Tobacco Documents Online

Draft March 20, 1991 Philip Morris Companies Inc. FORM 10-K Annual Report to the Securities and Exchange Commission for the Year Ended December 31, 1990

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1990 OR TRANSITION REPORT PURSUANT TO SECTION 13"OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 1.8940 Philip Morris Companies Inc. CExact name of registrant as specified in its charter) Virginia (State or other jurisdictiom of incorporation or organization) 120 Park Avenue, New York, N.Y. (Address of principal executive offices) 13-3260245 CI.R.S. Employer Identification No.) 10017 (z~p Code) Registrant's telephone number, including area code: 212-880-5000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $1 par value Name of each exchange on which registered New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes / No~ At February 1, 199 I, the aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was approximately $52.6 billion. At such date, there were 926,520,979 shares of the registrant's Common Stock outstanding. Documents Incorporated by Reference Portions of the registrant's annual report to stockholders for the year ended December 31, 1990 are incorporated in Item 1 of Part I, Part H and Part IV hereof and made a part hereof. The registrant's definitive proxy statement in connection with its annual meeting of stockholders tQ be held on April 25, 1991, filed with the Securities and Exchange Commission, is incorporated in Part III hereof and made a part hereof.

PARTI Item 1. Business. General Description of Business General Philip Morris Companies Inc. is a holding company whose principal wholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris International Inc., Kraft General Foods, Inc. and Miller Brewing Company, are engaged primarily in the manufacture and sale of various consumer products. A wholly-owned subsidiary of the Company, Philip Morris Capital Corporation ("PMCC")~ engages in various financing and investment activities. A wholly-owned real estate subsidiary of PMCC, Mission Viejo Company ("Mission Viejo"), is engaged principally in land planning, development and sales. As used herein, unless the context indicates otherwise, the term "Company" means Philip Morris Companies Inc. and its subsidiaries. The Company is the largest consumer packaged goods company in the world. Philip Morris Incorporated ("Philip Morris U.S.A."), Philip Morris International Inc. ("Philip Morris International") and their subsidiaries and affiliates are engaged primarily in the manufacture and sale of tobacco products (mainly cigarettes). Philip Morris U.S.A. is the largest cigarette company in the United States and Philip Morris International is the leading United States exporter of cigarettes. Their principal brand, Marlboro, has been the world's largest selling cigarette brand since 1972. Through its food subsidiary, Kraft General Foods, Inc. ("KGF"), the Company is the largest processor and marketer of packaged grocery, coffee, cheese and processed meat products in the United States. A wide variety of sin~ilar products is manufactured and marketed by KGF in Europe, Canada and the Asia/Pacific region. KGF also conducts foodserviee businesses and sdls food ingredients. KGF resulted from the merger on December 30, 1989, of General Foods Corporation, acquired by the Company in 1985, into Kraft, Inc., acquired by the Company on December 7, 1988. In September 1990, Jacobs Suehard AG ("Jacobs Suchard"), a Swiss-based coffee and confectionery company, became a totally-held subsidiary of KGF. Miller Brewing Company ("Miller") is the second largest brewing company in the world. Source of Funds -- Dividends Because the Company is a holding company, one of its principal sources of funds is dividends from its subsidiaries. The Company's principal wholly-owned subsidiaries currently are not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock. Industry Segments Tobacco products (of which cigarettes accounted for 41% of the Company's operating revenues in 1990 as compared with 40% in 1989), food products, beer, and financial services and real estate represent the Company's significant industry segments. Operating revenues, operating profit (together with a reconciliation to operating income) and identifiable assets attributable to each such segment for each of the last three years, set forth in a note to the consolidated financial statements on page 44 of the Company's annual report to stockholders for the year ended December 31, 1990, are incorporated herein by reference and made a part hereof. Operating profit from tobacco operations was approximately 68% of the Company's total operating profit in 1990 compared with 72% in 1989, of which Philip Morris U.S.A. and Philip Morris International contributed 51% and 17%, respectively, in 1990 and 51% and 21%, respeetiveiy, in 1989. Food products accounted for approximately 27% of the Company's operating profit in 1990 and 23% in 1989. Operating profit from tobaeoo operations in 1989 reflects a $455 million gain on the sale of Philip Morris International's equity interest in Rothmans International p.l.e, and operating profit from food operations in 1989 reflects

$179 million of restructuring charges. Beer contributed approximately 3% and financial services and real estate contributed approximately 2% of the Company's operating profit in 1990 and 1989. Narr~ive Description of Business Tobacco Products Philip Morris U.S.A. is responsible for the manufacture, marketing and sale of tobacco products in the United States (including military sales) and Philip Morals International is responsible for the manufacture, marketing and sale of such products outside the United States and for tobacco product exports from the United States. Domestic Tobacco Products In 1990, Philip Morris U.S.A.'s total sales of cigarettes amounted to 220.5 billion units, an increase of one billion units over 1989. The industry's estimated cigarette sales in the United States decreased by 0.3% in 1990 as compared to 1989, following a decrease of 6.1% in 1989 as compared to 1988. The following table sets forth, based on shipments, the industry's estimated cigarette sales in the United States, Philip Morris U.S.A.'s unit sales and its share of industry sales. Export and overseas military sales have been excluded in all eases: Ye~r~ Ended December 31 1989 ..................................... 1988 ..................................... Philip Morris Philip Morris U~;.A. Share Industry (a) U~.A. of Industry (a) (in billions of units) (%) 522.1 220.5 42.2 523.9 219.5 41.9 558.1 219.3 39.3 (a) Source: Wheat, First Securities, Inc. (John C. Maxwell, Jr.) The industry decline in 1989 reflected, in part, a decision by Philip Morris U.S.A.'s competitors to reduce trade inventories by limiting shipments. Philip Morris U.S.A.'s 1990 increase in market share is understated due to these changes in competitors' trade inventory practices, which depressed their 1989 volume while inflating Philip Morals U.S.A.'s 1989 market share. Consequently, Philip Morris U.S.A.'s 1989 market share rose 2.6 share points and its 1990 market share rose 0.3 share points. In the opinion of the Company, however, a more meaningful indicator of underlying market share growth is Philip Morris U.S.A.'s average annual gain of 1.5 share points over the two-year period. According to The Maxwell Consumer Report issued by Wheat, First Securities, Inc., Philip Morals U.S.A. has been the leading cigarette company in the United States market since 1983. Philip Morris U.S.A.'s major cigarette brands are Marlboro, Benson & Hedges lO0's, Merit, V~rginia Slims and Cambridge. Marlboro is the largest selling brand in the United States with unit sales of 135.6 billion units in 1990, approximately 26% of the United States market. In 1990 and 1989, the market share of low "tax" cigarettes, generally considered to consist of cigarettes delivering 15 mg or less of "tar" per cigarette, accounted for 57.4% and 55.5% of United States industry sales, respectively. Philip Morris U.S.A.'s low "tar" brands accounted for 42.1% of such market in 1990 and 42.8% in 1989. The low "tar" cigarette market includes sales of ultra-low "tar" cigarettes, generally considered to consist of brands delivering 6 mg or less of "tar" per cigarette, which accounted for 11.3% of United States industry sales in 1990 and 10.8% in 1989. Philip Morals U.S.A.'s ultra-low "tar" cigarette brands accounted for 32.9% of such market in 1990 and 33.4% in 1989. Sales in the price-value category, which consists of "generic" and lower-priced cigarettes, have grown markedly in recent years, constituting 19.0% of United States industry sales in 1990, up from 14.9% in 1989. Philip Morris U.S.A. commenced the manufacture and sale of its lower-priced and generic cigarette brands in 1985 with Players Lights 25s and introduced Cambridge in 1986, Alpine in 1989, and Bristol and Bucks in 1990. Philip Morris U.S.A.'s cigarette products accounted for 26.3% of the price-value market category in

1990, up from 23.0% in 1989. Sales of lower-priced and generic cigarette brands constituted 11.8% of Philip Morris U.S.A.'s unit sales in 1990, up from 8.2% in 1989. Excise taxes, sales taxes and other taxes levied by various states, counties and municipalities affecting cigarettes have been increasing. These taxes vary considerably and, when combined with the federal excise tax, may be as high as 86 cents per package of 20 cigarettes. The federal excise tax was increased by 4 cents per package of 20 cigarettes effective January 1, 1991 and will increase an additional 4 cents per package effective January 1, 1993. In the opinion of the Company, the 1991 increase could have an adverse effect on International Tobacco Products Philip Morris International estimates that world cigarette industry unit sales (excluding the United States) were approximately 4.9 trillion units in 1990. Philip Morris International's share of the world market was 7.6% in 1990 and 6.7% in 1989. Unit sales of its principal brand, Marlboro, increased 13.2% in 1990 over 1989 to 206.9 billion units, accounting for 4.3% of the world cigarette market (excluding the United States). Philip Morris International has cigarette market shares of at least 15% m and in a number of instances substantially more than 15% -- in more than 25 countries, including Argentina, Australia, Finland, France, Germany, Hong Kong, Italy, Mexico, Saudi Arabia and Switzerland. Philip Morris International is the leading United States exporter of cigarettes. It exported 97.3 billion units in 1990, an increase of 24.8% from 1989. Prices in many of Philip Morris International's markets are government-controlled, and excise and other tax increases, higher costs and government price restraints in a number of markets have restricted, and may continue to restrict, the sales and income of Philip Morris International. Smoking and Health and Related Matters Reports with respect to the alleged harmful physical effects of cigarette smoking have been publicized for many years and, in the opinion of the Company, have had and may continue to have an adverse effect upon tobacco industry sales. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports purporting to link cigarette smoking with a broad range of health haT~rds, including various types of cancer, coronary heart disease and chronic lung disease, and recommending various govexnmental measures to reduce the incidence of smoking. The two most recent reports, released in 1989 and 1990, repeat many of the earlier conclusions regarding the alleged health hazards of smoking, recommend additional restrictions on smoking, and focus upon the purported addictive nature of cigarettes, the prevalence of smoking among different population segments and the decrease in smoking in the United States. Federal legislation requires cigarette manufacturers and importers to include the following warning statements in rotating sequence on cigarette packages and in advertisements: SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer, Heart Disease, Emphysema, And May Complicate Pregnancy; SURGEON GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious Risks to Your Health; SURGEON GENERAL'S WARNING: Smoking By Pregnant Women May Result in Fetal Injury, Premature Birth, And Low Birth Weight; and SURGEON GENERAL'S WARNING: Cigarette Smoke Contains Carbon Monoxide. Such legislation also covers the size and format of warnings on cigarette packages and in cigarette advertising, and prescribes a modified version of the warnings for outdoor billboard advertisements. In addition to the warning statements, cigarette advertising in the United States must disclose the average "tar" and nicotine deliveries of the advertised brand or variety. Cigarette manufacturers and importers are also required to provide annually to the Secretary of Health and Human Services a list of ingredients added to tobacco in the manufacture of cigarettes, and the Secretary is directed to report to Congress concerning the health effects, if any, of such ingredients. Most of Philip Morris International's

cigarettes are sold in countries where warning statement requirements for cigarette packages have been adopted or will be required by January I, 1992. Studies with respect to the alleged health risk to nonsmokers of diluted and modified cigarette smoke, often referred to as environmental tobacco smoke ("ETS"), have 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. The United States Environmental Protection Agency is in the process of drafting a report regarding the claimed risks of ETS. Adverse publicity on ETS has contributed to the enactment of legislation that restricts or bans cigarette smoking in public places and places of employment. Another federal statute established the Interagency Committee on Cigarette and Little Cigar Fire Safety to direct the work of a Technical Study Group created by the same statute and to make policy recommendations to Congress. The Technical Study Group, which consisted of representatives of designated government ageucies, the tobacco and furniture industries and various other organizations, studied the feasibility and consequences of developing cigarettes and little cigars that would have a minimum propensity to ignite upholstered furniture or mattresses. Based on this research, the Interagency Committee submitted its final technical report to Congress in December 1987, which contained the conclusion of the Technical Study Group that it is technically feasible and may be commercially feasible to develop cigarettes that will have a significantly reduced propensity to ignite upholstered furniture and mattresses. The Interagency Committee recommended that legislation be adopted to facilitate additional research guided by a new scientific Advisory Committee. In August 1990, legislation was enacted establishing a Technical Advisory Group to continue the research. The Technical Advisory Group has up to three years to report to Congress on its findings. Since 1971, television and radio advertising of cigarettes has been prohibited in the United States and prohibited or restricted in many other countries. Enactments by regulatory agencies and other governmental authorities have restricted or prohibited smoking areas aboard certain common carriers, in certain public places and in places of employment. Smoking is currently banned on all commercial airline flights, regardless of duration, within and between the 48 contiguous states, the District of Columbia, the U.S. Virgin Islands and Puerto Rico and within Alaska and Hawaii, and on all commercial flights to or from Alaska and Hawaii scheduled for less than six hours. Numerous other legislative and regulatory measures have been proposed at the federal, state and local levels which, if implemented, could adversely affect Philip Morris U.S.A.'s cigarette business. The most significant of such measures would increase federal, state or local taxes on cigarettes, restrict the sale and distribution of cigarettes through limitations on points of sale, further restrict cigarette advertising and promotion, and further restrict or prohibit smoking aboard common carriers or in public places or places of employment. A number of foreign countries have also taken steps to restrict or prohibit cigarette advertising and promotion, to increase taxes on cigarettes and to discourage cigarette smoking. In some eases, such restrictions are more onerous than those in the United States. Litigation is pending against the leading United States cigarette manufacturers seeking compensatory and, in some eases, punitive damages for cancer and other health effects alleged to have resulted from cigarette smoking. At; of March 1, 1991, 47 such actions against the leading United States cigarette manufacturers were pending, as compared to 50 as of December 31, 1990 and 59 as of December 31, 1989. Philip Morris U.S.A. was a defendant in 23 actions pending as of March I, 1991, as compared to 24 as of December 31, 1990 and 32 as of December 31, 1989. Among the defenses to this litigation raised by Philip Morris U.S.A. is preemption by the Federal Cigarette Labeling and Advertising Act (the "Cigarette Labeling Act") of some or all such claims arising after 1965. Five federal courts of appeals have hdd that the Cigarette Labeling Act bars at least some of such claims. Recently, the Supreme Court of New Jersey and one of the Texas intermediate courts of appeals held that the Cigarette Labeling Act does not limit the theories of liability that can be asserted against cigarette manufacturers. [This contliet among lower court decisions will be resolved by the United States Supreme

Court, which has accepted the ease of Cipollone v. Liggett Group Inc., et aL for review.] [On March ,1991, the United States Supreme Court denied the plainti~s petition for certiorari in the case of Cipollone v. Liggett Group Inc., et al., one of the federal court of appeals decisions finding preemption of certain claims by the Cigarette Labeling Act.] It is not possible to predict the outcome of this litigation. Litigation is subject to many uncertainties and it is possible that some of these actions could be decided unfavorably to Philip Morris U.S.A. [An adverse decision on the preemption defense by the United States Supreme Court could adversely affect pending litigation and could encourage the commencement of additional similar litigation.] [Adverse decisions by other courts on the preemption defense could adversely affect pending litigation and could encourage the commencement of additional similar litigation.] All actions are and will be vigoronsly defended. Management does not believe that this litigation will have a material adverse effect upon the financial condition of the Company. Distribution, Competition and Raw Materials Philip Morals U.S.A. sells its tobacco products principally to wholesalers (including distributors), large retail organizations, vending machine operators and the armed services. Philip Morals International markets cigarettes and other tobacco products worldwide through subsidiaries, affiliates, export sales organizations, licensees and other entities with which it has contractual arrangements. The market for tobacco products is highly competitive, with product quality, pdee, marketing and packaging constituting significant methods of competition. Promotional activities include, in certain instances, allowances, the use of incentive items, price reductions and other discounts. Philip Morris U.S.A. and Philip Morris International extensively advertise and promote their tobacco products through various media, although television and radio advertising of cigarettes is prohibited in the United States and is prohibited or restricted in many other countries. Philip Morris U.S.A. and Philip Morris International purchase leaf tobacco of various grades and types each year, primarily at auction. The tobacco is then graded, cleaned, stemmed and redried prior to its storage for aging up to three years. Large quantities of leaf tobacco inventory are maintained to support cigarette manufacturing requirements. Tobacco is an agricultural commodity subject to United States government controls, including the tobacco pdee support and production adjustment programs administered by the United States Department of Agriculture (the "USDA"). Food Products KGF consists of seven operating units: (i) General Foods USA, responsible for General Foods domestic packaged grocery products and coffee businesses; (ii) Kraft USA, responsible for Kraft domestic dry grocery foods and refrigerated foods businesses; (iii) Kraft General Foods International, responsible for all of the Company's food, coffee and coufeetionery businesses outside the United States, Canada and Latin America; (iv) Kraft General Foods Canada, responsible for all General Foods and Kraft Canadian businesses; (v) Oscar Mayer Foods, responsible for domestic processed meat and poultry products businesses; (vi) Kraft General Foods Frozen Products, responsible for domestic frozen foods and cultured dairy products businesses; and (vii) Kraft General Foods Commercial Products, responsible for domestic foodserviee and food ingredients businesses. GE~T_aXtAL FOODS USA. General Foods USA is one of the largest processors and marketers of packaged grocery products and is the largest processor and marketer of coffee in the United States. Its principal brands include Maxwell House, Yuban, Sanka, Brim, Maxim and General Foods International coffees, Jell-O desserts, Post cereals, Log Cabin syrups, Kool-Aid, Tang, Crystal I_4"ght and Country Time beverages, Entenraann's and Freihofer's bakery products, including the Entenmann's fat free and cholesterol free bakery line, Oroweat specialty breads, Minute dee, Stove Top stuita.ng, Shake'n Bake coatings, and Good Seasons salad dressings.

K~FT USA. Kraft USA's principal products include cheese and related products; vegetable oil-based products, such as salad dressings and related products; margarine and margarine-type spreads; barbecue sauce; confections; fruit spreads, jellies and preserves; packaged pasta dinners; and dips. Kraft USA has recently introduced low fat cheese and nonfat process cheese, salad dressing and mayonnaise dressing products. In addition to Kraft, its principal brands include Velveeta, Cracker Barrel and Churny cheeses, Miracle Whip salad dressing, Philadelphia Brand cream cheese, Cheez Whiz pasteurized process cheese spread, Seven Seas pourable dressings, Parkay and Chiffon margarines and Bull's-Eye barbecue sauce. KRAFT GENERAL FOODS INTERNATIONAL. Kraft General Foods International is responsible for manufacturing and marketing a wide variety of packaged grocery, coffee, confectionery, cheese and processed meat products in Europe and the Asia/Pacific region, and for the Company's international foodservice business. International brands include a wide variety of the products sold by General Foods USA and Kraft USA, as well as Milka, Tobler, Toblerone, Suchard and Cbte d'Or confections, Carte Noire, Gevalia, Grand'Mere, Hag, Jaoobs Caf~, Jacques Vabre, Kenco, Night & Day and Saimaza coffees, Negroni and Simmenthal meats, Mir~coli pasta dinners, Dairylea processed cheese, Vegemite sandwich spread, and Hollywood chewing gum. The international foodservice business markets coffee and grocery products to restaurants, airlines, schools and other institutions. Effective January 1, 1991, KGF transferred its food businesses in Latin America to Philip Morris International. These businesses manufacture and market a wide variety of food products, including a number of the products sold by General Foods USA and Kraft USA as well as Kibon ice cream. KRAFt GENERAL FOODS CANADA. Kraft General Foods Canada is responsible for manufacturing and marketing packaged grocery, coffee and cheese products. Major brand names include Kraft, Philadelphia Brand, Jell-O, Post, Kool-Aid, Baker's, Tang, Miracle Whip, Parkay, Cool Whip, Sanka, Maxwell House and Magic Moments. In addition, Hostess and Frito-Lay products are manufactured and sold pursuant to a partnership with another company. The Canadian foodservice business markets coffee, salad dressings and food condiments to restaurants and other institutions. OSCAR MAYER FOODS. Oscar Mayer Foods is one of the largest processors and marketers of processed meat and poultry products sold in the United States. Its principal brands include Oscar Mayer luncheon meats, hot dogs, bacon, ham and other meat products; Louis Rich turkey cuts, luncheon meats and other products; Louis Kemp Seafood Company surimi products; Lunchables lnnch combinations and Claussen pickles. KRAFT GENERAL FOODS FROZEN PRODUCTS. Kraft General Foods Frozen Products is responsible for the manufacture and marketing of a variety of products, including the following brands: The Budget Gourmet frozen entrees, side dishes and dinners, Zappetites microwavable frozen sandwiches, Lender's frozen bagels, Breyers ice cream and yogurt, Sealtest frozen desserts and cultured dairy products, Light n' Lively ice milk and cultured dairy products, Knudsen cultured dairy products, Frusen Gl'ddj~ super-premium ice cream products, Birds Eye frozen foods, Tombstone frozen pizza, Jell-O frozen novelties, Cool Whip toppings and Breakstone's cultured dairy products. Kraft General Foods Frozen Products has recently introduced nonfat frozen desserts and nonfat cultured dairy products. KRAFT GF2qERAL FOODS COMMERCIAL PRODUC'rS. Kraft General Foods Commercial Products consists of domestic Foodservice and Food Ingredients businesses. Kraft Foodservicc is the second largest broadlinc distributor of foodscrvice products, including food products and supplies manufactured by others, in the United States. Kraft Food Ingredients manufactures certain private label products as well as a variety of industrial food products for sale to other food processors, which products include edible oils, shortenings, whey products, non,airy creamers, confection products, cheese flavorings, seasonings and cheese analogs.

Distribution, Competition and Rm~, Materials Sales of products of the General Foods USA, Kraft USA, Kraft General Foods Canada, Oscar Mayer Foods and Kraft General Foods Frozen Products operating units are generally made on the basis of orders by supermarket chains, wholesalers, buying cooperatives, distributors and individual stores. Substantially all products axe distributed through retail food outlets. Dry grocery products are shipped to, or picked up by, customers from plants and distribution centers. Products are also shipped to customers from a number of satellite warehouses and other facilities. Frozen and refrigerated products are shipped from manufacturing locations and from intermediate public cold storage facilities. Fresh baked goods are delivered daily to depots where they are then distributed to the retail trade. Selling efforts are assisted by national and regional advertising on television and radio, and in magazines and newspapers, as well as by sales promotions, product displays, informative material offered to customers and other promotional activities. Regional foodservice distribution centers support the operations of the Foodservice business of Kraft General Foods Commercial Products. Each Kraft Foodservice distribution center has a warehouse, sales office and fleet of trucks to distribute products to customers in its district. The products of the Food Ingredients business of Kraft General Foods Commercial Products are distributed to food processors, foodservice operators and distributors and retail food stores. Sales are made primarily through the Kraft Food Ingredients sales force, but also to independent brokers. Kraft Food Ingredients maintains warehouse and distribution centers at each of its main manufacturing facilities. Advertising is primarily through promotional programs, including price reductions, allowances and functional discounts. Products of Kraft General Foods International are sold primarily through sales offices and agents abroad. The majority of the sales of this operating unit are derived from Europe. European regional distribution is coordinated from headquarters offices located in Munich, Germany and Zurich, Switzerland, and through facilities located throughout Europe. The Asia/Pacific area operations are headquartered in Hong Kong. World trade operations are directed from the Kraft General Foods International headquarters in Rye Brook, New York. Advertising is tailored by product and country to reach targeted audiences. KGF is subject to highly competitive conditions in virtually all aspects of its business. Competitors include large national and international companies and numerous local and regional companies. Its food products also compete with generic products and private label products of food retailers, wholesalers and cooperatives. In the United States, KGF is the leading or a leading seller of cheese, viscous salad products, coffee, luncheon meats and other processed meat and poultry products, pourable dressings, barbecue sauce, packaged dinners, bakery products, frozen bagels, mayonnaise, margarine, jellies and preserves, syrups, ice cream, powdered beverages, frozen pizza and entrees, cottage cheese, sour cream, yogurt and refined oils. KGF competes primarily with respect to product quality, service, marketing, advertising and price. KGF is amajor purchaser of green coffee beans, milk, cheese, wheat, cocoa, dee, eggs, livestock, poultry, meat cuts, shortening, vegetable oil, aspartame, flour, fruits and berries, sugar, corn syrup, herbs and spices, and tomato products. KGF continuously monitors worldwide supply and cost trends of these commodities to enable it to take appropriate action to obtain ingredients needed for production. KGF purchases from outside sources all of its milk requirements and a substantial part of its cheddar cheese requirements. Such purchases are made principally from cooperatives and individual producers, pursuant to both contractual relationships and informal arrangements. The prices for United States milk purchases are based upon or substantially influenced by the floor prices established by the milk price support program administered by the USDA and/or state government agencies. The prices paid for cheese in the United States are based upon or substantially influenced by weekly quotations on the National Cheese Exchange in Green Bay, Wisconsin. Such quotations generally reflect the USDA-set support price at which the Commodity Credit Corporation ("CCC"), an arm of the USDA, will purchase cheese, which price, in turn, is based upon the floor prices established by the milk price support program. See "Regulation" below.

The most significant cost item in coffee products is green coffee beans, which are purchased on world markets. Green coffee bean prices are affected by the quality and availability of supply, trade agreements among producing and consuming nations, the unilateral policies of the producing nations, changes in the value of the United States dollar in relation to certain other currencies, and consumer demand for coffee products. Green coffee bean prices have moderated as a result of the July 1989 expiration of the International Coffee Agreement. Governmental discussions between producer and consumer nations have taken place and are continuing on an informal basis. These discussions may result in a formal agreement which could affect market pdces. Livestock (principally hogs), poultry (turkey) and meat cuts (pork, i~eef, turkey and chicken) represent the principal raw materials used in manufacturing Oscar Mayer and Louis Rich branded products. The price paid for these raw materials is the major factor in the cost of these products. Livestock and meat cut prices are affected by market demand and supply. Poultry prices are principally affected by the cost of turkey- growing operations. Meats for Oscar Mayer processed products are primarily provided by bulk market purchases. KGF is also a major user of packaging materials, which are purchased from many suppliers. The prices paid for other food product raw materials generally reflect external forces, among which weather conditions and commodity market activities are significant. Although the prices of the principal raw materials required by KGF can be expected to fluctuate as a result of government actions and/or market forces (which would directly affect the cost of products and value of inventories), such materials are generally in adequate supply and available from numerous sources. Research and Development Research and development activities support KGF operations through applied and fundamental technical and market research. The staffs of the technology centers in Glenview, Illinois, Tarrytown, New York and Memphis, Tennessee work with operating personnel to develop new products, product line extensions (including fat free and cholesterol free products), processes and packaging, to improve established products and the economies of production, and to find uses for by-products. These staffs also maintain a liaison with government and university laboratories. In addition, Kraft General Foods International maintains research and development centers in Europe and Australia. Regulation Almost all of KGF's domestic food products (and packaging materials therefor) are subject to regulations administered by the Food and Drug Administration ("FDA"), with the exception of products containing meat and poultry products, which are regulated by the USDA. Among other things, the FDA enforces statutory prohibitions against misbranded and adulterated foods, establishes ingredients and/or manufacturing procedures for certain standard foods, establishes standards of identity for food, determines the safety of food substances, and establishes labeling standards for food products. FDA regulations may, in certain instances, affect the ability of KGF's domestic operating units to develop and market new products and to utilize technological innovations in the processing of existing products. In addition, various states regulate the business of KGF's domestic operating units by licensing dairy plants, enforcing federal and state standards of identity for food, enforcing federal standards and their own standards for fluid milk products, grading food products, inspecting plants~ regulating certain trade practices in connection with the sale of dairy products, and imposing their own labeling requirements on food products. The prices paid for grade-A raw milk in the United States are controlled in most areas by Federal Milk Marketing Orders or state regulatory agencies. Such orders and agencies establish basic minimum prices, with adjustments based upon usage and geographic location. In some areas, the prices for raw milk also include additional premiums charged by suppliers. In certain states, governmental agencies affect the wholesale price of dairy products.