basic EPS 2,135 2,191
Plus incremental shares from assumed conversions:
Restricted stock and stock rights 1 6
Stock options 23 24
------ ------
Weighted average shares for diluted EPS 2,159 2,221
====== ======
The number of shares of common stock excluded from the calculation of weighted
average shares for diluted EPS because their effects were antidilutive was
immaterial for all periods presented.
Note 7. Segment Reporting:
The products of the Company's subsidiaries include cigarettes, food (consisting
principally of a wide variety of snacks, beverages, cheese, grocery products and
convenient meals) and, prior to the merger of Miller into SAB on July 9, 2002,
beer. Another subsidiary of the Company, Philip Morris Capital Corporation, is
primarily engaged in leasing activities. The products and services of these
subsidiaries constitute the Company's reportable segments of domestic tobacco,
international tobacco, North American food, international food, beer and
financial services.
The Company's management reviews operating companies income to evaluate segment
performance and allocate resources. Operating companies income for the segments
excludes general corporate expenses and amortization of intangibles. Interest
and other debt expense, net, and provision for income taxes are centrally
-13-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
managed at the corporate level and, accordingly, such items are not presented by
segment since they are excluded from the measure of segment profitability
reviewed by the Company's management. Segment data were as follows:
For the Six Months Ended
June 30,
------------------------
2002 2001
------- -------
(in millions)
Net revenues:
Domestic tobacco $ 9,899 $ 9,682
International tobacco 14,173 13,721
North American food 10,862 10,662
International food 3,798 4,008
Beer 2,641 2,464
Financial services 265 211
------- -------
Total net revenues $41,638 $40,748
======= =======
Operating companies income:
Domestic tobacco $ 2,704 $ 2,085
International tobacco 2,967 2,906
North American food 2,467 2,496
International food 551 537
Beer 276 292
Financial services 175 140
------- -------
Total operating companies income 9,140 8,456
Amortization of intangibles (4) (506)
General corporate expenses (338) (379)
------- -------
Total operating income 8,798 7,571
Interest and other debt expense, net (602) (889)
------- -------
Total earnings before income taxes, minority interest
and cumulative effect of accounting change $ 8,196 $ 6,682
======= =======
For the Three Months Ended
June 30,
--------------------------
2002 2001
------- -------
(in millions)
Net revenues:
Domestic tobacco $ 4,881 $ 5,105
International tobacco 7,139 6,750
North American food 5,568 5,428
International food 1,945 2,045
Beer 1,422 1,350
Financial services 148 111
------- -------
Total net revenues $21,103 $20,789
======= =======
-14-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the Three Months Ended
June 30,
--------------------------
2002 2001
------ ------
(in millions)
Operating companies income:
Domestic tobacco $1,454 $1,383
International tobacco 1,403 1,348
North American food 1,369 1,353
International food 299 298
Beer 169 168
Financial services 104 76
------ ------
Total operating companies income 4,798 4,626
Amortization of intangibles (2) (253)
General corporate expenses (169) (169)
------ ------
Total operating income 4,627 4,204
Interest and other debt expense, net (309) (438)
------ ------
Total earnings before income taxes and minority interest $4,318 $3,766
====== ======
During 2002, operating companies income for the North American food and
international food segments included pre-tax charges related to the
consolidation of production lines, the closing of a facility and other
consolidation programs. Pre-tax charges of $102 million and $75 million were
recorded in marketing, administration and research costs of the North American
food segment for the six months and three months ended June 30, 2002,
respectively, and $17 million was recorded in the international food segment for
the six months and three months ended June 30, 2002. The 2002 integration
related charges of $119 million included $21 million relating to severance,
$82 million relating to asset write-offs and $16 million relating to other cash
exit costs. Cash payments relating to this charge will approximate $37 million
of which $1 million has been paid through June 30, 2002. The majority of the
remaining payments are expected to be made by December 31, 2002.
During the first quarter of 2002, a pre-tax charge of $15 million was recorded
in marketing, administration and research costs for a beer asset impairment.
During the second quarter of 2002, the international tobacco business announced
a voluntary early retirement program in Germany and approximately 160 employees
accepted the benefits offered by this program. As a result, in the second
quarter of 2002, a pre-tax charge of $25 million, which includes enhanced
pension and postretirement benefits, was recorded in marketing, administration
and research costs of the international tobacco segment.
During 2001, voluntary early retirement programs were announced for certain
eligible salaried employees in the food and beer businesses. During the first
quarter of 2002, approximately 800 employees accepted the benefits offered by
these programs and elected to retire or terminate employment. Pre-tax charges of
$135 million, $7 million and $8 million were recorded in marketing,
administration and research costs of the North American food, international food
and beer segments, respectively, in the first quarter of 2002 for these
voluntary retirement programs.
As discussed in Note 8. Contingencies, on May 7, 2001, the trial court in the
Engle class action approved a stipulation and agreed order among Philip Morris
Incorporated ("PM Inc."), certain other defendants and the plaintiffs providing
that the execution or enforcement of the punitive damages component of the
judgment in that case will remain stayed through the completion of all judicial
review. As a result of the stipulation, PM Inc. placed $500 million into a
separate interest-bearing escrow account that, regardless of the outcome of the
appeal, will be paid to the court and the court will determine how to allocate
or distribute it consistent with the Florida Rules of Civil Procedure. As a
result, a $500 million pre-tax charge was recorded by the domestic
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
tobacco business during the first quarter of 2001. In July 2001, PM Inc. also
placed $1.2 billion into an interest-bearing escrow account, which will be
returned to PM Inc. should it prevail in its appeal of the case. The $1.2
billion escrow account is included in the June 30, 2002 and December 31, 2001
consolidated balance sheets as other assets. Interest income on the $1.2 billion
escrow account is paid to PM Inc. quarterly and is being recorded as earned in
interest and other debt expense, net, in the consolidated statements of
earnings.
During the first quarter of 2001, KFNA sold a North American food factory, which
resulted in a pre-tax loss of $29 million.
Note 8. Contingencies:
Legal proceedings covering a wide range of matters are pending or threatened in
various United States and foreign jurisdictions against the Company, its
subsidiaries and affiliates, including PM Inc. and Philip Morris International
Inc. ("PMI"), the Company's international tobacco subsidiary, as well as their
respective indemnitees. Various types of claims are raised in these proceedings,
including product liability, consumer protection, antitrust, tax, contraband
shipments, patent infringement, employment matters, claims for contribution and
claims of competitors and distributors.
Overview of Tobacco-Related Litigation
Types and Number of Cases
Pending claims related to tobacco products generally fall within the following
categories: (i) smoking and health cases alleging personal injury brought on
behalf of individual plaintiffs, (ii) smoking and health cases primarily
alleging personal injury and purporting to be brought on behalf of a class of
individual plaintiffs, (iii) health care cost recovery cases brought by
governmental (both domestic and foreign) and non-governmental plaintiffs seeking
reimbursement for health care expenditures allegedly caused by cigarette smoking
and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other
tobacco-related litigation includes class action suits alleging that the use of
the terms "Lights" and "Ultra Lights" constitutes deceptive and unfair trade
practices, suits by foreign governments seeking to recover damages resulting
from the allegedly illegal importation of cigarettes into various jurisdictions,
suits by former asbestos manufacturers seeking contribution or reimbursement for
amounts expended in connection with the defense and payment of asbestos claims
that were allegedly caused in whole or in part by cigarette smoking, and various
antitrust suits. Damages claimed in some of the smoking and health class
actions, health care cost recovery cases and other tobacco-related litigation
range into the billions of dollars. In July 2000, a jury in a Florida smoking
and health class action returned a punitive damages award of approximately $74
billion against PM Inc. (see discussion of the Engle case below). Plaintiffs'
theories of recovery and the defenses raised in the smoking and health and
health care cost recovery cases are discussed below. Exhibit 99.1 hereto lists
the smoking and health class actions, health care cost recovery and certain
other actions pending as of August 1, 2002, and discusses certain developments
in such cases since May 10, 2002.
As of August 1, 2002 there were approximately 1,500 smoking and health cases
filed and served on behalf of individual plaintiffs in the United States against
PM Inc. and, in some instances, the Company, compared with approximately 1,500
such cases on August 1, 2001, and approximately 390 such cases on August 1,
2000. In certain jurisdictions, individual smoking and health cases have been
aggregated for trial in a single proceeding; the largest such proceeding
aggregates 1,250 cases in West Virginia and is currently scheduled for trial in
June 2003. An estimated 14 of the individual cases involve allegations of
various personal injuries allegedly related to exposure to environmental tobacco
smoke ("ETS"). In addition, approximately 2,800 additional individual cases are
pending in Florida by current and former flight attendants claiming personal
injuries allegedly related to ETS. The flight attendants allege that they are
members of an ETS smoking and health class action, which was settled in 1997.
The terms of the court-approved settlement in that case allow class members to
file
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
individual lawsuits seeking compensatory damages, but prohibit them from seeking
punitive damages.
As of August 1, 2002, there were an estimated 21 smoking and health purported
class actions pending in the United States against PM Inc. and, in some cases,
the Company (including two that involve allegations of various personal
injuries related to exposure to ETS), compared with approximately 28 such cases
on August 1, 2001, and approximately 35 such cases on August 1, 2000. Some of
these actions purport to constitute statewide class actions and were filed after
May 1996, when the United States Court of Appeals for the Fifth Circuit reversed
a federal district court's certification of a purported nationwide class action
on behalf of persons who were allegedly "addicted" to tobacco products.
As of August 1, 2002, there were an estimated 43 health care cost recovery
actions, including the suit discussed below under "Federal Government's
Lawsuit," filed by the United States government, pending in the United States
against PM Inc. and, in some instances, the Company, compared with approximately
52 such cases pending on August 1, 2001, and 50 such cases on August 1, 2000. In
addition, health care cost recovery actions are pending in Israel, the Province
of British Columbia, Canada, France (in a case brought by a local agency of the
French social security health insurance system) and Spain.
There are also a number of other tobacco-related actions pending outside the
United States against PMI and its affiliates and subsidiaries, including an
estimated 73 smoking and health cases brought on behalf of individuals
(Argentina (40), Australia (1), Brazil (19), Czech Republic (1), Ireland (1),
Israel (2), Italy (4), Japan (1), the Philippines (1), Scotland (1), and Spain
(2)), compared with approximately 69 such cases on August 1, 2001, and 45 such
cases on August 1, 2000. In addition, as of August 1, 2002, there were eight
smoking and health putative class actions pending outside the United States
(Brazil (1), Canada (3), and Spain (4)), compared with 12 such cases on August
1, 2001 and ten such cases on August 1, 2000.
Pending and Upcoming Trials
Jury selection is proceeding in a smoking and health class action in Louisiana
in which PM Inc. is a defendant and in which plaintiffs seek the creation of
funds to pay for medical monitoring and smoking cessation programs. Jury
selection is also proceeding in an individual smoking and health case against PM
Inc. in California. In addition, later in August, trials are scheduled to begin
in two cases in Florida brought by flight attendants seeking compensatory
damages for personal injuries allegedly caused by ETS; PM Inc. is a defendant in
both cases.
As set forth in Exhibit 99.2 hereto, additional cases against PM Inc. and, in
some instances, the Company, are scheduled for trial through the end of 2003.
They include two class actions in California in which plaintiffs seek damages
under the California Business and Professions Code for the costs of cigarettes
purchased by class members during the class period, a case in West Virginia that
aggregates 1,250 individual smoking and health cases, a Lights/Ultra Lights
class action in Illinois and the health care cost recovery case brought by the
United States government as well as an estimated 26 individual smoking and
health cases and 14 additional cases brought by flight attendants seeking
compensatory damages for personal injuries allegedly caused by ETS. Five of the
trials in the individual smoking and health cases are scheduled to begin in
October 2002 and one of the trials is scheduled to begin in November 2002.
Trials are scheduled to begin in six of the cases brought by flight attendants
in the next three months. Cases against other tobacco companies are also
scheduled for trial through the end of 2003. Trial dates, however, are subject
to change.
Recent Trial Results
Since January 1999, jury verdicts have been returned in 21 smoking and health
and health care cost recovery cases in which PM Inc. was a defendant. Verdicts
in favor of PM Inc. and other defendants were returned in 12 of the 21 cases.
These 12 cases were tried in Rhode Island, West Virginia, Ohio (2), New Jersey,
Florida (2), New York (2), Mississippi and Tennessee (2). Plaintiffs' appeals or
post-trial motions challenging the verdicts are pending in West Virginia, Ohio
and Florida. In May 2002, a mistrial was declared in a case brought by a flight
attendant claiming personal injuries allegedly caused by ETS, and the case was
subsequently dismissed. In
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
addition, in 2001, a mistrial was declared in New York in an asbestos
contribution case, and plaintiffs subsequently voluntarily dismissed the case.
The chart below lists the verdicts and post-trial developments in the nine cases
that have gone to trial since January 1999 in which verdicts were returned in
favor of plaintiffs.
Location Type of Post-Trial
Date of Court Case Verdict Developments
- -------- ---------- ------------- --------------------------------- -----------------------------------
June Florida Flight $5.5 million in compensatory Defendants have filed post-trial
2002 Attendant ETS damages against all motions challenging the verdict.
Litigation defendants, including PM Inc.
June Florida Individual $37.5 million in compensatory Defendants have filed post-trial
2002 Smoking and damages against all defendants, motions challenging the verdict.
Health including PM Inc.
March Oregon Individual $168,500 in compensatory damages In May 2002, the trial court reduced
2002 Smoking and and $150 million in punitive the punitive damages award to
Health damages against PM Inc. $100 million, and in July 2002,
the trial court denied PM Inc.'s
post-trial motions challenging the
verdict. PM Inc. has appealed.
June California Individual $5.5 million in compensatory In August 2001, the trial court
2001 Smoking and damages, and $3 billion in reduced the punitive damages award
Health punitive damages against PM Inc. to $100 million; PM Inc. has
appealed.
June New York Health Care $17.8 million in compensatory In February 2002, the trial court
2001 Cost damages, against all defendants awarded plaintiffs $38 million in
Recovery including $6.8 million against attorneys' fees. Defendants have
PM Inc. appealed.
July Florida Smoking and $145 billion in punitive damages See "Engle Class Action," below.
2000 Health against all defendants, including
Class Action $74 billion against PM Inc.
March California Individual $1.72 million in compensatory Defendants have appealed.
2000 Smoking and damages against PM Inc. and
Health another defendant, and $10
million in punitive damages
against PM Inc. and $10
million in punitive damages
against the other defendant.
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Location Type of Post-Trial
Date of Court Case Verdict Developments
- -------- ---------- ------------- --------------------------------- -----------------------------------
March Oregon Individual $800,000 in compensatory The trial court reduced the
1999 Smoking and damages, $21,500 in medical punitive damages award to $32
Health expenses and $79.5 million in million, and PM Inc. appealed. In
punitive damages against PM Inc. June 2002, the Oregon Court of
Appeals reinstated the $79.5
million punitive damages award; PM
Inc. has appealed to the Oregon
Supreme Court.
February California Individual $1.5 million in compensatory The trial court reduced the
1999 Smoking and damages and $50 million in punitive damages award to $25
Health punitive damages against PM Inc. million and PM Inc. appealed. In
November 2001, a California
District Court of Appeals affirmed
the trial court's ruling, and PM
Inc. has appealed to the California
Supreme Court.
In addition, since January 1999, jury verdicts have been returned in 12
tobacco-related cases in which neither the Company nor any of its subsidiaries
were defendants. Verdicts in favor of defendants were returned in eight of the
12 cases in cases tried in Connecticut, Texas, South Carolina, Mississippi,
Louisiana, Missouri and Tennessee (2). Plaintiffs' appeal is pending in
Mississippi. Verdicts in favor of plaintiffs were returned in four of the 12
cases in cases tried in Australia, Kansas and Florida (2). Defendants' appeals
or post-trial motions are pending. In addition, in a case in France the trial
court found in favor of plaintiff, however, the appellate court reversed the
trial court's ruling and dismissed plaintiff's claim.
Engle Class Action
Verdicts have been returned and judgment has been entered against PM Inc. and
other defendants in the first two phases of this three-phase smoking and health
class action trial in Florida. The class consists of all Florida residents and
citizens, and their survivors, "who have suffered, presently suffer or have died
from diseases and medical conditions caused by their addiction to cigarettes
that contain nicotine."
In July 1999, the jury returned a verdict against defendants in phase one of the
trial concerning certain issues determined by the trial court to be "common" to
the causes of action of the plaintiff class. Among other things, the jury found
that smoking cigarettes causes 20 diseases or medical conditions, that
cigarettes are addictive or dependence-producing, defective and unreasonably
dangerous, that defendants made materially false statements with the intention
of misleading smokers, that defendants concealed or omitted material information
concerning the health effects and/or the addictive nature of smoking cigarettes,
and that defendants were negligent and engaged in extreme and outrageous conduct
or acted with reckless disregard with the intent to inflict emotional distress.
During phase two of the trial, the claims of three of the named plaintiffs were
adjudicated in a consolidated trial before the same jury that returned the
verdict in phase one. In April 2000, the jury determined liability against the
defendants and awarded $12.7 million in compensatory damages to the three named
plaintiffs.
In July 2000, the same jury returned a verdict assessing punitive damages on a
lump sum basis for the entire class totaling approximately $145 billion against
the various defendants in the case, including approximately $74 billion
severally against PM Inc. PM Inc. believes that the punitive damages award was
determined improperly and that it should ultimately be set aside on any one of
numerous grounds. Included among these grounds are the following: under
applicable law, (i) defendants are entitled to have liability and damages for
each plaintiff tried by the same jury, an impossibility due to the jury's
dismissal; (ii) punitive damages cannot
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
be assessed before the jury determines entitlement to, and the amount of,
compensatory damages for all class members; (iii) punitive damages must bear a
reasonable relationship to compensatory damages, a determination that cannot be
made before compensatory damages are assessed for all class members; and (iv)
punitive damages can "punish" but cannot "destroy" the defendant. In March 2000,
at the request of the Florida legislature, the Attorney General of Florida
issued an advisory legal opinion stating that "Florida law is clear that
compensatory damages must be determined prior to an award of punitive damages"
in cases such as Engle. As noted above, compensatory damages for all but three
members of the class have not been determined.
Following the verdict in the second phase of the trial, the jury was dismissed,
notwithstanding that liability and compensatory damages for all but three class
members have not yet been determined. According to the trial plan, phase three
of the trial will address other class members' claims, including issues of
specific causation, reliance, affirmative defenses and other individual-specific
issues regarding entitlement to damages, in individual trials before separate
juries.
It is unclear how the trial plan will be further implemented. The trial plan
provides that the punitive damages award should be standard as to each class
member and acknowledges that the actual size of the class will not be known
until the last class member's case has withstood appeal, i.e., the punitive
damages amount would be divided equally among those plaintiffs who, in addition
to the successful phase two plaintiffs, are ultimately successful in phase three
of the trial and in any appeal.
Following the jury's punitive damages verdict in July 2000, defendants removed
the case to federal district court following the intervention application of a
union health fund that raised federal issues in the case. In November 2000, the
federal district court remanded the case to state court on the grounds that the
removal was premature.
The trial judge in the state court, without a hearing, then immediately denied
the defendants' post-trial motions and entered judgment on the compensatory and
punitive damages awarded by the jury. PM Inc. and the Company believe that the
entry of judgment by the trial court is unconstitutional and violates Florida
law. PM Inc. has filed an appeal with respect to the entry of judgment, class
certification and numerous other reversible errors that have occurred during the
trial. PM Inc. has also posted a $100 million bond to stay execution of the
judgment with respect to the $74 billion in punitive damages that has been
awarded against it. The bond was posted pursuant to legislation that was enacted
in Florida in May 2000 that limits the size of the bond that must be posted in
order to stay execution of a judgment for punitive damages in a certified class
action to no more than $100 million, regardless of the amount of punitive
damages ("bond cap legislation").
Plaintiffs had previously indicated that they believe the bond cap legislation
is unconstitutional and might seek to challenge the $100 million bond. If the
bond were found to be invalid, it would be commercially impossible for PM Inc.
to post a bond in the full amount of the judgment and, absent appellate relief,
PM Inc. would not be able to stay any attempted execution of the judgment in
Florida. PM Inc. and the Company will take all appropriate steps to seek to
prevent this worst-case scenario from occurring. In May 2001, the trial court
approved a stipulation (the "Stipulation") among PM Inc., certain other
defendants, plaintiffs and the plaintiff class that provides that execution or
enforcement of the punitive damages component of the Engle judgment will remain
stayed against PM Inc. and the other participating defendants through the
completion of all judicial review. As a result of the Stipulation and in
addition to the $100 million bond it previously posted, PM Inc. placed $1.2
billion into an interest-bearing escrow account for the benefit of the Engle
class. Should PM Inc. prevail in its appeal of the case, both amounts are to be
returned to PM Inc. PM Inc. also placed an additional $500 million into a
separate interest-bearing escrow account for the benefit of the Engle class. If
PM Inc. prevails in its appeal, this amount will be paid to the court, and the
court will determine how to allocate or distribute it consistent with the
Florida Rules of Civil Procedure. In connection with the Stipulation, the
Company recorded a $500 million pre-tax charge in its consolidated statement of
earnings for the quarter ended March 31, 2001.
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
PM Inc. and the Company remain of the view that the Engle case should not have
been certified as a class action. The certification is inconsistent with the
overwhelming majority of federal and state court decisions that have held that
mass smoking and health claims are inappropriate for class treatment. PM Inc.
has filed an appeal challenging the class certification and the compensatory and
punitive damages awards, as well as numerous other reversible errors that it
believes occurred during the trial to date.
Smoking and Health Litigation
Plaintiffs' allegations of liability in smoking and health cases are based on
various theories of recovery, including negligence, gross negligence, strict
liability, fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, breach of special duty, conspiracy, concert of
action, violations of deceptive trade practice laws and consumer protection
statutes, and claims under the federal and state RICO statutes. In certain of
these cases, plaintiffs claim that cigarette smoking exacerbated the injuries
caused by their exposure to asbestos. Plaintiffs in the smoking and health
actions seek various forms of relief, including compensatory and punitive
damages, treble/multiple damages and other statutory damages and penalties,
creation of medical monitoring and smoking cessation funds, disgorgement of
profits, and injunctive and equitable relief. Defenses raised in these cases
include lack of proximate cause, assumption of the risk, comparative fault
and/or contributory negligence, statutes of limitations and preemption by the
Federal Cigarette Labeling and Advertising Act. In May 1996, the United States
Court of Appeals for the Fifth Circuit held in the Castano case that a class
consisting of all "addicted" smokers nationwide did not meet the standards and
requirements of the federal rules governing class actions. Since this class
decertification, lawyers for plaintiffs have filed numerous putative smoking and
health class action suits in various state and federal courts. In general, these
cases purport to be brought on behalf of residents of a particular state or
states (although a few cases purport to be nationwide in scope) and raise
"addiction" claims and, in many cases, claims of physical injury as well. As of
August 1, 2002, smoking and health putative class actions were pending in
Alabama, Florida, Illinois, Louisiana, Michigan, Missouri, New York, Ohio,
Oregon, Tennessee, Utah, West Virginia and the District of Columbia, as well
as in Brazil, Canada, Israel and Spain. Class certification has been denied
or reversed by courts in 29 smoking and health class actions involving PM Inc.
in Arkansas, the District of Columbia, Illinois (2), Iowa, Kansas, Louisiana,
Maryland, Michigan, Minnesota, Nevada (4), New Jersey (6), New York (2), Ohio,
Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin, while
classes remain certified in the Engle case in Florida (discussed above) and a
case in Louisiana in which plaintiffs seek the creation of funds to pay for
medical monitoring and smoking cessation programs for class members. In May
1999, the United States Supreme Court declined to review the decision of the
United States Court of Appeals for the Third Circuit affirming a lower court's
decertification of a class. In November 2001, in the first medical monitoring
class action case to go to trial, a West Virginia jury returned a verdict in
favor of all defendants, including PM Inc. In January 2002, the trial court
denied plaintiffs' motion for a new trial, and plaintiffs have appealed.
Health Care Cost Recovery Litigation
Overview
In certain pending proceedings, domestic and foreign governmental entities and
non-governmental plaintiffs, including union health and welfare funds
("unions"), Native American tribes, insurers and self-insurers such as Blue
Cross and Blue Shield plans, hospitals, taxpayers and others, are seeking
reimbursement of health care cost expenditures allegedly caused by tobacco
products and, in some cases, of future expenditures and damages as well. Relief
sought by some but not all plaintiffs includes punitive damages, multiple
damages and other
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
statutory damages and penalties, injunctions prohibiting alleged marketing and
sales to minors, disclosure of research, disgorgement of profits, funding of
anti-smoking programs, additional disclosure of nicotine yields, and payment of
attorney and expert witness fees. Certain of the health care cost recovery cases
purport to be brought on behalf of a class of plaintiffs.
The claims asserted in the health care cost recovery actions include the
equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs'
payment of health care costs allegedly attributable to smoking, the equitable
claim of indemnity, common law claims of negligence, strict liability, breach of
express and implied warranty, violation of a voluntary undertaking or special
duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims
under federal and state statutes governing consumer fraud, antitrust, deceptive
trade practices and false advertising, and claims under federal and state RICO
statutes.
Defenses raised include lack of proximate cause, remoteness of injury, failure
to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands"
(namely, that plaintiffs cannot obtain equitable relief because they
participated in, and benefited from, the sale of cigarettes), lack of antitrust
standing and injury, federal preemption, lack of statutory authority to bring
suit, and statutes of limitations. In addition, defendants argue that they
should be entitled to "set off" any alleged damages to the extent the plaintiff
benefits economically from the sale of cigarettes through the receipt of excise
taxes or otherwise. Defendants also argue that these cases are improper because
plaintiffs must proceed under principles of subrogation and assignment. Under
traditional theories of recovery, a payor of medical costs (such as an insurer)
can seek recovery of health care costs from a third party solely by "standing in
the shoes" of the injured party. Defendants argue that plaintiffs should be
required to bring any actions as subrogees of individual health care recipients
and should be subject to all defenses available against the injured party.
Although there have been some decisions to the contrary, most courts that have
decided motions in these cases have dismissed all or most of the claims against
the industry. In addition, eight federal circuit courts of appeals, the Second,
Third, Fifth, Seventh, Eighth, Ninth, Eleventh and District of Columbia
circuits, as well as California and Tennessee intermediate appellate courts,
relying primarily on grounds that plaintiffs' claims were too remote, have
affirmed dismissals of, or reversed trial courts that had refused to dismiss,
health care cost recovery actions. The United States Supreme Court has refused
to consider plaintiffs' appeals from the cases decided by the courts of appeals
for the Second, Third, Ninth and District of Columbia circuits.
As of August 1, 2002, there were an estimated 43 health care cost recovery cases
pending in the United States against PM Inc., and in some instances, the
Company, including the case filed by the United States government, which is
discussed below under "Federal Government's Lawsuit."
The cases brought in the United States include actions brought by Belize,
Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario,
Canada, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 11
Brazilian states, 11 Brazilian cities and a group of Argentine unions. The
actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the
Province of Ontario, Panama, the Russian Federation, Tajikistan, Ukraine,
Venezuela, 10 Brazilian states and 11 Brazilian cities were consolidated for
pre-trial purposes and transferred to the United States District Court for the
District of Columbia. The district court dismissed the cases brought by
Guatemala, Nicaragua, Ukraine and the Province of Ontario, and the dismissals
are now final. The district court has remanded to state courts the remaining
cases except for the cases brought by Bolivia and Panama. Subsequent to remand,
the Ecuador case was voluntarily dismissed. In November 2001, the cases brought
by Venezuela and the Brazilian state of Espirito Santo were dismissed by the
state court, and Venezuela has appealed. In January 2001, the Superior Court of
the District of Columbia dismissed the suit brought by the Argentine unions, and
the dismissal is now final. In addition to cases brought in the United States,
health care cost recovery actions have also been brought in Israel, the Marshall
Islands (dismissed), the Province of British Columbia, Canada, France and Spain,
and other entities have stated that they are considering filing such actions.
In March 1999, in the first health care cost recovery case to go to trial, an
Ohio jury returned a verdict in favor of defendants on all counts. In June 2001,
a New York jury returned a verdict awarding $6.83 million in
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
compensatory damages against PM Inc. and a total of $11 million against four
other defendants in a health care cost recovery action brought by a Blue Cross
and Blue Shield plan. In February 2002, the court awarded plaintiff
approximately $38 million for attorneys' fees. Defendants, including PM Inc.,
have appealed.
Settlements of Health Care Cost Recovery Litigation
In November 1998, PM Inc. and certain other United States tobacco product
manufacturers entered into the Master Settlement Agreement (the "MSA") with 46
states, the District of Columbia, Puerto Rico, Guam, the United States Virgin
Islands, American Samoa and the Northern Marianas to settle asserted and
unasserted health care cost recovery and other claims. PM Inc. and certain other
United States tobacco product manufacturers had previously settled similar
claims brought by Mississippi, Florida, Texas and Minnesota (together with the
MSA, the "State Settlement Agreements"). The MSA has received final judicial
approval in all 52 settling jurisdictions.
The State Settlement Agreements require that the domestic tobacco industry make
substantial annual payments in the following amounts (excluding future annual
payments contemplated by the agreement with tobacco growers discussed below),
subject to adjustment for several factors, including inflation, market share and
industry volume: 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007,
$8.4 billion each year; and, thereafter, $9.4 billion each year. In addition,
the domestic tobacco industry is required to pay settling plaintiffs' attorneys'
fees, subject to an annual cap of $500 million, as well as additional annual
payments of $250 million through 2003. These payment obligations are the several
and not joint obligations of each settling defendant. PM Inc.'s portion of
ongoing adjusted payments and legal fees is based on its relative share of the
settling manufacturers' domestic cigarette shipments, including roll-your-own
cigarettes, in the year preceding that in which the payment is due. PM Inc.
records its portions of ongoing settlement payments as part of cost of sales as
product is shipped.
The State Settlement Agreements also include provisions, discussed below in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, relating to advertising and marketing restrictions, public
disclosure of certain industry documents, limitations on challenges to certain
tobacco control and underage use laws, restrictions on lobbying activities and
other provisions.
As part of the MSA, the settling defendants committed to work cooperatively with
the tobacco-growing states to address concerns about the potential adverse
economic impact of the MSA on tobacco growers and quota-holders. To that end,
four of the major domestic tobacco product manufacturers, including PM Inc., and
the grower states, have established a trust fund to provide aid to tobacco
growers and quota-holders. The trust will be funded by these four manufacturers
over 12 years with payments, prior to application of various adjustments,
scheduled to total $5.15 billion. Future industry payments (2002 through 2008,
$500 million each year; 2009 and 2010, $295 million each year) are subject to
adjustment for several factors, including inflation, United States cigarette
volume and certain other contingent events, and, in general, are to be allocated
based on each manufacturer's relative market share. PM Inc. records its portion
of these payments as part of cost of sales as product is shipped.
The State Settlement Agreements have materially adversely affected the volumes
of PM Inc. and the Company; the Company believes that they may materially
adversely affect the business, volumes, results of operations, cash flows or
financial position of PM Inc. and the Company in future periods. The degree of
the adverse impact will depend, among other things, on the rate of decline in
United States cigarette sales in the premium and discount segments, PM Inc.'s
share of the domestic premium and discount cigarette segments, and the effect of
any resulting cost advantage of manufacturers not subject to the MSA and the
other State Settlement Agreements.
Certain litigation, described in Exhibit 99.1, has arisen challenging the
validity of the MSA and alleging violations of antitrust laws.
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Federal Government's Lawsuit
In 1999, the United States government filed a lawsuit in the United States
District Court for the District of Columbia against various cigarette
manufacturers and others, including PM Inc. and the Company, asserting claims
under three federal statutes, the Medical Care Recovery Act ("MCRA"), the
Medicare Secondary Payer ("MSP") provisions of the Social Security Act and the
Racketeer Influenced and Corrupt Organizations Act ("RICO"). The lawsuit seeks
to recover an unspecified amount of health care costs for tobacco-related
illnesses allegedly caused by defendants' fraudulent and tortious conduct and
paid for by the government under various federal health care programs, including
Medicare, military and veterans' health benefits programs, and the Federal
Employees Health Benefits Program. The complaint alleges that such costs total
more than $20 billion annually. It also seeks various types of what it alleges
to be equitable and declaratory relief, including disgorgement, an injunction
prohibiting certain actions by the defendants, and a declaration that the
defendants are liable for the federal government's future costs of providing
health care resulting from defendants' alleged past tortious and wrongful
conduct. PM Inc. and the Company moved to dismiss this lawsuit on numerous
grounds, including that the statutes invoked by the government do not provide a
basis for the relief sought. In September 2000, the trial court dismissed the
government's MCRA and MSP claims, but permitted discovery to proceed on the
government's claims for relief under RICO. In October 2000, the government moved
for reconsideration of the trial court's order to the extent that it dismissed
the MCRA claims for health care costs paid pursuant to government health benefit
programs other than Medicare and the Federal Employees Health Benefits Act. In
February 2001, the government filed an amended complaint attempting to replead
the MSP claims. In July 2001, the court denied the government's motion for
reconsideration of the dismissal of the MCRA claims and dismissed the
government's amended MSP claims. Trial of the case is currently scheduled for
July 2003.
In June 2001, representatives of the Department of Justice invited the
defendants, including PM Inc. and the Company, to participate in settlement
discussions. A meeting with representatives of the Department of Justice was
held in July 2001. PM Inc. and the Company cannot predict whether discussions
will continue or the outcome of any such discussions.
Certain Other Tobacco-Related Litigation
Lights/Ultra Lights Cases: As of August 1, 2002, there were 13 putative class
actions pending against PM Inc. and, in some instances, the Company in
California, Florida, Illinois, Massachusetts, Minnesota, Missouri, New
Hampshire, New Jersey, Ohio (2), Oregon, Tennessee and West Virginia on behalf
of individuals who purchased and consumed various brands of cigarettes,
including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and
Superslims, Merit Lights and Cambridge Lights. Plaintiffs in these cases allege,
among other things, that the use of the terms "Lights" and/or "Ultra Lights"
constitutes deceptive and unfair trade practices, and seek injunctive and
equitable relief, including restitution. Classes have been certified in
Illinois, Massachusetts and Florida. Trial in the Illinois case is scheduled for
January 2003.
Cigarette Contraband Cases: As of August 1, 2002, the European Community and ten
member states, various Departments of Colombia, Ecuador, Belize and Honduras had
filed suits in the United States against the Company and certain of its
subsidiaries, including PM Inc. and PMI, and other cigarette manufacturers and
their affiliates, alleging that defendants sold to distributors cigarettes that
would be illegally imported into various jurisdictions. The claims asserted in
these cases include negligence, negligent misrepresentation, fraud, unjust
enrichment, violations of RICO and its state-law equivalents and conspiracy.
Plaintiffs in these cases seek actual damages, treble damages and undisclosed
injunctive relief. In February 2002, the courts granted defendants' motions to
dismiss all of the actions. In the Colombia and European Community actions,
however, the RICO and fraud claims predicated on allegations of money laundering
claims were dismissed without prejudice. Plaintiffs in each of the cases have
appealed. In October 2001, the United States Court of Appeals for the Second
Circuit affirmed the dismissal of a cigarette contraband case filed against
another cigarette manufacturer and in March 2002, plaintiff in that case
petitioned the United States Supreme Court for further review.
-24-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Asbestos Contribution Cases: As of August 1, 2002, an estimated 9 suits were
pending on behalf of former asbestos manufacturers and affiliated entities
against domestic tobacco manufacturers, including PM Inc. These cases seek,
among other things, contribution or reimbursement for amounts expended in
connection with the defense and payment of asbestos claims that were allegedly
caused in whole or in part by cigarette smoking. Plaintiffs in most of these
cases also seek punitive damages.
Retail Leaders Case: Three domestic tobacco manufacturers filed suit against PM
Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that became
available to retailers in October 1998. The complaint alleged that this retail
merchandising program is exclusionary, creates an unreasonable restraint of
trade and constitutes unlawful monopolization. In addition to an injunction,
plaintiffs sought unspecified treble damages, attorneys' fees, costs and
interest. In May 2002, the court granted PM Inc.'s motion for summary judgment
and dismissed all of plaintiffs' claims with prejudice. Plaintiffs have
appealed.
Vending Machine Case: Plaintiffs, who began their case as a purported nationwide
class of cigarette vending machine operators, allege that PM Inc. has violated
the Robinson-Patman Act in connection with its promotional and merchandising
programs available to retail stores and not available to cigarette vending
machine operators. The initial complaint was amended to bring the total number
of plaintiffs to 211, but by stipulated orders, all claims were stayed, except
those of ten plaintiffs that proceeded to pre-trial discovery. Plaintiffs
request actual damages, treble damages, injunctive relief, attorneys' fees and
costs, and other unspecified relief. In June 1999, the court denied plaintiffs'
motion for a preliminary injunction. Plaintiffs have withdrawn their request for
class action status. In August 2001, the court granted PM Inc.'s motion for
summary judgment and dismissed, with prejudice, the claims of the ten
plaintiffs. In October 2001, the court certified its decision for appeal to the
United States Court of Appeals for the Sixth Circuit following the stipulation
of all plaintiffs that the district court's dismissal would, if affirmed, be
binding on all plaintiffs.
Tobacco Price Cases: As of August 1, 2002, there were 36 putative class actions
pending against PM Inc. and other domestic tobacco manufacturers, as well as, in
certain instances, the Company and PMI, alleging that defendants conspired to
fix cigarette prices in violation of antitrust laws. Seven of the putative class
actions were filed in various federal district courts by direct purchasers of
tobacco products, and the remaining 29 were filed in 14 states and the District
of Columbia by retail purchasers of tobacco products. In November 2001,
plaintiffs' motion for class certification was granted in a case pending in
state court in Kansas, and trial in this case is scheduled for September 2003.
In November 2001, plaintiffs' motion for class certification was denied in a
case pending in state court in Minnesota. In June 2002, plaintiffs' motion for
class certification was denied in a case pending in the State of Michigan.
Plaintiffs' motion for reconsideration of this ruling and defendants' motions
for summary judgment are pending. In May 2002, the Arizona Court of Appeals
reversed the trial court's decision to dismiss an action, and defendants have
appealed. The seven federal class actions have been consolidated in the United
States District Court for the Northern District of Georgia. In July 2002, the
court granted defendants' motion for summary judgment dismissing the case in its
entirety, and plaintiffs have appealed. The cases are listed in Exhibit 99.1.
Cases Under the California Business and Professions Code: In June 1997 and July
1998, two suits were filed in California courts alleging that domestic cigarette
manufacturers, including PM Inc. and others, have violated California Business
and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and
fraudulent business practices. Class certification was granted as to plaintiffs'
claims that defendants violated sections 17200 and/or 17500 of California
Business and Professions Code pursuant to which plaintiffs allege that class
members are entitled to reimbursement of the costs of cigarettes purchased
during the class periods and injunctive relief. Trials in the cases are
scheduled for October 2002 and April 2003.
Tobacco Growers' Case: In February 2000, a suit was filed on behalf of a
purported class of tobacco growers and quota-holders, and amended complaints
were filed in May 2000 and in August 2000. The second amended complaint alleges
that defendants, including PM Inc., violated antitrust laws by bid-rigging and
allocating purchases at tobacco auctions and by conspiring to undermine the
tobacco quota and price-support program administered by the federal government.
In October 2000, defendants filed motions to dismiss the amended
-25-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
complaint and to transfer the case, and plaintiffs filed a motion for class
certification. In November 2000, the court granted defendants' motion to
transfer the case to the United States District Court for the Middle District of
North Carolina. In December 2000, plaintiffs served a motion for leave to file a
third amended complaint to add tobacco leaf buyers as defendants. This motion
was granted, and the additional parties were served in February 2001. In March
2001, the leaf buyer defendants filed a motion to dismiss the case. In July
2001, the court denied the manufacturer and leaf buyer defendants' motions to
dismiss the case, and in April 2002 granted plaintiffs' motion for class
certification. Defendants' petition for interlocutory review of the class
certification order was denied in June 2002.
Consolidated Putative Punitive Damages Cases: In September 2000, a putative
class action was filed in the federal district court in the Eastern District of
New York that purports to consolidate punitive damages claims in ten
tobacco-related actions then pending in federal districts court New York and
Pennsylvania. In July 2002, plaintiffs filed an amended consolidated class
action complaint and a motion for class certification. The complaint seeks
certification of a punitive damages class of persons residing in the United
States who smoke or smoked defendants' cigarettes, and who have been diagnosed
by a physician with an enumerated disease from April 1993 through the date
notice of the certification of this class is disseminated.
Certain Other Actions
National Cheese Exchange Cases: Since 1996, seven putative class actions have
been filed by various dairy farmers alleging that Kraft and others engaged in a
conspiracy to fix and depress the prices of bulk cheese and milk through their
trading activity on the National Cheese Exchange. Plaintiffs seek injunctive and
equitable relief and unspecified treble damages. Plaintiffs voluntarily
dismissed two of the actions after class certification was denied. Three cases
were consolidated in state court in Wisconsin, and in November 1999, the court
granted Kraft's motion for summary judgment. In June 2001, the Wisconsin Court
of Appeals affirmed the trial court's ruling dismissing the cases. In April
2002, the Wisconsin Supreme Court affirmed the intermediate appellate court's
ruling. In April 2002, Kraft's motion for summary judgment dismissing the case
was granted in a case pending in the United States District Court for the
Central District of California. In June 2002, the parties settled this dispute
on an individual (non-class) basis, and plaintiffs dismissed their appeal. A
case in Illinois state court has been settled and dismissed.
Italian Tax Matters: One hundred ninety-four tax assessments alleging the
nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1996 and
income taxes for the years 1987 to 1996) have been served upon certain
affiliates of the Company, including six new assessments (for the year 1996),
which were served in October and December 2001. The aggregate amount of alleged
unpaid taxes assessed to date is the euro equivalent of $2.3 billion. In
addition, the euro equivalent of $3.5 billion in interest and penalties has been
assessed. The Company anticipates that value-added and income tax assessments
may also be received with respect to subsequent years. All of the assessments
are being vigorously contested. To date, the Italian administrative tax court in
Milan has overturned 188 of the assessments, and the tax authorities have
appealed to the regional appellate court in Milan. To date, the regional
appellate court has rejected 81 of the appeals filed by the tax authorities. The
tax authorities have appealed 45 of the 81 decisions of the regional appellate
court to the Italian Supreme Court, and a hearing on these cases was held in
December 2001. Six of the 81 decisions were not appealed and are now final. In
March and May 2002, the Italian Supreme Court issued its decision in 42 of the
45 appeals. The Italian Supreme Court rejected 12 of the 45 appeals and these 12
cases are now final. The Italian Supreme Court vacated the decisions of the
regional appellate court in 30 of the cases and remanded these cases back to the
regional appellate court for further hearings on the merits. Three decisions
have not been issued. In a separate proceeding in October 1997, a Naples court
dismissed charges of criminal association against certain present and former
officers and directors of affiliates of the Company, but permitted tax evasion
and related charges to remain pending. In February 1998, the criminal court in
Naples determined that jurisdiction was not proper, and the case file was
transmitted to the public prosecutor in Milan. In March 2002, after the Milan
prosecutor's investigation into the matter, these present and former officers
and directors received notices that an initial hearing would take place in June
2002 at which time the "preliminary judge" hearing the case would evaluate
whether the Milan prosecutor's charges should be sent to a criminal judge for a
full trial. At the June 2002 hearing, the "preliminary judge" ruled that there
was no legal basis for the
-26-
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
prosecutor's charges and acquitted all of the defendants; the prosecutor has
appealed. The Company, its affiliates and the officers and directors who are
subject to the proceedings believe they have complied with applicable Italian
tax laws and are vigorously contesting the pending assessments and proceedings.
----------
It is not possible to predict the outcome of the litigation pending against the
Company and its subsidiaries. Litigation is subject to many uncertainties.
Unfavorable verdicts awarding compensatory and/or punitive damages against
PM Inc. have been returned in the Engle smoking and health class action, several
individual smoking and health cases, a flight attendant ETS lawsuit, and a
health care cost recovery case and are being appealed. It is possible that there
could be further adverse developments in these cases and that additional cases
could be decided unfavorably. An unfavorable outcome or settlement of a pending
tobacco-related litigation could encourage the commencement of additional
litigation. There have also been a number of adverse legislative, regulatory,
political and other developments concerning cigarette smoking and the tobacco
industry that have received widespread media attention. These developments may
negatively affect the perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending litigation, and
may prompt the commencement of additional similar litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of pending tobacco-related
litigation, and the Company has not provided any amounts in the consolidated
financial statements for unfavorable outcomes, if any. The present legislative
and litigation environment is substantially uncertain, and it is possible that
the Company's business, volume, results of operations, cash flows or financial
position could be materially affected by an unfavorable outcome or settlement of
certain pending litigation or by the enactment of federal or state tobacco
legislation. The Company and each of its subsidiaries named as a defendant
believe, and each has been so advised by counsel handling the respective cases,
that it has a number of valid defenses to the litigation pending against it, as
well as valid bases for appeal of adverse verdicts against it. All such cases
are, and will continue to be, vigorously defended. However, the Company and its
subsidiaries may enter into discussions in an attempt to settle particular cases
if they believe it is in the best interests of the Company's stockholders to do
so.
Note 9. Recently Issued Accounting Pronouncements:
On July 30, 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Costs covered by SFAS No. 146 include lease termination
costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing or other exit or disposal
activity. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. Accordingly, the Company will apply the
provisions of SFAS No. 146 prospectively to exit or disposal activities
initiated after December 31, 2002.
-27-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Consolidated Operating Results
For the Six Months Ended June 30,
Net Revenues
-----------------
(in millions)
2002 2001
------- -------
Domestic tobacco $ 9,899 $ 9,682
International tobacco 14,173 13,721
North American food 10,862 10,662
International food 3,798 4,008
Beer 2,641 2,464
Financial services 265 211
------- -------
Net revenues $41,638 $40,748
======= =======
Operating Income
-----------------
(in millions)
2002 2001
------- -------
Domestic tobacco $2,704 $2,085
International tobacco 2,967 2,906
North American food 2,467 2,496
International food 551 537
Beer 276 292
Financial services 175 140
------ ------
Operating companies income 9,140 8,456
Amortization of intangibles (4) (506)
General corporate expenses (338) (379)
------ ------
Operating income $8,798 $7,571
====== ======
For the Three Months Ended June 30,
Net Revenues
-----------------
(in millions)
2002 2001
------- -------
Domestic tobacco $ 4,881 $ 5,105
International tobacco 7,139 6,750
North American food 5,568 5,428
International food 1,945 2,045
Beer 1,422 1,350
Financial services 148 111
------- -------
Net revenues $21,103 $20,789
======= =======
-28-
For the Three Months Ended June 30,
Operating Income
----------------
(in millions)
2002 2001
------ ------
Domestic tobacco $1,454 $1,383
International tobacco 1,403 1,348
North American food 1,369 1,353
International food 299 298
Beer 169 168
Financial services 104 76
------ ------
Operating companies income 4,798 4,626
Amortization of intangibles (2) (253)
General corporate expenses (169) (169)
------ ------
Operating income $4,627 $4,204
====== ======
Several events occurred during the first six months of 2002 and 2001 that
affected the comparability of statement of earnings amounts. In order to isolate
the impact of these events and discuss underlying business trends, comparisons
will be given both including and excluding these events, which were as follows:
o Sale of Food Factory and Integration Costs - During the first six months
and second quarter of 2002, Kraft Foods North America, Inc. ("KFNA")
recorded pre-tax charges of $102 million and $75 million, respectively,
related to the closing of a facility and other consolidation programs in
North America. In addition, during the second quarter of 2002, Kraft Foods
International, Inc. ("KFI") recorded pre-tax charges of $17 million to
consolidate production lines and distribution networks in Latin America.
These charges were part of the previously announced $200 million to $300
million original estimate to close or reconfigure existing Kraft facilities
and integrate Nabisco. As of June 30, 2002, the aggregate pre-tax charges
to the consolidated statement of earnings to close or reconfigure Kraft
facilities and integrate Nabisco, including Kraft's voluntary early
retirement programs discussed below, were $314 million, slightly above the
original estimate. The 2002 integration related charges of $119 million
included $21 million relating to severance, $82 million relating to asset
write-offs and $16 million relating to other cash exit costs. Cash payments
relating to this charge will approximate $37 million of which $1 million
has been paid through June 30, 2002. The majority of the remaining payments
are expected to be made by December 31, 2002. In addition, during the first
quarter of 2001, KFNA recorded a pre-tax charge of $29 million on the sale
of a North American food factory. These pre-tax charges were included in
marketing, administration and research costs of the North American food and
international food segments in their respective periods.
o Voluntary Retirement Programs - In the second quarter of 2002, a voluntary
early retirement program in the international tobacco business in Germany
was announced and approximately 160 employees accepted the benefits offered
by this program. As a result, in the second quarter of 2002, a pre-tax
charge of $25 million was recorded in marketing, administration and
research costs of the international tobacco segment. In the fourth quarter
of 2001, voluntary early retirement programs were offered to certain
salaried employees in the beer and food businesses. During the first
quarter of 2002, approximately 800 employees accepted the benefits offered
by these programs. Pre-tax charges of $135 million, $7 million and $8
million were recorded in marketing, administration and research costs of
the North American food, international food and beer segments,
respectively, in the first quarter of 2002 for these voluntary retirement
programs.
o Amortization of Intangibles - On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." As
a result, the Company stopped recording the amortization of goodwill and
indefinite life intangible assets as a charge to earnings as of January 1,
2002. The Company estimates that net earnings would have been approximately
$4.6 billion and $2.5 billion in the first six months and second quarter of
2001, respectively, and diluted earnings per share ("EPS") would have been
$2.05 and $1.14, respectively, had the provisions of the new standards been
applied as of January 1, 2001.
-29-
o Businesses Previously Held for Sale - During 2001, certain Nabisco
businesses were reclassified to businesses held for sale, including
their estimated results of operations through anticipated sale dates.
These businesses have subsequen