<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8940
Philip Morris Companies Inc.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Virginia 13-3260245
________________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Park Avenue, New York, New York 10017
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 880-5000
______________________________
________________________________________________________________________________
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
________ ________
At April 28, 1995, there were 844,823,375 shares outstanding of the
registrant's common stock, par value $1 per share.
<PAGE>
PHILIP MORRIS COMPANIES INC.
TABLE OF CONTENTS
<TABLE>
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Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets as at
March 31, 1995 and December 31, 1994 3 - 4
Condensed Consolidated Statements of Earnings for the
Three Months Ended March 31, 1995 and 1994 5
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 1994
and the Three Months Ended March 31, 1995 6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1995 and 1994 7 - 8
Notes to Condensed Consolidated Financial Statements 9 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 17 - 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 25
Item 4. Submission of Matters to a Vote of Security Holders. 25
Item 6. Exhibits and Reports on Form 8-K. 26
Signature 27
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- ------------
<S> <C> <C>
ASSETS
CONSUMER PRODUCTS
Cash and cash equivalents $ 257 $ 184
Receivables, net 4,973 4,382
Inventories:
Leaf tobacco 2,975 3,029
Other raw materials 1,966 1,943
Finished product 3,121 3,015
------- -------
8,062 7,987
Other current assets 1,345 1,355
------- -------
Total current assets 14,637 13,908
Property, plant and equipment, at cost 18,541 18,254
Less accumulated depreciation 7,306 7,083
------- -------
11,235 11,171
Goodwill and other intangible assets
(less accumulated amortization of
$3,514 and $3,342) 19,846 19,744
Other assets 2,642 2,633
------- -------
Total consumer products assets 48,360 47,456
FINANCIAL SERVICES AND REAL ESTATE
Finance assets, net 4,460 4,519
Real estate held for development and sale 401 401
Other assets 266 273
------- -------
Total financial services and
real estate assets 5,127 5,193
------- -------
TOTAL ASSETS $53,487 $52,649
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
Continued
-3-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
--------- ------------
<S> <C> <C>
LIABILITIES
CONSUMER PRODUCTS
Short-term borrowings $ 148 $ 181
Current portion of long-term debt 931 712
Accounts payable 2,528 3,789
Accrued taxes, except income taxes 1,370 948
Accrued marketing 1,988 2,086
Other accrued liabilities 3,064 3,216
Income taxes 1,805 1,325
Dividends payable 703 708
------- -------
Total current liabilities 12,537 12,965
Long-term debt 14,695 14,085
Deferred income taxes 340 385
Accrued postretirement health care costs 2,192 2,164
Other liabilities 5,760 5,609
------- -------
Total consumer products liabilities 35,524 35,208
FINANCIAL SERVICES AND REAL ESTATE
Short-term borrowings 410 604
Long-term debt 926 890
Deferred income taxes 3,019 3,010
Other liabilities 198 151
------- -------
Total financial services and
real estate liabilities 4,553 4,655
------- -------
Total liabilities 40,077 39,863
Contingencies (Note 2)
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share
(935,320,439 shares issued) 935 935
Earnings reinvested in the business 18,085 17,489
Currency translation adjustments 381 (47)
------- -------
19,401 18,377
Less cost of treasury stock
(88,990,365 and 82,461,374 shares) 5,991 5,591
------- -------
Total stockholders' equity 13,410 12,786
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $53,487 $52,649
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1995 1994
------- -------
<S> <C> <C>
Operating revenues $16,517 $15,500
Cost of sales 6,833 6,798
Excise taxes on products 3,217 2,773
------- -------
Gross profit 6,467 5,929
Marketing, administration and research costs 3,673 3,426
Amortization of goodwill 146 141
------- -------
Operating income 2,648 2,362
Interest and other debt expense, net 318 319
------- -------
Earnings before income taxes
and cumulative effect of
accounting changes 2,330 2,043
Provision for income taxes 967 872
------- -------
Earnings before cumulative effect
of accounting changes 1,363 1,171
Cumulative effect of changes in method of
accounting (Note 3) (28)
------- -------
Net earnings $ 1,335 $ 1,171
======= =======
Weighted average number of shares 850 877
======= =======
Per share data:
Earnings before cumulative effect of
accounting changes $ 1.60 $ 1.34
Cumulative effect of accounting changes (.03)
------- -------
Net earnings $ 1.57 $ 1.34
======= =======
Dividends declared $ .825 $ .69
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1994 and
the Three Months Ended March 31, 1995
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Earnings Total
Reinvested Currency Cost of Stock-
Common in the Translation Treasury holders'
Stock Business Adjustments Stock Equity
------ ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994 $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
($3.03 per share) (2,623) (2,623)
Currency translation adjustments 664 664
Stock purchased (1,600) (1,600)
Unrealized appreciation
(depreciation) on securities (114) (114)
---- ------- ----- ------- -------
Balances, December 31, 1994 935 17,489 (47) (5,591) 12,786
Net earnings 1,335 1,335
Exercise of stock options
and issuance of other stock
awards (7) 81 74
Cash dividends declared
($.825 per share) (700) (700)
Redemption of stock rights (9) (9)
Currency translation adjustments 428 428
Stock purchased (481) (481)
Unrealized appreciation
(depreciation) on securities (23) (23)
---- ------- ----- ------- -------
Balances, March 31, 1995 $935 $18,085 $ 381 $(5,991) $13,410
==== ======= ===== ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
-6-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1995 1994
------- ------
<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $ 1,314 $1,135
- Financial services and real estate 21 36
------- ------
Net earnings 1,335 1,171
Adjustments to reconcile net earnings to
operating cash flows:
CONSUMER PRODUCTS
Cumulative effect of accounting changes 46
Depreciation and amortization 432 398
Deferred income tax provision 82 25
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (727) (780)
Inventories (132) (73)
Accounts payable (1,133) (634)
Income taxes 440 531
Other working capital items (42) 133
Other 17 65
FINANCIAL SERVICES AND REAL ESTATE
Deferred income tax provision 23 42
Decrease in real estate receivables 19 5
(Increase) decrease in real estate held for
development and sale (1) 6
Other 48 (15)
------- ------
Net cash provided by operating activities 407 874
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
CONSUMER PRODUCTS
Capital expenditures (308) (266)
Purchases of businesses, net of acquired cash (5) (25)
Proceeds from sales of businesses 691 56
Other (45) 23
FINANCIAL SERVICES AND REAL ESTATE
Investments in finance assets (26) (48)
Proceeds from other finance assets 38 711
------- ------
Net cash provided by
investing activities 345 451
------- ------
Net cash provided by operating and
investing activities $ 752 $1,325
------- ------
</TABLE>
See notes to condensed consolidated financial statements.
Continued
-7-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1995 1994
----- -------
<S> <C> <C>
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
CONSUMER PRODUCTS
Net issuance of short-term borrowings $ 732 $ 354
Long-term debt proceeds 19 20
Long-term debt repaid (101) (663)
FINANCIAL SERVICES AND REAL ESTATE
Net repayment of short-term borrowings (194) (271)
Purchase of treasury stock (478) (177)
Dividends paid (706) (570)
Issuance of shares 53 10
Other (3)
----- -------
Net cash used in
financing activities (675) (1,300)
Effect of exchange rate changes on cash and
cash equivalents (4) 2
----- -------
Cash and cash equivalents:
Increase 73 27
Balance at beginning of period 184 182
----- -------
Balance at end of period $ 257 $ 209
===== =======
</TABLE>
See notes to condensed consolidated financial statements.
-8-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies:
_____________________________
The interim condensed consolidated financial statements of Philip Morris
Companies Inc. (the "Company") are unaudited. It is the opinion of the Company's
management that all adjustments necessary for a fair statement of the interim
results presented have been reflected therein. All such adjustments were of a
normal recurring nature. Operating revenues and net earnings for any interim
period are not necessarily indicative of results that may be expected for the
entire year. First quarter results should not be considered indicative of full-
year results. See Management's Discussion and Analysis on page 17.
These statements should be read in conjunction with the consolidated
financial statements and related notes which are incorporated by reference in
the Company's annual report to stockholders for the year ended December 31,
1994.
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.
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 assets, liabilities and commitments are deferred and
are recognized in income as the related transaction is realized. (See page 23
in the Management's Discussion and Analysis of Financial Condition and Results
of Operations.)
Note 2. 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.
Continued
-9-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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"). In June 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 and 1995
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 was denied in April 1995 by the Florida
Supreme Court. In December 1994, the court granted plaintiffs' motion for class
certification. Defendants have appealed the class certification decision and
order to the Florida Third District Court of Appeals.
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 Appeals.
Continued
-10-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 February 1995, PM Inc. and one other party
petitioned the Supreme Court of Florida, in a separate action, to prohibit two
purported state agencies from filing and maintaining an action against the
tobacco industry under the statute. Also in February 1995, the State of Florida
filed an action against the tobacco industry under the same statute, attempting
to recover certain Medicaid costs. In April 1995, the Supreme Court denied PM
Inc.'s February petition. Also in April 1995, the trial court stayed the
State's action against the tobacco industry until July 1995. Defendants have
filed a motion to dismiss the case. As of May 5, 1995, legislation repealing
the statute had been passed in both Houses of the Florida Legislature.
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, and in February 1995, the court conditionally certified
the class for certain issues, including fraud, breach of warranty, intentional
tort, negligence, strict liability, consumer protection and punitive damages.
However, the court declined to certify a class on the issues of injury in fact,
causation, reliance, compensatory damages, certain affirmative defenses and on
plaintiffs' claim for medical monitoring. Defendants, including the Company,
have asked the District Court to certify its class certification decision for
immediate appeal to the United States Court of Appeals for the Fifth Circuit. A
hearing has been scheduled for May 10.
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 in January
1995. The United States Court of Appeals for the Ninth Circuit entered an order
dismissing the appeal in February 1995.
Continued
-11-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 was never served on the Company. Plaintiffs' voluntary notice of
dismissal of this action, without prejudice, was entered by the Court in March
1995.
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.
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 in August
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, including PM Inc., moved for
judgment on the pleadings. In February 1995, the latter motion was denied by
the court and plaintiffs' motion to strike certain of defendants' challenges to
the sufficiency of the complaint and subject matter jurisdiction of the Chancery
Court was granted.
In August 1994, an action was filed in Minnesota state court against the
leading United States cigarette manufacturers and others 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, as are various motions brought by plaintiffs (to
dismiss certain defenses asserted by defendants) and defendants (to dismiss all
claims of Blue Cross and several claims brought by the State), which were heard
by the Court in March 1995.
Continued
-12-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
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 consumer 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. In May 1995, the Court
dismissed eight of ten counts of the complaint for lack of standing. The Court
did not rule on the antitrust and consumer fraud counts.
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 have filed an appeal, which is pending.
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 have filed an answer denying the material allegations of the
complaint and discovery is proceeding. 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.
In March 1995, an antitrust action was filed in California State Court
against the leading United States cereal manufacturers, including the Post
Division of Kraft Foods, Inc., by plaintiffs purporting to represent all
California residents who purchased defendants' cereal products for consumption
during the four years preceding the date upon which the complaint was filed.
Plaintiffs seek treble damages and the return of profits resulting from the
defendants' alleged conspiracy to fix and raise prices of cereal products sold
to California consumers. In April 1995, the defendants filed a demurrer to the
complaint.
Continued
-13-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Each of the Company and PM Inc. believes, and each has been so advised by
counsel handling the respective cases, that it has a number of valid defenses to
all pending litigation. In addition, in each smoking and health case naming the
Company as a defendant, the Company has sought and obtained or is seeking
dismissal on the ground that it is not a proper party to such action. All such
cases are, and will continue to be, vigorously defended. 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. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. There have also
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.
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.
Continued
-14-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 3. New Accounting Standards:
__________________________________
Postretirement Benefits Other Than Pensions - Non-U.S. Plans
____________________________________________________________
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," for its non-U.S. retiree benefit plans. Under
SFAS No. 106, the Company is required to accrue the estimated cost of retiree
benefit payments, other than pensions, during employees' active service periods.
The Company previously expensed the cost of these benefits, which are
principally health care, as claims were incurred.
Consistent with the transition methodology for U.S. plans adopted in 1991,
the Company has recognized this change in accounting on the immediate
recognition basis. The cumulative effects as of January 1, 1995 of adopting
SFAS No. 106 for non-U.S. plans were an increase in other assets of $14 million,
an increase in accrued postretirement health care costs of $35 million and a
decrease in 1995 net earnings of $21 million ($.02 per share). However,
application of SFAS No. 106 during the three months ended March 31, 1995 did not
materially reduce 1995 net earnings before cumulative effect of accounting
changes.
The Company's Canadian subsidiary provides health care and other benefits to
its retired employees, their covered dependents and beneficiaries. Health care
benefits for non-U.S. plans are generally provided through local government
plans. Generally, employees who have attained age 55 and who have rendered 10
years of service are eligible for these benefits.
The Company's non-U.S. postretirement health care plans currently are not
funded. The status of the non-U.S. plans at January 1, 1995 was as follows (in
millions):
Actuarial present value of accumulated
postretirement benefit obligation:
<TABLE>
<S> <C>
Retirees $17
Fully eligible active plan participants 6
Other active plan participants 12
---
Accrued postretirement health care costs $35
===
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 15% in 1995, gradually declining to 5% by
the year 2005 and remaining at that level thereafter. The assumed dental care
trend rate was 5%. 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 January 1, 1995 and net postretirement health care cost
by approximately 13% and 15%, respectively.
The assumed discount rate used in determining the accumulated postretirement
benefit obligation for the Canadian plans was 9.75%.
Continued
-15-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Contributions Received and Contributions Made
_____________________________________________
Effective January 1, 1995, the Company adopted SFAS No. 116, "Accounting for
Contributions Received and Contributions Made." This statement requires the
Company to recognize an unconditional promise to make a contribution as an
expense in the period the promise is made. The Company had previously expensed
contributions when payment was made.
The cumulative effect at January 1, 1995 of adopting SFAS No. 116 reduced
1995 net earnings by $7 million ($.01 per share), net of $4 million of income
tax benefits. However, application of SFAS No. 116 during the three months ended
March 31, 1995 did not materially reduce 1995 net earnings before cumulative
effect of accounting changes.
Note 4. Capital Stock:
_______________________
On March 1, 1995, the Board of Directors authorized the redemption of the
Company's Common Stock Purchase Rights. The rights were redeemed on April 10,
1995, by payment of $.01 per common share to stockholders of record on March 15,
1995.
-16-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
________________________________________________________________________
Operating Results
- -----------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------------------
Operating Revenues Operating Income
--------------------- -------------------
(in millions)
1995 1994 1995 1994
------- ------- ------ ------
<S> <C> <C> <C> <C>
Tobacco $ 7,941 $ 6,954 $1,824 $1,560
Food 7,459 7,419 933 880
Beer 1,046 1,030 114 103
Financial services
and real estate 71 97 32 54
Amortization of goodwill (146) (141)
Unallocated corporate
expenses (109) (94)
------- ------- ------ ------
Total $16,517 $15,500 $2,648 $2,362
======= ======= ====== ======
</TABLE>
Operating revenues of $16.5 billion for the first quarter of 1995 increased
$1.0 billion (6.6%) and operating income for the first quarter of 1995 increased
$286 million (12.1%) over the comparable 1994 period. Operating income in all
consumer products business segments increased over the comparable 1994 period.
The Company sold substantially all of the distribution business of Kraft
Foodservice in February 1995 and all of the frozen dinners business of The All
American Gourmet Company during the fourth quarter of 1994. Excluding these
divestitures, on an ongoing basis the Company's operating revenues and operating
income increased 10.2% and 12.6%, respectively, in the first quarter of 1995,
versus the comparable period of 1994.
Effective January 1, 1995, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for its non-U.S.
employees, and SFAS No. 116, "Accounting for Contributions Received and
Contributions Made." The cumulative effect at January 1, 1995 of adopting these
standards reduced 1995 net earnings by $28 million ($.03 per share). However,
application of these standards will not materially impact 1995 earnings before
cumulative effect of accounting changes.
Net earnings and net earnings per share, before cumulative effect of
accounting changes, were up 16.4% and 19.4%, respectively, in the first quarter
of 1995, as compared to prior year. On an ongoing basis, earnings before
cumulative effect of accounting changes were up 16.7%, versus the comparable
1994 period.
-17-
<PAGE>
Operating Results by Business Segment
_____________________________________
Tobacco
- -------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------------------
Operating Revenues Operating Income
--------------------- -------------------
(in millions)
1995 1994 1995 1994
------ ------ ------ ------
<S> <C> <C> <C> <C>
Domestic tobacco $2,578 $2,497 $ 874 $ 769
International tobacco 5,363 4,457 950 791
------ ------ ------ ------
Total $7,941 $6,954 $1,824 $1,560
====== ====== ====== ======
</TABLE>
BUSINESS ENVIRONMENT. The tobacco industry, including PM Inc., has faced,
and continues to face, a number of issues which have affected volume, operating
revenues and operating income. These include proposed federal regulatory
controls, actual and proposed excise tax increases, federal, state and local
governmental and private restrictions on smoking (including additional
restrictions imposed by airlines), new and proposed restrictions on tobacco
manufacturing, marketing, advertising and sales, increased assertions of adverse
health effects associated with both smoking and exposure to tobacco smoke (and
legislation or other governmental action seeking to ascribe to the industry
responsibility and liability therefor), the diminishing social acceptance of
smoking and the commencement of private plaintiff class action litigation as
well as actions by states seeking Medicaid reimbursement. See Note 2 to the
Condensed Consolidated Financial Statements regarding litigation in which the
Company and/or PM Inc. are defendants.
Currently, the federal excise tax on cigarettes is $12 per thousand ($.24 per
pack). During 1994, the legislative health care debate produced numerous
proposals for increasing the federal excise tax on tobacco, ranging from
increases of $.45 to $1.75 per pack. Congress did not enact these proposals.
If higher excise taxes are enacted in the future, it could result in volume
declines for PM Inc., and the cigarette industry and might cause shifts between
the premium and discount segments.
Legislation or other governmental action is proposed periodically that not
only would increase excise taxes but also would curtail further the
advertisement and use of tobacco products. During 1994, members of Congress and
the Administration proposed measures which, if adopted, would ban or severely
restrict smoking in workplaces and in buildings permitting public access,
require substantial additional health warning and product content information on
cigarette packages and in advertising, eliminate the tax deductibility of a
portion of the cost of tobacco advertising and authorize the United States Food
and Drug Administration to regulate tobacco as an addictive drug.
-18-
<PAGE>
It is not possible to determine what, if any, governmental legislation or
regulations will be adopted relating to cigarettes or to smoking. However, any
or all of the foregoing, if implemented, could have an adverse impact on PM
Inc.'s volume, operating revenues and operating income, the amounts of which
cannot be determined. In addition, there is litigation pending against the
Company and PM Inc. which is discussed in Note 2 to the Condensed Consolidated
Financial Statements. The Company's position with regard to this litigation is
set forth therein.
DOMESTIC TOBACCO. During the first quarter of 1995, domestic cigarette
industry volume (based on shipments) continued to shift from the discount
segment to the premium segment. The premium and discount segments accounted for
approximately 69% and 31%, respectively, of the domestic cigarette industry in
the first quarter of 1995, compared with 66% and 34%, respectively, in the first
quarter of 1994.
PM Inc.'s domestic volume (based on shipments) was 50.5 billion units for the
first quarter of 1995, an increase of 1.7% over the first quarter of 1994. This
compared with an industry decrease of 4.6%. The industry decline reflects trade
inventory reductions during the quarter. PM Inc. estimates that underlying
industry consumption trends remain in line with previous industry declines of
1.5% to 2.0% annually.
PM Inc.'s market share (based on shipments) for the first quarter of 1995 was
46.0%, an increase of 2.9 share points from the first quarter of 1994. In the
premium segment, volume in PM Inc.'s brands increased 5.6% in the quarter,
compared with a 0.3% decrease for the industry, resulting in a market share gain
of 3.0 share points to 54.5%. The Marlboro family's volume was up 2.7 billion
units (9.0%) for a 29.6% share of the total industry, as compared with a 25.9%
share in the first quarter of 1994. In the discount segment, the Company's
shipments decreased 13.2% to 9.0 billion units in the first quarter of 1995,
resulting in a market share in this segment of 26.7%, unchanged from the first
quarter of 1994.
Retail sales data (compiled by the A. C. Nielsen Company), a more accurate
reflection of consumer buying habits than shipment data, indicate PM Inc. and
Marlboro first quarter 1995 market shares of 47.5% and 30.6%, respectively, as
compared with 45.4% and 27.2%, respectively, in the first quarter of 1994. As a
group, PM Inc.'s other premium brands had an 8.9% market share in the first
quarter of 1995, slightly lower than the first quarter of 1994. Among discount
cigarettes, Basic increased its market share of the discount category 1.1 share
points, to 15.3% in the first quarter of 1995.
PM Inc. cannot predict whether, and there can be no assurance that, the
increases or rate of increases in PM Inc.'s shipments, shipment share or retail
market share discussed above will continue or that the shift in domestic
cigarette industry volume from discount brands to premium brands will continue.
During the quarter, the Company's domestic tobacco operating revenues
increased 3.2% due primarily to volume increases ($45 million) and favorable
product mix ($23 million). Operating income for the first quarter of 1995
increased 13.7% from the comparable 1994 period, due primarily to lower fixed
manufacturing costs ($42 million), volume increases ($27 million) and favorable
product mix ($26 million).
On May 4, 1995, a major competitor increased the average price of its
domestic brands by $1.50 per thousand, effective immediately. PM Inc. has
announced that it will also raise the price of its domestic brands by $1.50 per
thousand, effective with shipments of May 9, 1995.
-19-
<PAGE>
INTERNATIONAL TOBACCO. Operating revenues for the first quarter of 1995
increased 20.3% due primarily to higher foreign excise taxes ($434 million),
favorable volume/mix ($261 million), currency movement ($192 million) and price
increases ($27 million). Total international unit volume increased 20.0 billion
units (14.7%) to 155.9 billion units. The Company's volume grew in most of its
major markets, including strong gains in Germany, Italy, Spain, Central and
Eastern Europe, Turkey, Japan, Hong Kong, Korea, the Philippines and Argentina.
Market share also advanced in most major markets, with significant share gains
in Germany, Italy, Spain, Holland, Belgium, Japan, Korea, Hong Kong, Singapore
and Argentina. Well positioned for continued expansion in the growing American-
blend segment, shipments of the Company's nine U.S.-heritage and international
brands collectively grew 20% in the first quarter of 1995, as compared to the
first quarter of 1994. Operating income for the first quarter of 1995 increased
20.1% from the comparable 1994 period, due primarily to volume/mix increases
($151 million), price increases and lower costs (aggregating $88 million) and
currency movement ($52 million), partially offset by higher marketing,
administration and research costs ($130 million).
Food
- ----
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
----------------------------------------------
Operating Revenues Operating Income
-------------------- ------------------
(in millions)
1995 1994 1995 1994
------ ------ ----- -----
<S> <C> <C> <C> <C>
North American food $4,901 $5,191 $671 $638
International food 2,558 2,228 262 242
------ ------ ---- ----
Total $7,459 $7,419 $933 $880
====== ====== ==== ====
</TABLE>
BUSINESS ENVIRONMENT. The Company has taken several steps to reduce costs
and increase profitability. Effective January 1995, the Company implemented a
reorganization of its North American food business to fully integrate the
operations of the former Kraft USA and General Foods USA. The combined
organization, named Kraft Foods, Inc., has begun to streamline operations and
improve effectiveness and customer response. Similarly, the Company continued
to integrate its European operations into one entity, Kraft Jacobs Suchard.
In addition to the above steps, the Company has sold domestic businesses as
part of a broad strategy to rebalance its branded food portfolio for enhanced
growth and profitability. These include The All American Gourmet Company, maker
of frozen meals and side dishes, which was divested in the fourth quarter of
1994 and the Kraft Foodservice distribution business, sold in February 1995.
The Kraft Foodservice divestiture will lower 1995 operating revenues by
approximately $3.5 billion, net of sales to Kraft Foodservice from the Company's
other North American food businesses. This divestiture will not have a material
effect on the Company's results of operations in 1995, but will improve the
operating profit margin of North American food operations.
-20-
<PAGE>
During the second half of 1994 and into the first quarter of 1995, both the
North American and International food businesses were affected by higher green
coffee bean prices, resulting from frosts in Brazil in the second quarter of
1994. Late in the fourth quarter of 1994, green coffee bean prices moderated
slightly, due primarily to higher Brazilian crop estimates than originally
anticipated, and remained stable through the first quarter of 1995.
NORTH AMERICAN FOOD. Operating revenues for the first quarter of 1995
decreased 5.6% due primarily to the impact of divestitures ($469 million),
partially offset by price increases ($131 million) and volume increases ($60
million). Volume grew in a number of key categories, including cheese, led by
growth in the natural and cream cheese segments; processed meats, driven by
lunch combinations; ready-to-eat desserts, due to enhanced marketing efforts and
the introduction of new items; frozen pizza, due in part to continued geographic
expansion; bagels, helped by geographic expansion; beverages, on the strength of
fruit drinks and powered soft drinks; dry packaged dinners, due to strong
marketing programs and product introductions; and barbeque sauce and the
spoonable salad dressing category. In coffee, overall volume was down due to
higher retail prices throughout the industry, the result of a rise in green bean
costs. In Canada, volume was lower as the Company exited several unprofitable
product lines. Overall, retail shares improved in 18 of North American foods'
top 20 categories. Operating income for the first quarter of 1995 increased
5.2% over the comparable 1994 period, due primarily to price increases ($44
million) and volume increases ($32 million), partially offset by higher
marketing, administration and research costs ($28 million) and the impact of
divestitures ($10 million).
The Company sold substantially all of the distribution business of Kraft
Foodservice in February 1995 and all of the frozen dinners business of The All
American Gourmet Company during the fourth quarter of 1994. Excluding these
divestitures, on an ongoing basis North American food's operating revenues and
operating income increased 4.2% and 6.8%, respectively, in the first quarter of
1995, versus the comparable period of 1994.
INTERNATIONAL FOOD. Operating revenues for the first quarter of 1995
increased 14.8% due to currency movement ($217 million), price increases ($178
million) and the impact of acquisitions ($43 million), partially offset by
volume decreases ($108 million). Overall volume declined in the first quarter
of 1995, reflecting a soft European coffee market; however, volume growth was
strong in the developing markets of Central and Eastern Europe, Asia and Latin
America. In Central and Eastern Europe, volume growth was led by grocery
exports and higher confectionery sales in Slovakia and Hungary. In Asia, the
Company's developing markets registered volume growth, particularly in the
Philippines, helped by new product introductions, and Indonesia, where the
cheese business continued to expand, partly as a result of acquisitions. Latin
America volume was significantly higher than the first quarter of 1994, driven
by higher ice cream sales in Brazil and increased powdered soft drink volume in
Argentina and Brazil. In Europe, consumer resistance to higher coffee prices
caused an overall decline in the market, which lowered the Company's volume in
the quarter. European confectionery volume decreased due to a soft market;
however, market shares rose substantially in the important chocolate tablet
segment in key markets. Continuing competitive pressures depressed cheese and
grocery volumes in Europe. Operating income for the first quarter of 1995
increased 8.3% from the comparable 1994 period, due primarily to price increases
($56 million), the impact of acquisitions ($5 million) and lower marketing,
administration and research costs ($4 million), partially offset by volume
decreases ($47 million).
-21-
<PAGE>
Beer
____
Operating revenues for the first quarter of 1995 increased $16 million (1.6%)
from the comparable 1994 period. This increase was due to price increases ($12
million) and volume increases ($4 million). Unit volume (based on shipments)
increased .4% in the first quarter of 1995 compared with an estimated .3% volume
decline for the U.S. malt beverage industry. Shipments of Miller's premium-
priced beers increased 2.1% in the first quarter of 1995 to account for 80% of
their volume mix, up 1.4 percentage points from the first quarter of 1994.
Volume growth was paced by the initial success of Red Dog and by continued
growth of Icehouse. Volume for Miller Lite improved; however, the Lite
franchise was down slightly due to lower Lite Ice volume. The decrease in Lite
Ice is attributable to higher-than-normal shipments in the first quarter of
1994, when the product was introduced nationally. Shipments of Miller Genuine
Draft and the Molson brands also were down versus prior year. Operating income
for the first quarter of 1995 increased $11 million (10.7%) from the comparable
1994 period, due primarily to price increases and lower costs (aggregating $15
million) and lower fixed manufacturing expenses, as a result of a plant closing
in 1994 ($8 million), partially offset by higher marketing, administration and
research costs ($9 million) and dispositions ($6 million).
Financial Services and Real Estate
__________________________________
During the first quarter of 1995, operating revenues and operating income
from financial services and real estate operations decreased 26.8% and 40.7%,
respectively, from the first quarter of 1994. First quarter 1995 operating
income from financial services decreased due primarily to gains recognized in
the first quarter of 1994 on the sale of the Company's marketable securities
portfolio and lack of income from this portfolio in 1995. Operating income from
real estate operations in 1995 decreased from 1994 levels, reflecting lower
residential land sales in Southern California, partially offset by higher land
sales in Colorado.
Cash Provided and Used
______________________
Net Cash Provided by Operating Activities
_________________________________________
During the first quarter of 1995, cash provided by operating activities was
$407 million, compared with $874 million in the first quarter of 1994. The
decrease was due primarily to more cash used for working capital items,
partially offset by higher net earnings.
Net Cash Provided by Investing Activities
_________________________________________
Cash provided by investing activities for the first quarter of 1995 was $345
million, compared with $451 million for the comparable 1994 period. The change
reflects a $651 million decrease in cash provided by net proceeds from finance
assets and a $42 million increase in capital expenditures, partially offset by a
$635 million increase in cash provided from the sales of businesses. Capital
expenditures were $308 million in the first quarter of 1995, of which 49%
related to food operations and 31% related to tobacco operations. In February
1995, the Company sold its Kraft Foodservice distribution business for $690
million.
-22-
<PAGE>
Net Cash Used in Financing Activities
_____________________________________
During the first quarter of 1995, the Company's cash used in financing
activities was $675 million, compared with $1.3 billion during the first quarter
of 1994. Cash used in financing activities for the first quarter of 1995 was
used primarily for cash dividends paid ($706 million), the repurchase of common
stock ($478 million), net repayment of financial services' short-term borrowings
($194 million) and consumer products' net repayment of long-term debt ($82
million), partially offset by consumer products' net issuance of short-term
borrowings ($732 million).
The Company operates internationally, with manufacturing and sales facilities
around the world. The Company continually evaluates its foreign currency
exposure (primarily the Swiss franc, Deutsche mark, Japanese yen, Swedish krona
and Canadian dollar) based on current market conditions and business strategies.
It acts to manage interest rate and foreign currency rate exposures, when deemed
prudent, by creating offsetting exposures through the use of derivative
financial instruments. The Company is not a party to leveraged derivatives.
The Company enters into forward exchange contracts, for purposes other than
trading, to reduce the effect of fluctuating foreign currency on foreign
currency denominated assets, liabilities, commitments and short-term
intercompany transactions. At March 31, 1995 and 1994, the Company had forward
exchange contracts, with maturities of less than one year, of $4.5 billion and
$3.0 billion, respectively.
At March 31, 1995, the Company had consumer products short-term borrowings of
$3.5 billion, $3.3 billion of which was reclassified as long-term debt based
upon the Company's intent and ability to refinance such debt under a $8 billion
revolving bank credit agreement that expires in 1998. At December 31, 1994, the
Company had consumer products short-term borrowings of $2.7 billion, $2.5
billion of which was reclassified as long-term debt. The Company expects to
continue to refinance long-term and short-term debt from time to time. The
nature and amount of the Company's long-term and short-term debt and the
proportionate amount of each can be expected to vary as a result of future
business requirements, market conditions and other factors.
At March 31, 1995, the Company's ratio of consumer products debt to total
equity was 1.18, up from 1.17 at December 31, 1994. The change reflects an
increase in consumer products debt, partially offset by an increase in
stockholders' equity. The increase in stockholders' equity was due primarily to
net earnings in the first quarter of 1995 and favorable movement in the currency
translation adjustments account, partially offset by dividends declared and the
repurchase of common stock.
The Company's ratio of consumer products debt to total equity was 1.34 at
March 31, 1994. The change from March 31, 1994 to March 31, 1995 reflects lower
consumer products debt ($336 million) and increased total stockholders' equity
($1.4 billion).
Dividends paid in the first quarter of 1995 increased 23.9% over the
comparable period of 1994, reflecting the increase in dividends declared,
partially offset by fewer shares outstanding. The Board of Directors increased
the Company's quarterly dividend rate 6.2% in February 1994 and 19.6% in August
1994 to an annualized dividend rate of $3.30 per share.
-23-
<PAGE>
During the first quarter of 1995, the Company repurchased 7.7 million shares
of its common stock at an aggregate cost of $481 million. These purchases were
made in accordance with the Company's August 1994 announcement of its intention
to spend up to $6 billion to repurchase common stock in open market transactions
over three years. The program began in October 1994. Through March 31, 1995,
cumulative purchases under the program totaled 15.0 million shares at a cost of
$914 million.
Contingencies
_____________
See Note 2 to the Condensed Consolidated Financial Statements for discussion
of contingencies.
-24-
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 2, "Contingencies", of the Notes to Condensed
Consolidated Financial Statements included in Part I, Item 1 of this Report.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders was held in Richmond, Virginia on April
27, 1995. 715,861,987 shares of Common Stock, 83.9% of outstanding shares, were
represented in person or by proxy.
The following fourteen directors were elected to a one-year term expiring in
1996:
<TABLE>
<CAPTION>
Number of Shares
-----------------------
For Withheld
----------- ----------
<S> <C> <C>
Elizabeth E. Bailey 688,108,448 27,753,539
Geoffrey C. Bible 687,428,375 28,433,612
Murray H. Bring 687,373,826 28,488,161
Harold Brown 687,916,928 27,945,059
William H. Donaldson 688,284,711 27,577,276
Jane Evans 688,045,344 27,816,643
Robert E. R. Huntley 687,258,038 28,603,949
Rupert Murdoch 687,593,104 28,268,883
John D. Nichols 688,069,603 27,792,384
Richard D. Parsons 688,059,171 27,802,816
Roger S. Penske 688,189,652 27,672,335
John S. Reed 688,229,774 27,632,213
Hans G. Storr 687,440,455 28,421,532
Stephen M. Wolf 687,804,199 28,057,788
</TABLE>
The selection of Coopers & Lybrand L.L.P. as auditors was approved:
708,307,239 shares, 99.2% of those voting, voted in favor; 5,520,627 shares,
0.8%, voted against and 2,034,121 shares abstained.
Six stockholder proposals were defeated:
Proposal One: That a Committee of outside directors institute an executive
compensation review and prepare a report to be made available to stockholders:
34,231,365 shares, or 5.9% of the shares voting on the proposal, voted in favor;
541,449,326 shares, or 94.1%, voted against and 140,181,296 shares abstained
(including broker non-votes);
Proposal Two: That the Company refrain from making expenditures to challenge
health studies relating to environmental tobacco smoke: 34,685,502 shares, or
6.4% of the shares voting on the proposal, voted in favor; 505,261,361 shares,
or 93.6%, voted against and 175,915,124 shares abstained (including broker non-
votes);
Proposal Three: That the Company take action to spin-off, sell or otherwise
divest its domestic tobacco business: 19,466,201 shares, or 3.5% of shares
voting on the proposal, voted in favor; 539,208,085 shares, or 96.5%, voted
against and 157,187,701 shares abstained (including broker non-votes);
Proposal Four: That the Company refrain from providing pension or other
retirement benefits to non-employee directors unless they have been submitted to
stockholders for approval: 141,936,351 shares, or 24.6% of the shares voting on
the proposal, voted in favor; 435,790,187 shares, or 75.4%, voted against and
138,135,449 shares abstained (including broker non-votes);
-25-
<PAGE>
Proposal Five: That the Company establish a Committee of the Board to review
how tobacco farmers can be helped in converting their farmland to use for other
purposes: 20,230,805 shares, or 3.7% of the shares voting on the proposal,
voted in favor; 531,279,264 shares, or 96.3%, voted against and 164,351,918
shares abstained (including broker non-votes);
Proposal Six: That the Board of Directors establish an Independent Directors
Committee: 27,418,915 shares, or 4.8% of the shares voting on the proposal,
voted in favor; 548,300,777 shares, or 95.2%, voted against and 140,142,295
shares abstained (including broker non-votes).
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
12 Statement regarding computation of ratios of earnings to fixed
charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K. During the quarter for which this report is filed,
the Registrant filed a Current Report on Form 8-K, dated January 26, 1995,
containing the Registrant's consolidated financial statements for the
year ended December 31, 1994.
___________
-26-
<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
Hans G. Storr, Executive Vice President and
Chief Financial Officer
DATE May 9, 1995
-27-
<PAGE>
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(Dollars in millions)
___________________
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1995
-------------------
<S> <C>
Earnings before income taxes and cumulative
effect of accounting changes $2,330
Add (Deduct):
Equity in net earnings of less than 50% owned
affiliates (55)
Dividends from less than 50% owned
affiliates 66
Fixed charges 396
Interest capitalized, net of amortization (2)
------
Earnings available for fixed charges $2,735
======
Fixed charges:
Interest incurred:
Consumer products $ 339
Financial services and real estate 22
------
361
Portion of rent expense deemed to represent
interest factor 35
------
Fixed charges $ 396
======
Ratio of earnings to fixed charges 6.9
======
</TABLE>
<PAGE>
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges (continued)
(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 changes $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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Pages 3-5 of the
Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1995 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 257
<SECURITIES> 0
<RECEIVABLES> 5,139
<ALLOWANCES> 166
<INVENTORY> 8,062
<CURRENT-ASSETS> 14,637
<PP&E> 18,541
<DEPRECIATION> 7,306
<TOTAL-ASSETS> 53,487
<CURRENT-LIABILITIES> 12,537
<BONDS> 15,621
<COMMON> 935
0
0
<OTHER-SE> 12,475
<TOTAL-LIABILITY-AND-EQUITY> 53,487
<SALES> 16,517
<TOTAL-REVENUES> 16,517
<CGS> 10,050
<TOTAL-COSTS> 10,050
<OTHER-EXPENSES> 3,819
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 318
<INCOME-PRETAX> 2,330
<INCOME-TAX> 967
<INCOME-CONTINUING> 1,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 28
<NET-INCOME> 1,335
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
</TABLE>
