<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 26, 1995
----------------
PHILIP MORRIS COMPANIES INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 1-8940 13-3260245
- --------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction File Number) Identification No.)
of incorporation)
120 Park Avenue, New York, New York 10017-5592
- --------------------------------------------------------------------------------
(Address of principal
executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 880-5000
--------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events.
- ------ ------------
Filed as part of this Current Report on Form 8-K are the consolidated
balance sheets of Philip Morris Companies Inc. and subsidiaries (the "Company")
as of December 31, 1994 and 1993, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1994 (the "Financial Statements"), the independent
accountants' report thereon and the statement regarding computation of ratios of
earnings to fixed charges. The Financial Statements and independent
accountants' report will be incorporated by reference in the Company's Annual
Report on Form 10-K for the year ended December 31, 1994.
Item 7. Financial Statements and Exhibits.
- ------ ---------------------------------
The Financial Statements, together with the independent accountants'
report thereon, are included herein.
(c) Exhibits
12. Statement regarding computation of ratios of earnings to
fixed charges.
23. Consent of independent accountants.
27. Financial Data Schedule.
99. Financial Statements.
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
BY /s/ HANS G. STORR
Executive Vice President and
Chief Financial Officer
DATE January 26, 1995
3
<PAGE>
EXHIBIT INDEX
Exhibit No. Page
- ----------- ----
12. Statement regarding computation of ratios of earnings
to fixed charges.
23. Consent of independent accountants.
27. Financial Data Schedule.
99. Financial Statements.
<PAGE>
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(dollars in millions)
___________________
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Earnings before
income taxes and
cumulative effect
of accounting change $8,216 $6,196 $ 8,608 $6,971 $6,311
Add (Deduct):
Equity in net earnings of
less than 50% owned
affiliates (184) (164) (107) (95) (90)
Dividends from less than
50% owned affiliates 165 151 125 72 71
Fixed charges 1,537 1,716 1,736 1,899 1,941
Interest capitalized, net
of amortization (1) (13) (3) (11) -
------ ------ ------- ------ ------
Earnings available for
fixed charges $9,733 $7,886 $10,359 $8,836 $8,233
====== ====== ======= ====== ======
Fixed charges:
Interest incurred:
Consumer products $1,317 $1,502 $ 1,525 $1,711 $1,754
Financial services and
real estate 78 87 95 83 93
------ ------ ------- ------ ------
1,395 1,589 1,620 1,794 1,847
Portion of rent expense
deemed to represent
interest factor 142 127 116 105 94
------ ------ ------- ------ ------
Fixed charges $1,537 $1,716 $ 1,736 $1,899 $1,941
====== ====== ======= ====== ======
Ratio of earnings to
fixed charges 6.3 4.6 6.0 4.7 4.2
====== ====== ======= ====== ======
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 13
to the registration statement of Philip Morris Companies Inc. (the "Company")
on Form S-14 (File No. 2-96149) and in the Company's registration statements on
Form S-3 (File Nos. 33-21033 and 33-49195) and Form S-8 (File Nos. 33-1479, 33-
1480, 33-10218, 33-13210, 33-14561, 33-17870, 33-37115, 33-38781, 33-39162,33-
40110 and 33-48781), of our report, which includes an explanatory paragraph
related to litigation pending against the Company, dated January 23,1995
(included herein), on our audits of the consolidated financial statements of
the Company, which are included in this Current Report on Form 8-K dated
January 26,1995, as indicated in item 7 herein.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
January 23, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Pages 2-6 of
the Company's consolidated financial statements for the year ended December 31,
1994 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 184
<SECURITIES> 0
<RECEIVABLES> 4,555
<ALLOWANCES> 173
<INVENTORY> 7,987
<CURRENT-ASSETS> 13,908
<PP&E> 18,254
<DEPRECIATION> 7,083
<TOTAL-ASSETS> 52,649
<CURRENT-LIABILITIES> 12,965
<BONDS> 14,975
<COMMON> 935
0
0
<OTHER-SE> 11,851
<TOTAL-LIABILITY-AND-EQUITY> 52,649
<SALES> 65,125
<TOTAL-REVENUES> 65,125
<CGS> 39,700
<TOTAL-COSTS> 39,700
<OTHER-EXPENSES> 15,976
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,233
<INCOME-PRETAX> 8,216
<INCOME-TAX> 3,491
<INCOME-CONTINUING> 4,725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,725
<EPS-PRIMARY> 5.45
<EPS-DILUTED> 5.45
</TABLE>
<PAGE>
Exhibit 99
PHILIP MORRIS COMPANIES INC.
and SUBSIDIARIES
Consolidated Financial Statements
for the period ended December 31, 1994
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
_________________________________
To the Board of Directors and Stockholders of
Philip Morris Companies Inc.:
We have audited the accompanying consolidated balance sheets of Philip Morris
Companies Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Philip Morris
Companies Inc. and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 15 to the consolidated financial statements, there is
litigation pending against the Company. The ultimate outcome of the litigation
cannot presently be determined. Accordingly, no provision for any liability
that may result upon adjudication has been made in the accompanying financial
statements.
As discussed in Note 13 to the consolidated financial statements, the Company
adopted in 1993 the method of accounting for postemployment benefits prescribed
by Statement of Financial Accounting Standards No. 112.
/S/ Coopers & Lybrand L.L.P.
New York, New York
January 23, 1995
<PAGE>
PHILIP MORRIS COMPANIES INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS, at December 31,
(in millions of dollars, except per share data)
------------
<TABLE>
<CAPTION>
ASSETS 1994 1993
---- ----
<S> <C> <C>
CONSUMER PRODUCTS
Cash and cash equivalents $ 184 $ 182
Receivables, net 4,382 3,982
Inventories:
Leaf tobacco 3,029 3,030
Other raw materials 1,943 1,695
Finished product 3,015 2,633
------- -------
7,987 7,358
Other current assets 1,355 1,286
------- -------
Total current assets 13,908 12,808
Property, plant and equipment, at cost:
Land and land improvements 743 709
Buildings and building equipment 4,834 4,600
Machinery and equipment 11,248 10,494
Construction in progress 1,429 1,127
------- -------
18,254 16,930
Less accumulated depreciation 7,083 6,467
------- -------
11,171 10,463
Goodwill and other intangible assets
(less accumulated amortization of
$3,342 and $2,727) 19,744 19,746
Other assets 2,633 2,529
------- -------
TOTAL CONSUMER PRODUCTS ASSETS 47,456 45,546
FINANCIAL SERVICES AND REAL ESTATE
Finance assets, net 4,519 4,869
Real estate held for development and sale 401 489
Other assets 273 301
------- -------
TOTAL FINANCIAL SERVICES AND
REAL ESTATE ASSETS 5,193 5,659
------- -------
TOTAL ASSETS $52,649 $51,205
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES 1994 1993
---- ----
<S> <C> <C>
CONSUMER PRODUCTS
Short-term borrowings $ 181 $ 268
Current portion of long-term debt 712 1,738
Accounts payable 3,789 3,137
Accrued liabilities:
Marketing 2,086 1,619
Taxes, except income taxes 948 860
Employment costs 926 874
Other 2,290 2,618
Income taxes 1,325 1,853
Dividends payable 708 572
------- -------
Total current liabilities 12,965 13,539
Long-term debt 14,085 14,358
Deferred income taxes 385 361
Accrued postretirement health care costs 2,164 2,031
Other liabilities 5,609 4,622
------- -------
TOTAL CONSUMER PRODUCTS LIABILITIES 35,208 34,911
FINANCIAL SERVICES AND REAL ESTATE
Short-term borrowings 604 929
Long-term debt 890 863
Deferred income taxes 3,010 2,706
Other liabilities 151 169
------- -------
TOTAL FINANCIAL SERVICES AND
REAL ESTATE LIABILITIES 4,655 4,667
------- -------
Total liabilities 39,863 39,578
Contingencies (Note 15)
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share
(935,320,439 shares issued) 935 935
Earnings reinvested in the business 17,489 15,718
Currency translation adjustments (47) (711)
------- -------
18,377 15,942
Less cost of treasury stock
(82,461,374 and 58,229,749 shares) 5,591 4,315
------- -------
Total stockholders' equity 12,786 11,627
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $52,649 $51,205
======= =======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
CONSOLIDATED STATEMENTS of EARNINGS
for the years ended December 31,
(in millions of dollars, except per share data)
------------
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- --------
<S> <C> <C> <C>
Operating revenues $65,125 $60,901 $59,131
Cost of sales 28,351 26,771 26,082
Excise taxes on products 11,349 10,280 9,036
------- ------- -------
Gross profit 25,425 23,850 24,013
Marketing, administration and research costs 15,372 15,694 13,433
Amortization of goodwill 604 569 521
------- ------- -------
Operating income 9,449 7,587 10,059
Interest and other debt expense, net 1,233 1,391 1,451
------- ------- -------
Earnings before income taxes and
cumulative effect of accounting change 8,216 6,196 8,608
Provision for income taxes 3,491 2,628 3,669
------- ------- -------
Earnings before cumulative effect
of accounting change 4,725 3,568 4,939
Cumulative effect of change in method
of accounting for postemployment benefits
(Note 13) (477)
------- ------- -------
Net earnings $ 4,725 $ 3,091 $ 4,939
======= ======= =======
Per share data:
Earnings before cumulative effect of
accounting change $ 5.45 $4.06 $5.45
Cumulative effect of accounting change (.54)
------- ------- -------
Net earnings $ 5.45 $3.52 $5.45
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY
(in millions of dollars, except per share data)
------------
<TABLE>
<CAPTION>
Earnings Currency Cost of Total
Reinvested in Translation Treasury Stockholders'
Common Stock the Business Adjustments Stock Equity
------------ ------------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1992 $935 $12,038 $ 453 $ (914) $12,512
Net earnings 4,939 4,939
Exercise of stock options and issuance
of other stock awards (5) 200 195
Cash dividends declared
($2.35 per share) (2,125) (2,125)
Currency translation adjustments (487) (487)
Stock purchased (2,509) (2,509)
Stock issued in connection with an acquisition 20 18 38
---- ------- ----- ------- -------
Balances, December 31, 1992 935 14,867 (34) (3,205) 12,563
Net earnings 3,091 3,091
Exercise of stock options and issuance
of other stock awards (51) 108 57
Cash dividends declared
($2.60 per share) (2,280) (2,280)
Currency translation adjustments (677) (677)
Stock purchased (1,218) (1,218)
Net unrealized appreciation on securities 91 91
---- ------- ----- ------- -------
Balances, December 31, 1993 935 15,718 (711) (4,315) 11,627
Net earnings 4,725 4,725
Exercise of stock options and issuance
of other stock awards (217) 324 107
Cash dividends declared
($3.03 per share) (2,623) (2,623)
Currency translation adjustments 664 664
Stock purchased (1,600) (1,600)
Change in unrealized appreciation on securities (114) (114)
---- ------- ----- ------- -------
Balances, December 31, 1994 $935 $17,489 $ (47) $(5,591) $12,786
==== ======= ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS of CASH FLOWS
for the years ended December 31,
(in millions of dollars)
------------
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
Net earnings - CONSUMER PRODUCTS $ 4,591 $ 2,960 $ 4,799
- FINANCIAL SERVICES AND REAL ESTATE 134 131 140
------- ------- -------
Net earnings 4,725 3,091 4,939
Adjustments to reconcile net earnings to operating cash flows:
CONSUMER PRODUCTS
Depreciation and amortization 1,722 1,619 1,542
Deferred income tax provision (benefit) 237 (430) 137
Losses (gains) on sales of businesses 19 (46) (162)
Cumulative effect of accounting change 774
Restructuring charge 741
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (239) 105 (57)
Inventories (387) 396 (304)
Accounts payable 582 700 (421)
Income taxes 194 121 368
Other working capital items (288) (736) 30
Other 180 203 331
FINANCIAL SERVICES AND REAL ESTATE
Deferred income tax provision 376 461 446
(Increase) decrease in real estate receivables (30) 34 68
Decrease (increase) in real estate held for development and sale 86 (2) (22)
Other (82) (64) (13)
------- ------- -------
Net cash provided by operating activities before
interest payment on zero coupon bonds 7,095 6,967 6,882
Interest payment on zero coupon bonds - financial
services and real estate (156)
------- ------- ------
Net cash provided by operating activities 6,939 6,967 6,882
CASH USED IN INVESTING ACTIVITIES
CONSUMER PRODUCTS
Capital expenditures (1,726) (1,592) (1,573)
Purchase of businesses, net of acquired cash (146) (3,161) (727)
Proceeds from sales of businesses 300 553 255
Other 28 49 (98)
FINANCIAL SERVICES AND REAL ESTATE
Investments in finance assets (582) (597) (1,577)
Proceeds from other finance assets 889 527 776
------- ------- -------
Net cash used in investing activities (1,237) (4,221) (2,944)
------- ------- -------
Net cash provided by operating and investing activities $ 5,702 $ 2,746 $ 3,938
------- ------- -------
</TABLE>
See notes to consolidated financial statements.
Continued
5
<PAGE>
CONSOLIDATED STATEMENTS of CASH FLOWS (Continued)
for the years ended December 31,
(in millions of dollars)
------------
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH USED IN FINANCING ACTIVITIES
CONSUMER PRODUCTS
Net issuance (repayment) of short-term borrowings $ 172 $ 1,220 $ (683)
Long-term debt proceeds 97 1,027 3,832
Long-term debt repaid (1,817) (2,154) (2,130)
FINANCIAL SERVICES AND REAL ESTATE
Net (repayment) issuance of short-term borrowings (325) 171 (60)
Long-term debt proceeds 185 585
Long-term debt repaid (44) (290) (208)
Purchase of treasury stock (1,532) (1,218) (2,449)
Dividends paid (2,487) (2,291) (2,028)
Issuance of shares 54 39 115
Other (20) (34)
------- ------- -------
Net cash used in financing activities (5,717) (3,530) (3,026)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents 17 (55) (17)
------- ------- -------
Cash and cash equivalents:
Increase (decrease) 2 (839) 895
Balance at beginning of year 182 1,021 126
------- ------- -------
Balance at end of year $ 184 $ 182 $ 1,021
======= ======= =======
Cash paid: Interest - Consumer products $ 1,340 $ 1,391 $ 1,362
======= ======= =======
- Financial services and real estate $ 229 $ 81 $ 70
======= ======= =======
Income taxes $ 2,449 $ 2,092 $ 2,717
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
----------
Note 1. Summary of Significant Accounting Policies:
- ----------------------------------------------------
Basis of presentation:
The consolidated financial statements include all significant subsidiaries.
Balance sheet accounts are segregated by two broad types of business.
Consumer products assets and liabilities are classified as either current
or non-current, whereas financial services and real estate assets and
liabilities are unclassified, in accordance with respective industry
practices.
Cash and cash equivalents:
Cash equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.
Inventories:
Inventories are stated at the lower of cost or market. The last-in, first-
out ("LIFO") method is used to cost substantially all domestic
inventories. The cost of other inventories is determined by the average
cost or first-in, first-out methods. It is a generally recognized
industry practice to classify the total amount of leaf tobacco inventory
as a current asset although part of such inventory, because of the
duration of the aging process, ordinarily would not be utilized within
one year.
Advertising costs:
Advertising costs are generally expensed as incurred.
Depreciation and amortization:
Depreciation is recorded by the straight-line method. Substantially all
goodwill and other intangible assets are amortized by the straight-line
method, principally over 40 years.
Derivative financial instruments:
Derivative financial instruments are used by the Company to manage its
foreign currency and interest rate exposures. Realized and unrealized
gains and losses on foreign currency swaps that are effective as hedges
of net assets in foreign subsidiaries are offset against the foreign
exchange gains or losses in a component of stockholders' equity. The
interest differential to be paid or received under the currency and
related interest rate swap agreements is recognized over the life of the
related debt and is included in interest and other debt expense, net.
Unrealized gains and losses on forward contracts that are effective as
hedges of existing assets and liabilities are deferred as adjustments to
the carrying amount of those accounts and are recognized in income as
part of those carrying amounts.
Continued
7
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Note 2. Acquisitions and Divestitures:
- ---------------------------------------
During the fourth quarter of 1994, the Company sold The All American Gourmet
Company (frozen dinners business). The proceeds from this sale were $170
million. The effect of this disposition, and other smaller acquisitions
and dispositions, were not material to the Company's 1994 results of
operations. In addition, the Company entered into an agreement to sell the
distribution business of Kraft Foodservice in 1995.
During 1993, the Company acquired Freia Marabou a.s, a Scandinavian
confectionery company, at a cost of $1.3 billion, a North American ready-
to-eat cold cereal business at a cost of $448 million and The Terry's
Group, a United Kingdom confectionery company for $295 million. In
addition, the Company acquired a 20% equity interest in Molson Breweries in
Canada and 100% of Molson Breweries U.S.A., at a cost of $320 million. The
Company also increased its investment in tobacco and food operations in
Central and Eastern Europe. The effects of these, and other smaller
acquisitions, were not material to the Company's 1993 results of
operations.
During 1993, the Company sold its ice cream business, Birds Eye frozen
vegetables business and beer can manufacturing plants. The proceeds from
the sales of these businesses aggregated $498 million.
During 1992, the Company purchased several businesses at a total cost of $765
million, consisting of cash of $727 million and $38 million in shares of
the Company's common stock. The effects of these acquisitions were not
material to the Company's 1992 results of operations.
Note 3. Restructuring:
- -----------------------
In the fourth quarter of 1993, the Company provided for the costs of
restructuring its worldwide operations. The charge related primarily to
the downsizing or closure of approximately 40 manufacturing and other
facilities. This restructuring charge reduced 1993 earnings before income
taxes, net earnings and earnings per share by $741 million, $457 million
and $.52, respectively.
Continued
8
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Note 4. Inventories:
- ---------------------
The cost of approximately 48% of inventories in 1994 and 54% of inventories in
1993 was determined using the LIFO method. The stated LIFO values of
inventories were approximately $870 million and $1.0 billion lower than the
current cost of inventories at December 31, 1994 and 1993, respectively.
Note 5. Short-Term Borrowings and Borrowing Arrangements:
- ----------------------------------------------------------
At December 31, the Company's short-term borrowings and related average
interest rates consisted of the following:
<TABLE>
<CAPTION>
1994 1993
---------------------- ----------------------
(in millions)
Average Average
Amount Year-End Amount Year-End
Outstanding Rate Outstanding Rate
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Consumer products:
Bank loans $ 215 12.0% $ 276 9.3%
Commercial paper 2,505 5.9% 2,288 3.4%
Amount reclassified
as long-term debt (2,539) (2,296)
------- -------
$ 181 $ 268
======= =======
Financial services and
real estate:
Commercial paper $ 604 5.9% $ 929 3.3%
======= =======
</TABLE>
The fair values of the Company's short-term borrowings at December 31, 1994 and
1993, based upon market rates, approximate the amounts disclosed above.
The Company maintains credit facilities with a number of lending institutions,
amounting to approximately $15.3 billion at December 31, 1994.
Approximately $15.1 billion of these facilities were unused at December 31,
1994. These facilities are used primarily to support the Company's
commercial paper borrowings and are available for acquisitions and other
corporate purposes.
The Company's credit facilities include revolving bank credit agreements
totaling $12.0 billion. An agreement for $4.0 billion expires in December
1995, and an agreement for $8.0 billion expires in 1998 enabling the
Company to refinance short-term debt on a long-term basis. Accordingly,
short-term borrowings intended to be refinanced were reclassified as long-
term debt.
Continued
9
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Certain of these facilities limit payment of cash dividends and the purchase,
redemption or retirement of common stock and/or require maintenance of a
fixed charges coverage ratio. At December 31, 1994, approximately $4.1
billion of earnings reinvested in the business was free of such
restrictions.
Note 6. Long-Term Debt:
- ------------------------
At December 31, the Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
1994 1993
---- ----
(in millions)
<S> <C> <C>
Consumer products:
Short-term borrowings, reclassified $2,539 $ 2,296
Notes, 4.75% to 9.8% (average effective
rate 8.31%), due through 2004 9,760 11,441
Debentures, 6.0% to 8.5%
(average effective rate 10.95%),
$1.3 billion face amount,
due through 2017 995 973
Foreign currency obligations:
Swiss franc, 4.44% to 7.0%
(average effective rate 6.31%),
due through 2000 942 836
Deutsche mark, 2.75% to 6.0%
(average effective rate 5.76%),
due through 1997 182 176
Other 118 98
Other 261 276
------- -------
14,797 16,096
Less current portion of long-term debt (712) (1,738)
------- -------
$14,085 $14,358
======= =======
</TABLE>
Continued
10
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
<TABLE>
<CAPTION>
1994 1993
---- ----
(in millions)
<S> <C> <C>
Financial services and real estate:
Eurodollar notes, 6.75% and 6.625% (average
rate 6.7%), due 1997 and 1999 $400 $399
Zero coupon bonds, 13.3% effective rate,
$200 million face amount, due 1994 190
Foreign currency obligations:
Swiss franc, 4.75%, due 1996 123 107
ECU notes, 9.25% and 8.5%, due
1997 and 1998 367 167
---- ----
$890 $863
==== ====
</TABLE>
Aggregate maturities of long-term debt, excluding short-term borrowings
reclassified as long-term debt, are as follows:
<TABLE>
<CAPTION>
Financial services and
Consumer products real estate
----------------- ----------------------
(in millions)
<S> <C> <C>
1995 $ 712 $ -
1996 1,886 123
1997 1,847 383
1998 2,000 184
1999 1,530 200
2000-2004 3,898
2005-2009 164
</TABLE>
The revolving credit facility under which the consumer products short-term debt
was reclassified as long-term debt expires in 1998 and any amounts then
outstanding mature.
Based on market quotes, where available, or interest rates currently available
to the Company for issuance of debt with similar terms and remaining
maturities, the aggregate fair value of consumer products and financial
services and real estate long-term debt, including current portion of long-
term debt, at December 31, 1994 and 1993 was $15.7 billion and $18.1
billion, respectively.
Continued
11
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Note 7. Capital Stock:
- -----------------------
Shares of authorized common stock are 4 billion; issued, treasury and
outstanding were as follows:
<TABLE>
<CAPTION>
Issued Treasury Outstanding
----------- ------------ ------------
<S> <C> <C> <C>
Balances, January 1, 1992 935,320,439 (15,469,198) 919,851,241
Exercise of stock options
and issuance of other
stock awards 5,037,244 5,037,244
Purchased (32,622,855) (32,622,855)
Shares issued in connection
with an acquisition 491,555 491,555
----------- ------------ -----------
Balances, December 31, 1992 935,320,439 (42,563,254) 892,757,185
Exercise of stock options
and issuance of other
stock awards 1,612,405 1,612,405
Purchased (17,278,900) (17,278,900)
----------- ------------ -----------
Balances, December 31, 1993 935,320,439 (58,229,749) 877,090,690
Exercise of stock options
and issuance of other
stock awards 4,569,731 4,569,731
Purchased (28,801,356) (28,801,356)
----------- ------------ -----------
Balances, December 31, 1994 935,320,439 (82,461,374) 852,859,065
=========== =========== ===========
</TABLE>
At December 31, 1994, 48,836,507 shares of common stock were reserved for stock
options and other stock awards under the Company's stock plans and
10,000,000 shares of Serial Preferred Stock, $1.00 par value, were
authorized, none of which have been issued.
Continued
12
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
In 1989, the Company distributed rights for each outstanding share of its
common stock. The rights are not exercisable and trade automatically with
the common stock until ten days after public announcement that any person
has acquired 10% or more of the Company's common stock or ten business days
after any person announces a tender offer for 10% or more of the Company's
common stock.
When exercisable, unless a person has acquired 10% or more of the Company's
shares, each right entitles the holder to buy from the Company one share of
common stock for the exercise price (currently $150). If the Company is
thereafter involved in a business combination, the rights will entitle
holders to buy shares of the acquiring company having a value of twice the
exercise price. If any person acquires 10% or more of the Company's common
stock, the rights will entitle holders (other than such person) to buy
shares of the Company's common stock having a market value of twice the
exercise price. Following the acquisition by any person of more than 10%
but less than 50% of the Company's shares, the Company may exchange one
share of common stock for each right (other than rights held by such
person).
The Company may redeem the rights for $.01 per right before any person acquires
10% or more of the Company's common stock. The rights expire on October
25, 1999 unless earlier redeemed or exchanged. At December 31, 1994,
984,156,946 shares of common stock were reserved for issuance upon exercise
of the rights.
Note 8. Stock Plans:
- ---------------------
Under the Philip Morris 1992 Incentive Compensation and Stock Option Plan, the
Company may grant to eligible employees stock options, stock appreciation
rights, restricted stock and annual incentive and long-term performance
cash awards. Up to 37 million shares of common stock are authorized for
grant, of which no more than 9 million shares may be awarded as restricted
stock. Stock options are granted at an exercise price no less than fair
value on the date of the grant.
At December 31, 1994 and 1993, options under the 1992 plan and previous plans
were exercisable for 27,253,547 shares and 21,723,491 shares, respectively.
Shares available to be granted at December 31, 1994 and 1993 were
20,064,190 and 23,900,470, respectively.
Continued
13
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Options activity was as follows for the years ended December 31,
<TABLE>
<CAPTION>
1994 1993 1992
-------------- ------------- ------------
<S> <C> <C> <C>
Balances, beginning of year 30,035,681 23,802,744 24,284,910
Granted 511,610 8,433,540 5,548,270
Exercised (2,394,089) (1,821,944) (5,872,571)
Cancelled (388,045) (378,659) (157,865)
-------------- ------------- ------------
Balances, end of year 27,765,157 30,035,681 23,802,744
============== ============= ============
Range of exercise prices
at year-end $10.66-$100.00 $8.67-$100.00 $7.26-$69.25
Price range of shares
exercised during
the year $8.67-$49.06 $7.26-$63.69 $6.43-$73.63
Weighted average grant
price per share $69.73 $49.09 $75.63
</TABLE>
From time to time, the Company grants shares of restricted stock to eligible
employees, giving them in most instances all of the rights of stockholders,
except that they may not sell, assign, pledge or otherwise encumber such
shares. During 1994, the Company granted 2,636,940 shares of restricted
stock to eligible U.S. based employees and also issued to eligible non-U.S.
employees rights to receive 1,034,320 like shares. Such shares and rights
are subject to forfeiture if certain employment conditions are not met. No
shares of restricted stock or rights were granted in 1993 or 1992. At
December 31, 1994, restrictions lapse as follows: 1995-41,000 shares; 1996-
304,600 shares; 1997-3,267,430 shares; 1998-50,000 shares and 2000 and
thereafter-184,000 shares.
The fair value of the 1994 shares and rights at the date of grant ($186
million) is being amortized to expense ratably over the restriction period.
At December 31, 1994 the unamortized balance of $154 million is recorded as
a reduction of earnings reinvested in the business.
Note 9. Earnings per Share:
- ----------------------------
Earnings per common share have been calculated on the weighted average number
of shares of common stock outstanding for each year, which was 867,288,869,
878,120,884 and 906,177,803 for 1994, 1993 and 1992, respectively.
Continued
14
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Note 10. Pretax Earnings and Provision for Income Taxes:
- ---------------------------------------------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
109 effective January 1, 1993. SFAS No. 109 is a modification of SFAS No.
96, which had been the accounting standard previously followed by the
Company. The effect of adoption of SFAS No. 109 was immaterial to the
Company's 1993 financial position and results of operations.
Pretax earnings and provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(in millions)
<S> <C> <C> <C>
Pretax earnings:
United States $5,781 $4,078 $6,367
Outside United States 2,435 2,118 2,241
------ ------ ------
Total pretax earnings $8,216 $6,196 $8,608
====== ====== ======
Provision for income taxes:
United States federal:
Current $1,540 $1,199 $1,630
Deferred 458 278 514
------ ------ ------
1,998 1,477 2,144
State and local 419 311 464
------ ------ ------
Total United States 2,417 1,788 2,608
------ ------ ------
Outside United States:
Current 919 830 992
Deferred 155 10 69
------ ------ ------
Total outside United States 1,074 840 1,061
------ ------ ------
Total provision for
income taxes $3,491 $2,628 $3,669
====== ====== ======
</TABLE>
At December 31, 1994 applicable United States federal income taxes and foreign
withholding taxes have not been provided on approximately $5.1 billion of
accumulated earnings of foreign subsidiaries that are expected to be
permanently reinvested abroad. If these amounts were not considered
permanently reinvested, additional deferred income taxes of approximately
$287 million would have been provided.
Continued
15
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
The effective income tax rate on pretax earnings differed from the U.S. federal
statutory rate for the following reasons:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Provision computed at U.S. federal
statutory rate 35.0% 35.0% 34.0%
Increases resulting from:
State and local income taxes, net of
federal tax benefit 3.3 3.3 3.6
Rate differences - foreign operations 1.0 0.6 1.9
Goodwill amortization 2.4 3.0 2.0
Other 0.8 0.5 1.1
---- ---- ----
Provision for income taxes 42.5% 42.4% 42.6%
==== ==== ====
</TABLE>
The tax effects of temporary differences which gave rise to consumer products
deferred income tax assets and liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
1994 1993
-------- --------
(in millions)
<S> <C> <C>
Deferred income tax assets:
Accrued postretirement and postemployment
benefits $ 925 $ 995
Accrued liabilities 542 464
Restructuring reserves 315 472
Other 754 445
------- -------
Gross deferred income tax assets 2,536 2,376
Valuation allowance (108) (62)
------- -------
Total deferred income tax assets 2,428 2,314
------- -------
Deferred income tax liabilities:
Property, plant and equipment (1,691) (1,573)
Prepaid pension costs (223) (203)
------- -------
Total deferred income tax liabilities (1,914) (1,776)
------- -------
Net deferred income tax assets $ 514 $ 538
======= =======
</TABLE>
Financial services and real estate deferred income tax liabilities are
primarily attributable to temporary differences from investments in finance
leases.
Continued
16
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Note 11. Segment Reporting:
- ----------------------------
Tobacco, food, beer, and financial services and real estate are the major
segments of the Company's operations. The Company's consolidated
operations outside the United States, which are principally in the tobacco
and food businesses, are organized into geographic regions by segment, with
Europe the most significant. Intersegment transactions are not reported
separately since they are not material.
For purposes of segment reporting, operating profit is operating income
exclusive of certain unallocated corporate expenses. See Note 2 regarding
acquisitions and divestitures and Note 3 regarding restructuring. The 1993
restructuring resulted in a reduction of tobacco, food and beer operating
profit of $245 million, $357 million and $139 million, respectively.
Substantially all goodwill amortization is attributable to the food
segment.
Identifiable assets are those assets applicable to the respective industry
segments. Reportable segment data were as follows:
Continued
17
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Data by Segment for the years ended December 31,
------------------------------------------------
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(in millions)
<S> <C> <C> <C>
Operating revenues:
Tobacco $28,671 $25,973 $25,677
Food 31,669 30,372 29,048
Beer 4,297 4,154 3,976
Financial services and real estate 488 402 430
------- ------- -------
Total operating revenues $65,125 $60,901 $59,131
======= ======= =======
Operating profit:
Tobacco $ 6,162 $ 4,910 $ 7,193
Food 3,108 2,608 2,769
Beer 413 215 258
Financial services and real estate 208 249 219
------- ------- -------
Total operating profit 9,891 7,982 10,439
Unallocated corporate expenses 442 395 380
------- ------- -------
Operating income $ 9,449 $ 7,587 $10,059
======= ======= =======
Identifiable assets:
Tobacco $ 9,926 $ 9,523 $ 9,479
Food 34,822 33,253 32,672
Beer 1,706 1,706 1,545
Financial services and real estate 5,193 5,659 5,297
------- ------- -------
51,647 50,141 48,993
Other assets 1,002 1,064 1,021
------- ------- -------
Total assets $52,649 $51,205 $50,014
======= ======= =======
Depreciation expense:
Tobacco $ 360 $ 342 $ 291
Food 539 538 507
Beer 108 140 141
Financial services and real estate 2
Capital additions:
Tobacco $ 529 $ 527 $ 460
Food 1,072 944 947
Beer 121 92 134
</TABLE>
Continued
18
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Data by Geographic Region for the years ended December 31,
----------------------------------------------------------
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(in millions)
<S> <C> <C> <C>
Operating revenues:
United States - domestic $35,936 $34,282 $35,304
- export 4,942 4,105 3,797
Europe 19,888 18,304 17,388
Other 4,359 4,210 2,642
------- ------- -------
Total operating revenues $65,125 $60,901 $59,131
======= ======= =======
Operating profit:
United States $ 7,306 $ 5,695 $ 8,146
Europe 1,914 1,689 1,764
Other 671 598 529
------- ------- -------
Total operating profit 9,891 7,982 10,439
Unallocated corporate expenses 442 395 380
------- ------- -------
Operating income $ 9,449 $ 7,587 $10,059
======= ======= =======
Identifiable assets:
United States $33,622 $34,522 $35,187
Europe 14,845 12,766 12,195
Other 3,180 2,853 1,611
------- ------- -------
51,647 50,141 48,993
Other assets 1,002 1,064 1,021
------- ------- -------
Total assets $52,649 $51,205 $50,014
======= ======= =======
</TABLE>
Continued
19
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Note 12. Pension Plans:
- ------------------------
The Company and its subsidiaries sponsor noncontributory defined benefit
pension plans covering substantially all U.S. employees. The plans provide
retirement benefits for salaried employees based generally on years of
service and compensation during the last years of employment. Retirement
benefits for hourly employees generally are a flat dollar amount for each
year of service. The Company funds these plans in amounts consistent with
the funding requirements of federal law and regulations.
Pension coverage for employees of the Company's non-U.S. subsidiaries is
provided, to the extent deemed appropriate, through separate plans, many of
which are governed by local statutory requirements. The plans provide
pension benefits that are based primarily on years of service and
employees' salaries near retirement. The Company provides for obligations
under such plans by depositing funds with trustees or purchasing insurance
policies. The Company records liabilities for unfunded foreign plans.
U.S. Plans
----------
Net pension (income) cost consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(in millions)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 130 $ 151 $ 163
Interest cost on projected benefit obligation 342 362 359
Loss (return) on assets - actual 94 (796) (345)
- deferred (loss) gain (605) 314 (119)
Amortization of net gain upon
adoption of SFAS No. 87 (28) (28) (28)
Other cost (income) 49 (47) 16
----- ----- -----
Net pension (income) cost $ (18) $ (44) $ 46
===== ===== =====
</TABLE>
During 1994, 1993 and 1992, the Company sold businesses and instituted early
retirement and workforce reduction programs affecting participants in its
pension plans. Such programs resulted in additional pension expense of $49
million and $16 million in 1994 and 1992, respectively, and curtailment
gains of $47 million in 1993.
Continued
20
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
The funded status of U.S. plans at December 31 was as follows:
<TABLE>
<CAPTION>
1994 1993
------ ------
(in millions)
<S> <C> <C>
Actuarial present value of accumulated
benefit obligation - vested $3,491 $3,702
- nonvested 270 349
------ ------
3,761 4,051
Benefits attributable to projected salaries 549 588
------ ------
Projected benefit obligation 4,310 4,639
Plan assets at fair value 5,735 6,099
------ ------
Excess of assets over projected
benefit obligation 1,425 1,460
Unamortized net gain upon
adoption of SFAS No. 87 (169) (197)
Unrecognized prior service cost 140 149
Unrecognized net gain from
experience differences (802) (882)
------ ------
Prepaid pension cost $ 594 $ 530
====== ======
</TABLE>
The projected benefit obligation at December 31, 1994, 1993 and 1992 was
determined using an assumed discount rate of 8.5%, 7.5% and 8.0%,
respectively, and assumed compensation increases of 5.0% at December 31,
1994, 4% at December 31, 1993 and 6% and 7% at December 31, 1992. The
assumed long-term rate of return on plan assets was 9% at December 31,
1994, 1993 and 1992. Plan assets consist principally of common stock and
fixed income securities.
The Company and certain of its subsidiaries sponsor deferred profit-sharing
plans covering certain salaried, nonunion and union employees.
Contributions and costs are determined generally as a percentage of pretax
earnings, as defined by the plans. Certain other subsidiaries of the
Company also maintain defined contribution plans. Amounts charged to
expense for defined contribution plans totaled $191 million, $214 million
and $229 million in 1994, 1993 and 1992, respectively.
Continued
21
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Non-U.S. Plans
- --------------
Net pension cost consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(in millions)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 72 $ 63 $ 59
Interest cost on projected benefit obligation 136 138 133
Loss (return) on assets - actual 4 (153) (78)
- deferred (loss) gain (113) 55 (21)
Amortization of net gain upon adoption of
SFAS No. 87 (1) (1) (1)
------ ----- -----
Net pension cost $ 98 $ 102 $ 92
====== ===== =====
The funded status of the non-U.S. plans at December 31 was as follows:
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
-------------------- --------------------
1994 1993 1994 1993
------ ------ ---- -----
(in millions)
Actuarial present value of
accumulated benefit
obligation - vested $1,046 $ 947 $ 606 $ 520
- nonvested 76 94 63 54
------ ------ ----- -----
1,122 1,041 669 574
Benefits attributable to
projected salaries 316 254 115 109
------ ------ ----- ----
Projected benefit obligation 1,438 1,295 784 683
Plan assets at fair value 1,532 1,408 51 44
------ ------ ----- ----
Plan assets in excess of (less
than) projected benefit
obligation 94 113 (733) (639)
Unamortized net (gain) loss
upon adoption of SFAS No. 87 (13) (14) 6 6
Unrecognized net (gain) loss
from experience differences (30) (12) 7
------ ----- ----- -----
Prepaid (accrued) pension cost $ 81 $ 69 $(739) $(626)
====== ====== ===== =====
</TABLE>
Continued
22
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
The assumptions used in 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
------------- -------------
<S> <C> <C>
Discount rates 5.0% to 13.0% 5.0% to 12.0%
Compensation increases 3.5% to 11.0% 3.5% to 11.0%
Long-term rates of
return on plan assets 5.5% to 12.0% 5.0% to 12.0%
</TABLE>
Plan assets consist primarily of common stock and fixed income securities.
Note 13. Postemployment Benefits:
- ----------------------------------
Effective January 1, 1993, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." This Statement requires the
Company to accrue the costs of postemployment benefits, other than pensions
and postretirement health care benefits, over the working lives of
employees. The Company previously had expensed the cost of these benefits,
which are principally severance and disability, when the related event
occurred.
The cumulative effect at January 1, 1993 of adopting SFAS No. 112, which was
calculated on an undiscounted basis, reduced 1993 net earnings by $477
million ($.54 per share), net of $297 million of income tax benefits.
Adoption of SFAS No. 112 did not materially reduce 1993 earnings before
cumulative effect of accounting change.
Note 14. Postretirement Benefits Other Than Pensions:
- ------------------------------------------------------
The Company accrues the estimated cost of retiree benefit payments, other than
pensions, during employees' active service periods as prescribed by SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," for its U.S. retiree benefit plans.
The Company will adopt SFAS No. 106 for its non-U.S. plans in 1995 and
estimates that the effects of adoption will not be significant. The cost
of postretirement health care benefits for the Company's non-U.S.
subsidiaries is expensed as incurred and was not significant for the years
ended 1994, 1993 and 1992.
U.S. Plans
----------
The Company and its U.S. subsidiaries provide health care and other benefits to
substantially all retired employees, their covered dependents and
beneficiaries. Generally, employees who have attained age 55 and who have
rendered at least 5 to 10 years of service are eligible for these benefits.
Certain health care plans are contributory; other benefit plans are
noncontributory.
Continued
23
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Net postretirement health care cost consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
(in millions)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 57 $ 59 $ 70
Interest cost on accumulated postretirement
benefit obligation 165 159 168
Amortization of unrecognized net loss from
experience differences 6 2
Amortization of unrecognized prior service cost (15) (16) (6)
Other cost (income) 32 (59)
---- ---- ----
Net postretirement health care cost $245 $143 $234
==== ==== ====
</TABLE>
During 1994 and 1993, the Company sold businesses and instituted early
retirement and workforce reduction programs affecting participants in its
postretirement health care plans. Such programs resulted in additional
expense of $32 million in 1994 and net curtailment and settlement gains of
$59 million in 1993.
The Company's postretirement health care plans currently are not funded. The
status of the plans at December 31 was as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
(in millions)
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $1,148 $1,279
Fully eligible active plan participants 127 182
Other active plan participants 792 644
------ ------
2,067 2,105
Unrecognized net gain (loss) from experience
differences 14 (162)
Unrecognized prior service cost 186 198
------ ------
Accrued postretirement health care costs $2,267 $2,141
====== ======
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 10.0% in 1993, 9.5% in 1994 and 9.0%
in 1995, gradually declining to 6.0% by the year 2001 and remaining at that
level thereafter. A one-percentage-point increase in the assumed health
care cost trend rate for each year would increase the accumulated
postretirement benefit obligation as of December 31, 1994 and net
postretirement health care cost for the year then ended by approximately
14% and 13%, respectively.
The accumulated postretirement benefit obligations at December 31, 1994, 1993
and 1992 were determined using assumed discount rates of 8.5%, 7.5% and
8.0%, respectively.
Continued
24
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Note 15. Contingencies:
- ------------------------
There is litigation pending against the leading United States cigarette
manufacturers alleging injury resulting from cigarette smoking or exposure
to cigarette smoking. In this litigation, plaintiffs seek compensatory
and, in some cases, punitive damages. The Company and Philip Morris
Incorporated ("PM Inc."), a wholly-owned subsidiary of the Company, are
defendants in some of these cases.
In certain of these cases, individuals seek recovery for personal injuries
allegedly caused by cigarette smoking. Among the defenses raised by
defendants to certain of this litigation is preemption by the Federal
Cigarette Labeling and Advertising Act, as amended (the "Act"). On June
24, 1992, the United States Supreme Court held that the Act, as enacted in
1965, does not preempt common law damage claims but that the Act, as
amended in 1969, preempts claims arising after 1969 against cigarette
manufacturers "based on failure to warn and the neutralization of federally
mandated warnings to the extent that those claims rely on omissions or
inclusions in advertising or promotions." The Court also held that the
1969 Act does not preempt claims based on express warranty, fraudulent
misrepresentation or conspiracy. The Court also held that claims for
fraudulent concealment were preempted except "insofar as those claims
relied on a duty to disclose...facts through channels of communication
other than advertising or promotion." (The Court did not consider whether
such common law damage claims were valid under state law.) The Court's
decision was announced by a plurality opinion. The effect of the decision
on pending and future cases will be the subject of further proceedings in
the lower federal and state courts. Additional similar litigation could be
encouraged if legislative proposals to eliminate the federal preemption
defense, pending in Congress since 1991, were enacted. It is not possible
to predict whether any such legislation will be enacted.
Certain developments in smoking and health litigation during 1994 are
summarized below.
In March 1994, a Florida state appellate court reversed a lower court ruling
and reinstated plaintiffs' class action allegations in a purported class
action against the leading United States cigarette manufacturers, in which
certain flight attendants, claiming to represent a class of 60,000
individuals, alleged personal injury caused by exposure to environmental
tobacco smoke ("ETS") aboard aircraft. The appellate court ordered the
trial court to hold further hearings on the class action allegations. The
defendants filed a request for review of this ruling by the full panel of
the appellate court. The request was denied. In October 1994, defendants
asked the Florida Supreme Court to review the March appellate court
decision. This request is pending. Concurrently, plaintiffs served notice
of a hearing in the trial court for late November 1994 attempting to secure
class certification. In December 1994, the court granted plaintiffs'
motion for class certification. Defendants are appealing this decision.
Continued
25
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
In May 1994, an action was filed in a Florida state court against the leading
United States tobacco manufacturers and others by plaintiffs alleging
injury and purporting to represent a class of certain smokers, certain
former smokers and their heirs. Plaintiffs cited the Florida appellate
reversal discussed above in support of their allegations of class action
status. Subsequently, the Company was voluntarily dismissed from this
action, which otherwise continues against the tobacco manufacturers,
including PM Inc. In October 1994, the trial court granted plaintiffs'
motion for class certification. The class, as certified, comprises "all
United States citizens and residents and their survivors who
have...suffered, presently suffer, or who have died from diseases and
medical conditions caused by their addiction to cigarettes that contain
nicotine." Defendants have appealed the class certification decision and
order to the Florida Third District Court of Appeal.
In May 1994, the State of Florida enacted a statute which purports to abolish
affirmative defenses in actions brought by the state seeking reimbursement
of Medicaid costs. The statute purports in such actions to adopt a market
share liability theory, to permit the introduction of statistical evidence
to prove causation, and to allow the state not to identify the individual
Medicaid recipients who received the benefits at issue in such action. In
June 1994, PM Inc. and others filed suit in Florida state court challenging
the constitutionality of the statute.
In March 1994, an action was filed in the United States District Court for the
Eastern District of Louisiana against the leading United States cigarette
manufacturers and others, including the Company, seeking certification of a
class action on behalf of all United States residents who allege that they
are addicted, or are the legal survivors of persons who were addicted, to
tobacco products. Plaintiffs allege that the cigarette manufacturers
manipulated the levels of nicotine in their tobacco products to make such
products addictive. In April 1994, a motion for intervention was filed by
plaintiffs who have never smoked but claim injury, on behalf of a purported
class, from their exposure to ETS resulting from the alleged addiction of
smokers to tobacco products. This motion was denied in June 1994.
Plaintiffs' motion for class certification was heard in December 1994. A
decision is pending.
Continued
26
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
In March 1994, two cases were filed in the United States District Court for the
Southern District of California against the leading United States cigarette
manufacturers and others, including the Company, on behalf of a purported
class of persons claiming to be addicted to cigarettes and who have been
prescribed treatment through the nicotine transdermal system (known as the
"nicotine patch"). Plaintiffs asserted violations of the Racketeer
Influenced Corrupt Organizations Act ("RICO") and claimed unspecified
actual and treble damages. In April 1994, the two cases, which are
virtually identical, were combined in a single amended complaint and
plaintiffs' counsel agreed to dismiss the separate second-filed case. In
July 1994, defendants filed a motion to dismiss the complaint on the
grounds that the complaint fails to state a claim. Subsequently, the
Company was dismissed from this action by stipulation of the parties; the
action continued against the tobacco manufacturers, including PM Inc. In
September 1994, the United States District Court granted defendants' motion
to dismiss the complaint with prejudice. Plaintiffs have filed a notice of
appeal, which they agreed to dismiss by stipulation of the parties dated
January 13, 1995.
In June 1994, a case was filed in the United States District Court for the
Southern District of California against the leading United States cigarette
manufacturers and others, including the Company, on behalf of a purported
class of persons claiming to be injured as a result of an alleged addiction
to cigarettes or by the alleged exposure to "second-hand" smoke. Plaintiff
asserts causes of action for fraud and deceit, negligent misrepresentation,
violation of consumer protection statutes, breach of express warranty,
breach of implied warranty, intentional infliction of emotional distress,
negligence, strict liability, and nuisance, and also seeks injunctive and
declaratory relief. The complaint has not been served on the Company.
In March 1994, an action was filed in an Alabama state court against the three
leading United States cigarette manufacturers, including PM Inc.
Plaintiff, claiming to represent all smokers who have smoked or are smoking
cigarettes manufactured and sold by defendants in the state of Alabama,
seeks compensatory and punitive damages not to exceed $48,500 per each
class member as well as injunctive relief arising from defendants' alleged
failure to disclose additives used in their cigarettes. In April 1994,
defendants removed the case to the United States District Court for the
Northern District of Alabama. The plaintiff subsequently filed a motion to
remand to an Alabama state court. The motion to remand has not been ruled
upon. A motion to stay the proceeding pending a decision on remand was
granted in September 1994.
Continued
27
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
In May 1994, an action was filed in Mississippi state court against the leading
United States cigarette manufacturers and others, including the Company, by
the Attorney General of Mississippi seeking reimbursement of Medicaid and
other expenditures by the State of Mississippi claimed to have been made to
treat smoking-related diseases. Plaintiff also seeks an injunction barring
defendants from selling or encouraging the sale of cigarettes to minors.
In June 1994, defendants removed the case to the United States District
Court for the Southern District of Mississippi. In that same month,
plaintiff moved to remand the case back to state court. Plaintiff's motion
was granted on August 17, 1994 and the case remanded to state Chancery
Court. In September 1994, the plaintiff moved to strike defendants'
challenges to the sufficiency of the complaint and the subject matter
jurisdiction of the Chancery Court. Also in September 1994, defendants
moved to transfer the case from the Chancery Court to the Circuit Court.
In October 1994, defendants moved for judgment on the pleadings. All three
motions are presently pending. In December 1994, the Governor of the State
of Mississippi filed an amicus brief in support of defendants' motions.
In August 1994, an action was filed in Minnesota state court against the
leading United States cigarette manufacturers and others, including the
Company, by the Attorney General of Minnesota and Blue Cross and Blue
Shield of Minnesota seeking reimbursement of Medicaid and other
expenditures by the plaintiffs claimed to have been made to treat smoking-
related diseases. Plaintiffs assert causes of action of negligent
performance of a voluntary undertaking, violation of Minnesota antitrust
laws, violation of consumer protection statutes, restitution, and
conspiracy. In November 1994, defendants moved to prohibit prosecution of
the case based upon the contingent fee arrangement between the State of
Minnesota and counsel for the state and one defendant moved to disqualify
plaintiffs' counsel based upon their prior representation of the moving
defendants. The court denied both motions but also denied plaintiffs'
motion to disqualify defendants' local counsel based upon counsels' prior
representation of various state agencies. A motion to dismiss one
defendant for lack of personal jurisdiction is pending.
In September 1994, an action was filed in West Virginia state court against the
leading United States cigarette manufacturers and others, including the
Company, by the Attorney General of West Virginia seeking reimbursement of
Medicaid and other expenditures by the State of West Virginia claimed to
have been made to treat smoking-related diseases. Plaintiff asserts causes
of action for restitution, public nuisance, negligent performance of a
voluntary undertaking, fraud, conspiracy and concert of action, aiding and
abetting, violation of consumer protection statutes, and violation of the
West Virginia Antitrust Act. Plaintiff also seeks an injunction barring
defendants from selling or encouraging the sale of cigarettes to minors.
In December 1994, defendants filed a motion to dismiss, claiming that the
Attorney General did not have standing to assert certain counts in the
complaint, and separate motions to dismiss the antitrust and fraud counts
of the complaint. In addition, the non-manufacturing defendants, including
the Company, have moved to dismiss based upon the absence of personal
jurisdiction.
Continued
28
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
The Commonwealth of Massachusetts has enacted legislation specifically
authorizing lawsuits similar to that described in the preceding paragraphs.
In April 1993, the Company and several of its officers were named as defendants
in the first of a number of purported shareholder class actions which have
been consolidated in the United States District Court for the Southern
District of New York. These lawsuits allege that the Company violated
federal securities laws by making false and misleading statements
concerning the effects of discount cigarettes on PM Inc.'s premium tobacco
business prior to April 2, 1993, the date upon which PM Inc. announced
revisions in its marketing and pricing strategies for its premium and
discount brands. In December 1994, defendants' motion to dismiss, heard by
the court in November 1993, was granted and the case was dismissed.
Plaintiffs are expected to appeal this decision.
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in complaints filed as purported class actions in the
United States District Courts in New York, one in the Eastern District and
two in the Southern District. In the Eastern District, plaintiffs allege
that defendants violated the federal securities laws by maintaining
artificially high levels of profitability through an inventory management
practice pursuant to which defendants allegedly shipped more inventory to
customers than was necessary to satisfy market demand. In December 1994, a
motion to dismiss by defendants was denied. Defendants will proceed to
file an answer and discovery may proceed. In the two cases in the Southern
District as described above, and in an additional purported class action
filed in September in the Southern District against the Company and certain
of its directors, plaintiffs assert that defendants violated federal
securities laws with statements and omissions regarding the allegedly
addictive qualities of cigarettes. Defendants' motions to dismiss are
pending in the latter cases. In each case, plaintiffs claim to have been
misled by defendants' knowing and intentional failure to disclose material
information.
The Company and PM Inc. believe, and have been so advised by counsel handling
the respective cases, that each has a number of valid defenses to all
pending litigation. All cases are, and will continue to be, vigorously
defended. Litigation is subject to many uncertainties, and it is possible
that some of these actions could be decided unfavorably. An unfavorable
outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation. Recently, there have been a
number of restrictive regulatory, adverse political and other developments
concerning cigarette smoking and the tobacco industry, including the
commencement of the purported class actions referred to above. These
developments generally receive widespread media attention. The Company is
not able to evaluate the effect of these developing matters on pending
litigation and the possible commencement of additional litigation.
Continued
29
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of all pending
litigation. It is possible that the Company's results of operations or
cash flows in a particular quarterly or annual period or its financial
position could be materially affected by an ultimate unfavorable outcome of
certain pending litigation. Management believes, however, that the
ultimate outcome of all pending litigation should not have a material
adverse effect on the Company's financial position.
In March 1994, the Company and PM Inc. filed an action against American
Broadcasting Companies, Inc. and others alleging injury caused by false and
defamatory statements made by defendants on various nationally televised
news programs. Among the statements giving rise to the action is
defendants' claim that tobacco companies, including PM Inc., artificially
"spike" and "fortify" their cigarettes sold in the United States with
additional nicotine. The Company and PM Inc. seek compensatory and
punitive damages totaling $10 billion. Litigation is subject to many
uncertainties and the Company and PM Inc. are unable to predict the outcome
of this matter. Pretrial discovery continues.
Note 16. Additional Information:
- ---------------------------------
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(in millions)
<S> <C> <C> <C>
Years ended December 31:
Depreciation expense $1,027 $1,042 $ 963
====== ====== ======
Rent expense $ 426 $ 380 $ 348
====== ====== ======
Research and development expense $ 435 $ 421 $ 410
====== ====== ======
Interest and other debt expense, net:
Interest expense $1,288 $1,478 $1,513
Interest income (55) (87) (62)
------ ------ ------
$1,233 $1,391 $1,451
====== ====== ======
Interest expense of financial services
and real estate operations included
in cost of sales $ 78 $ 87 $ 95
====== ====== ======
</TABLE>
Continued
30
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Note 17. Financial Services and Real Estate Operations:
- --------------------------------------------------------
Philip Morris Capital Corporation ("PMCC") is a wholly-owned subsidiary of the
Company. PMCC invests in leveraged and single-investor leases and other
tax-oriented financing transactions and third party financial instruments
and also engages in various financing activities for customers and
suppliers of the Company's subsidiaries. Additionally, PMCC is engaged
through its wholly-owned subsidiary, Mission Viejo Company, in land
planning, development and sales.
Pursuant to a support agreement, the Company has agreed to retain ownership of
100% of the voting stock of PMCC and make periodic payments to PMCC to the
extent necessary to ensure that earnings available for fixed charges equal
at least 1.25 times its fixed charges. No payments were required in 1994,
1993 or 1992.
Condensed balance sheet data at December 31 follow:
<TABLE>
<CAPTION>
1994 1993
------ ------
(in millions)
<S> <C> <C>
Assets
Finance leases $6,048 $5,314
Other investments 542 1,440
------ ------
6,590 6,754
Less unearned income and allowances 2,067 1,861
------ ------
Finance assets, net 4,523 4,893
Real estate held for development and sale 401 489
Goodwill, net of accumulated amortization 36 37
Other assets 276 284
------ ------
Total assets $5,236 $5,703
====== ======
Liabilities and stockholder's equity
Short-term borrowings $ 604 $ 929
Long-term debt 890 863
Deferred income taxes 3,010 2,706
Other liabilities 151 169
Stockholder's equity 581 1,036
------ ------
Total liabilities
and stockholder's equity $5,236 $5,703
====== ======
</TABLE>
Continued
31
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
The amounts shown above include receivables and payables with the Company and
its other subsidiaries as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
(in millions)
<S> <C> <C>
Finance assets, net $ 4 $24
Other assets $39 $20
</TABLE>
These amounts were eliminated in the Company's consolidated balance sheets.
Finance leases consist of a portfolio of investments in transportation, power
generation, manufacturing facilities and real estate. Rentals receivable
for leveraged leases represent unpaid rentals less principal and interest
on third-party nonrecourse debt.
Effective December 31, 1993, PMCC adopted the method of accounting prescribed
by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under SFAS No. 115, PMCC's investment securities, included in
other investments, are classified as available for sale and are recorded at
fair value, with unrealized gains and losses included as a component of
stockholders' equity.
Other investments also include real estate and commercial receivables, the
total estimated fair values of which, at December 31, 1994 and 1993,
approximated their carrying values. Fair values were estimated by
discounting projected cash flows using the current rates for similar loans
to borrowers with similar credit ratings and maturities.
Continued
32
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Condensed income statement data follow for the years ended December 31,
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
(in millions)
<S> <C> <C> <C>
Revenues:
Financial services $ 257 $ 276 $ 294
Real estate 236 134 146
----- ----- -----
Total revenues 493 410 440
Expenses:
Financial services 114 105 141
Real estate 190 90 93
----- ----- -----
Total expenses 304 195 234
Equity in earnings of limited
partnership investments 17 8
----- ----- -----
Earnings before income taxes
and cumulative adjustment 206 223 206
Cumulative pretax adjustment
related to leveraged leases 23
----- ----- -----
Earnings before income taxes 206 246 206
Provision for income taxes:
Current year 72 75 66
Cumulative adjustment
related to leveraged leases 40
----- ----- -----
Total provision for income taxes 72 115 66
----- ----- -----
Net earnings $ 134 $ 131 $ 140
===== ===== =====
</TABLE>
During 1993, PMCC's portfolio of leveraged leases was recalculated using a 35%
federal income tax rate, retroactive to January 1, 1993. A cumulative
adjustment was recorded that increased 1993 earnings before income taxes,
increased the provision for income taxes and decreased net earnings by $23
million, $40 million and $17 million, respectively.
Continued
33
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
---------
Note 18. Financial Instruments:
- --------------------------------
Derivative financial instruments
--------------------------------
The Company operates internationally, with manufacturing and sales facilities
in various locations around the world. Derivative financial instruments
are used by the Company for purposes other than trading, principally to
reduce exposures to market risks resulting from fluctuations in interest
rates and foreign exchange rates by creating offsetting exposures. The
Company is not a party to leveraged derivatives.
The Company has foreign currency and related interest rate swap agreements
which were executed to reduce the Company's borrowing costs and serve as
hedges of the Company's net assets in foreign subsidiaries, principally
those denominated in Swiss francs. At December 31, 1994 and 1993, the
notional principal amounts of these agreements were $1.6 billion and $1.4
billion, respectively. Aggregate maturities at December 31, 1994 were as
follows (in millions): 1996-$350; 1997-$737; 1998-$185 and 1999-$350. The
notional amount is the amount used for the calculation of interest payments
which are exchanged over the life of the swap transaction and is equal to
the amount of foreign currency or dollar principal exchanged at maturity.
Forward exchange contracts are used by the Company to reduce the effect of
fluctuating foreign currencies on short-term foreign currency denominated
intercompany transactions. At December 31, 1994 and 1993, the Company had
forward exchange contracts, with maturities of generally one month, of $1.6
billion and $1.1 billion, respectively.
Credit exposure and credit risk
-------------------------------
The Company is exposed to credit loss in the event of nonperformance by
counterparties to the swap agreements. However, such exposure was not
material at December 31, 1994, and the Company does not anticipate
nonperformance. Further, the Company does not have a significant credit
exposure to an individual counterparty.
Fair value
----------
The aggregate fair value, based on market quotes, of the Company's total debt
did not differ materially from its carrying value at December 31, 1994.
The aggregate fair value of the Company's total debt at December 31, 1993
was $19.3 billion as compared to its carrying value of $18.2 billion. The
estimated fair value of financial services and real estate other
investments, including real estate and commercial receivables, approximated
their carrying values at December 31, 1994 and 1993.
The carrying values of the foreign currency and related interest rate swap
agreements and of the forward contracts, which did not differ materially
from their fair values, were not material.
See Notes 5, 6 and 17 for additional disclosures of fair value for short-term
borrowings, long-term debt and financial instruments within the financial
services and real estate operations, respectively.
Continued
34
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Note 19. Quarterly Financial Data (Unaudited):
- -------------------------------------------------------------
<TABLE>
<CAPTION>
1994 Quarters
------------------------------------
<S> <C> <C> <C> <C>
1st 2nd 3rd 4th
-------- -------- ------- -------
(in millions, except per share data)
Operating revenues $15,500 $16,414 $16,710 $16,501
======= ======= ======= =======
Gross profit $ 5,929 $ 6,480 $ 6,579 $ 6,437
======= ======= ======= =======
Net earnings $ 1,171 $ 1,232 $ 1,230 $ 1,092
======= ======= ======= =======
Per share data:
Net earnings $ 1.34 $ 1.42 $ 1.42 $ 1.27
======= ======= ======= =======
Dividends declared $ .69 $ .69 $ .825 $ .825
======= ======= ======= =======
Market price - high $ 61 $55-3/8 $62-3/8 $64-1/2
- low $49-5/8 $47-1/4 $51-3/4 $56-1/8
</TABLE>
Continued
35
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Concluded
----------
<TABLE>
<CAPTION>
1993 Quarters
-------------------------------------
<S> <C> <C> <C> <C>
1st 2nd 3rd 4th
-------- -------- ------- -------
(in millions, except per share data)
Operating revenues $15,189 $15,789 $15,209 $14,714
======= ======== ======= =======
Gross profit $ 5,935 $ 6,277 $ 5,926 $ 5,712
======= ======== ======= =======
Earnings before
cumulative effect
of accounting change $ 1,214 $ 1,048 $ 967 $ 339
Cumulative effect of
change in method of
accounting (477)
------- -------- ------- -------
Net earnings $ 737 $ 1,048 $ 967 $ 339
======= ======== ======= =======
Per share data:
Earnings before
cumulative effect
of accounting
change $ 1.38 $ 1.19 $ 1.11 $ .38
Cumulative effect
of accounting
change (.54)
------- -------- ------- -------
Net earnings $ .84 $ 1.19 $ 1.11 $ .38
======= ======== ======= =======
Dividends declared $ .65 $ .65 $ .65 $ .65
======= ======== ======= =======
Market price - high $77-5/8 $64-3/4 $51-3/8 $59-3/8
- low $60-5/8 $ 45 $45-3/8 $45-1/2
</TABLE>
Effective January 1, 1993, the Company changed its method of accounting for
postemployment benefits. This change in accounting reduced previously
reported net earnings by $4 million in the first quarter, $5 million in the
second quarter ($.01 per share) and $4 million in the third quarter. See
Note 13.
During the fourth quarter of 1993, the Company provided $741 million pretax,
$457 million after tax, for the costs of restructuring its worldwide
operations. The pretax charge was included in marketing, administration
and research costs. See Note 3.
36
