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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) February 1, 1996
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PHILIP MORRIS COMPANIES INC.
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(Exact name of registrant as specified in its charter)
Virginia 1-8940 13-3260245
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(State or other (Commission (IRS Employer
jurisdiction File Number) Identification No.)
of incorporation)
120 Park Avenue, New York, New York 10017-5592
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(Address of principal
executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 880-5000
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(Former name or former address, if changed since last report)
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Item 5. Other Events.
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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, 1995 and 1994, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1995 (the "Financial Statements"), the independent
accountants' report thereon and the statement regarding computation of ratios of
earnings to fixed charges. The Financial Statements, the independent
accountants' report and the statement regarding computation of ratios of
earnings to fixed charges will be incorporated by reference in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
Additionally, see Exhibit 1 below.
Item 7. Financial Statements and Exhibits.
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The Financial Statements, together with the independent accountants'
report thereon, are included herein.
(c) Exhibits
1. Form of Underwriting Agreement, including form of Terms
Agreement.
12. Statement regarding computation of ratios of earnings to
fixed charges.
23. Consent of independent accountants.
27. Financial Data Schedule.
99. Financial Statements.
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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 February 1, 1996
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EXHIBIT INDEX
Exhibit No.
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1. Form of Underwriting Agreement, including form of
Terms Agreement.
12. Statement regarding computation of ratios of earnings
to fixed charges.
23. Consent of independent accountants.
27. Financial Data Schedule.
99. Financial Statements.
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Exhibit 1
PHILIP MORRIS COMPANIES INC.
DEBT SECURITIES, WARRANTS TO PURCHASE DEBT SECURITIES
AND CURRENCY WARRANTS
UNDERWRITING AGREEMENT
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DATED AS OF FEBRUARY 1, 1996
1. Introductory. Philip Morris Companies Inc., a Virginia corporation
("Company"), proposes to issue and sell from time to time certain of its debt
securities and warrants to purchase certain of its debt securities in an
aggregate principal amount expressed in U.S. dollars or in such foreign
currencies or currency units as the Company shall designate at the time of
offering, and currency warrants representing the right to receive from the
Company the cash value in U.S. dollars of the right to purchase and/or sell a
designated amount of U.S. dollars for a designated amount (the "Base Currency
Amount") of a specified foreign currency or currency unit (a "Base Currency")
as shall be determined by the Company at the time of offering. Such debt
securities, warrants, debt securities subject to such warrants and currency
warrants, registered under the registration statement referred to in Section
2(a), are hereinafter collectively referred to as "Registered Securities".
Registered Securities involved in any offering referred to below are
hereinafter collectively referred to as "Securities", such debt securities that
are Securities are hereinafter referred to as "Purchased Debt Securities",
warrants to purchase debt securities that are Securities are hereinafter
referred to as "Debt Warrants", debt securities subject to warrants that are
Securities are hereinafter referred to as "Warrant Debt Securities", currency
warrants are hereinafter collectively referred to as "Currency Warrants",
Purchased Debt Securities and Warrant Debt Securities are hereinafter
collectively referred to as "Debt Securities" and Purchased Debt Securities,
Debt Warrants and Currency Warrants are hereinafter collectively referred to as
"Purchased Securities". The Debt Securities will be issued under an Indenture,
dated as of August 1, 1990, as supplemented and amended by a First Supplemental
Indenture dated as of February 1, 1991 and a Second Supplemental Indenture
dated as of January 21, 1992 ("Indenture"), between the Company and Chemical
Bank, as Trustee, the Debt Warrants will be issued under a debt warrant
agreement (the "Debt Warrant Agreement"), between the Company and a bank or
trust company, as Debt Warrant Agent, specified in the Terms Agreement referred
to in Section 3 and the Currency Warrants will be issued under a currency
warrant agreement (the "Currency Warrant Agreement"), between the Company and a
bank or trust company, as Currency Warrant Agent, specified in the applicable
Terms Agreement, in one or more series or issues, which may vary as to interest
rates, maturities, redemption provisions, exercise prices, expiration dates,
selling prices, currency or currency units and other terms, with in each case
all such terms for any particular Registered Securities being determined at the
time of sale. Particular Purchased Securities will be sold pursuant to a Terms
Agreement and for resale in accordance with terms of offering determined at the
time of sale.
The firm or firms which agree to purchase the Purchased Securities are
hereinafter referred to as the "Underwriters" of such Purchased Securities, and
the representative or representatives of the Underwriters, if any, specified in
a Terms Agreement referred to in Section 3 are hereinafter referred to as the
"Representatives"; provided, however, that if the Terms Agreement does not
specify any representative of the Underwriters, the term "Representatives", as
used in this Agreement (other than in Sections 2(b), 6 and 7 and the second
sentence of Section 3), shall mean the Underwriters.
2. Representations and Warranties of the Company. The Company represents and
warrants to, and agrees with, each Underwriter that:
(a) A registration statement (No. 33-49195), including a prospectus,
relating to the Registered Securities has been filed with the Securities
and Exchange Commission ("Commission") and has become effective. Such
registration statement, as amended at the time of any Terms Agreement
referred to in Section 3, is hereinafter referred to as the "Registration
Statement", and the prospectus included in such Registration Statement, as
supplemented as contemplated by Section 3 to reflect the terms of the
Securities and the terms of offering thereof, including all material
incorporated by reference therein, is hereinafter referred to as the
"Prospectus".
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(b) On the effective date of the registration statement relating to the
Registered Securities, such registration statement conformed in all
respects to the requirements of the Securities Act of 1933 ("Act"), the
Trust Indenture Act of 1939 ("Trust Indenture Act") and the rules and
regulations of the Commission ("Rules and Regulations") and did not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading, and, on the date of each Terms Agreement referred to in
Section 3 and on each Closing Date as defined in Section 3, the
Registration Statement and the Prospectus will conform in all respects to
the requirements of the Act, the Trust Indenture Act and the Rules and
Regulations, and neither of such documents will include any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading, except that the foregoing does not apply to statements in or
omissions from any of such documents based upon written information
furnished to the Company by any Underwriter through the Representatives, if
any, specifically for use therein.
3. Purchase and Offering of Securities. The obligation of the Underwriters to
purchase the Purchased Securities will be evidenced by an exchange of
telegraphic or other written communications ("Terms Agreement") at the time the
Company determines to sell the Purchased Securities. The Terms Agreement will
incorporate by reference the provisions of this Agreement, except as otherwise
provided therein, and will specify the firm or firms which will be
Underwriters, the names of any Representatives, the principal amount of
Purchased Debt Securities, the number of Debt Warrants and the number of
Currency Warrants to be purchased by each Underwriter, the purchase price to be
paid by the Underwriters and the terms of the Purchased Securities not already
specified in the Indenture, the Debt Warrant Agreement or the Currency Warrant
Agreement, as the case may be, including, but not limited to, interest rate,
maturity, any redemption provisions and any sinking fund requirements, the
exercise price of the Debt Warrants to be purchased, the principal amount of
Warrant Debt Securities issuable upon exercise of one such Debt Warrant, the
date after which such Debt Warrants are exercisable, the expiration date
thereof and the date, if any, such Debt Warrants are detachable and whether any
of the Purchased Debt Securities or Debt Warrants may be sold to institutional
investors pursuant to Delayed Delivery Contracts (as defined below), and in the
event any Currency Warrants are to be sold, the conditions and procedures
relating to exercise, expiration date, Base Currency, Base Currency Amount and
formula for determining Cash Settlement Value (as defined in the Currency
Warrant Agreement). The Terms Agreement will also specify the time and date of
delivery and payment (such time and date, or such other time not later than
seven full business days thereafter as the Representatives and the Company
agree as the time for payment and delivery, being herein and in the Terms
Agreement referred to as the "Closing Date"), the place of delivery and payment
and any details of the terms of offering that should be reflected in the
prospectus supplement relating to the offering of the Securities. The
obligations of the Underwriters to purchase the Purchased Securities will be
several and not joint. It is understood that the Underwriters propose to offer
the Purchased Securities for sale as set forth in the Prospectus. The Purchased
Securities delivered to the Underwriters on the Closing Date will be in fully
registered or bearer form with respect to any Debt Securities, and in fully
registered form with respect to Debt Warrants, in each case in such
denominations and numbers and registered in such names as the Underwriters may
request, and will be represented by a single global Currency Warrant in the
case of Currency Warrants.
If the Terms Agreement provides for sales of Purchased Debt Securities or
Debt Warrants pursuant to delayed delivery contracts, the Company authorizes
the Underwriters to solicit offers to purchase Purchased Debt Securities or
Debt Warrants pursuant to delayed delivery contracts substantially in the form
of Annex I attached hereto ("Delayed Delivery Contracts") with such changes
therein as the Company may authorize or approve. Delayed Delivery Contracts are
to be with institutional investors, including commercial and savings banks,
insurance companies, pension funds, investment companies and educational and
charitable institutions. On the Closing Date the Company will pay, as
compensation, to the Representatives for the accounts of the Underwriters, the
fee set forth in such Terms Agreement in respect of the principal amount of
Purchased Debt Securities and number of Debt Warrants to be sold pursuant to
Delayed Delivery Contracts ("Contract Securities"). The Underwriters will not
have any responsibility in respect of the validity or the performance of
Delayed Delivery Contracts. If the Company executes and delivers Delayed
Delivery
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Contracts, the Contract Securities will be deducted from the Securities to be
purchased by the several Underwriters and the aggregate principal amount of
Purchased Debt Securities and number of Debt Warrants, as the case may be, to
be purchased by each Underwriter will be reduced pro rata in proportion to the
principal amount of Purchased Debt Securities or number of Debt Warrants set
forth opposite each Underwriter's name in such Terms Agreement, except to the
extent that the Representatives determine that such reduction shall be
otherwise than pro rata and so advise the Company. The Company will advise the
Representatives not later than the business day prior to the Closing Date of
the Purchased Debt Securities and Debt Warrants that are the Contract
Securities.
4. Certain Agreements of the Company. The Company agrees with the several
Underwriters that it will furnish to Simpson Thacher & Bartlett, counsel for
the Underwriters, one signed copy of the registration statement relating to the
Registered Securities, including all exhibits, in the form it became effective
and of all amendments thereto and that, in connection with each offering of
Securities:
(a) The Company will advise the Representatives promptly of any proposal
to amend or supplement the Registration Statement or the Prospectus and
will afford the Representatives a reasonable opportunity to comment on any
such proposed amendment or supplement; and the Company will also advise the
Representatives promptly of the filing of any such amendment or supplement
and of the institution by the Commission of any stop order proceedings in
respect of the Registration Statement or of any part thereof and will use
its best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible its lifting, if issued.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any
time to amend the Prospectus to comply with the Act, the Company promptly
will prepare and file with the Commission an amendment or supplement which
will correct such statement or omission or an amendment which will effect
such compliance.
(c) As soon as practicable, but not later than 18 months, after the date
of each Terms Agreement, the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12
months beginning after the later of (i) the most recent effective date of
the registration statement relating to the Registered Securities, (ii) the
effective date of the most recent post-effective amendment to the
Registration Statement to become effective prior to the date of such Terms
Agreement and (iii) the date of the Company's most recent Annual Report on
Form 10-K filed with the Commission prior to the date of such Terms
Agreement, which will satisfy the provisions of Section 11(a) of the Act
(including, at the option of the Company, Rule 158 of the Rules and
Regulations under the Act).
(d) The Company will furnish to the Representatives copies of the
Registration Statement, including all exhibits, any related preliminary
prospectus, any related preliminary prospectus supplement and all
amendments and supplements to such documents, in each case as soon as
available, and copies of the Prospectus and all amendments and supplements
to the Prospectus not later than 10:00 A.M., New York City time, on the day
following the date thereof. The Company will furnish each of such documents
in such quantities as are reasonably requested.
(e) The Company will arrange for the qualification of the Securities for
sale and the determination of their eligibility for investment under the
laws of such jurisdictions as the Representatives designate and will
continue such qualifications in effect so long as required for the
distribution; provided that the Company will not be required to qualify to
do business in any jurisdiction where it is not now qualified or to take
any action which would subject it to general or unlimited service of
process in any jurisdiction where it is not now subject.
(f) During the period of five years after the date of any Terms
Agreement, the Company will furnish to the Representatives and, upon
request, to each of the other Underwriters, if any, as soon as practicable
after the end of each fiscal year, a copy of its annual report to
stockholders for such year; and the Company will furnish to the
Representatives (i) as soon as available, a copy of each Annual Report on
Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K and
definitive proxy
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statement of the Company filed with the Commission under the Securities
Exchange Act of 1934 (the "Exchange Act") or mailed to stockholders, and
(ii) from time to time, such other information concerning the Company as
the Representatives may reasonably request.
(g) The Company will pay all expenses incident to the performance of its
obligations under this Agreement and will reimburse the Underwriters for
any expenses (including fees and disbursements of counsel) incurred by them
in connection with qualification of the Registered Securities for sale and
determination of their eligibility for investment under the laws of such
jurisdictions as the Representatives may designate and the printing of
memoranda relating thereto, for any fees charged by investment rating
agencies for the rating of the Securities, for the filing fee of the
National Association of Securities Dealers, Inc. relating to the Registered
Securities and for expenses incurred in distributing the Prospectus, any
preliminary prospectuses and any preliminary prospectus supplements to
Underwriters.
(h) For a period beginning at the time of execution of the Terms
Agreement and ending on the Closing Date, if any Debt Securities are being
issued, without the prior consent of the Representatives, the Company will
not offer or contract to sell or, except pursuant to a commitment entered
into prior to the date of the Terms Agreement, sell or otherwise dispose of
any debt securities denominated in the currency or currency unit in which
the Securities are denominated and issued or guaranteed by the Company and
having a maturity of more than one year from the date of issue, or, if any
Currency Warrants are being issued, any currency warrants having the same
Base Currency as any such Currency Warrants.
5. Conditions to the Obligations of the Company and the Underwriters With
Respect to Currency Warrants. If any Currency Warrants are to be purchased
hereunder, the obligations of the Company and the obligations of the
Underwriters hereunder are subject to the conditions that (i) not later than
the date of the applicable Terms Agreement, a United States national securities
exchange (the "Exchange") shall have approved such Currency Warrants for
listing, subject to official notice of issuance, and (ii) as of the date of the
applicable Terms Agreement, the Company's registration statement on Form 8-A
relating to the Securities (the "Form 8-A") shall have become effective under
the Exchange Act.
6. Conditions of the Obligations of the Underwriters. The obligations of the
several Underwriters to purchase and pay for the Purchased Securities will be
subject to the accuracy of the representations and warranties on the part of
the Company herein, to the accuracy of the statements of Company officers made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder and to the following additional conditions precedent:
(a) On or prior to the date of the Terms Agreement, the Representatives,
or counsel for the Underwriters, shall have received a letter of Coopers &
Lybrand L.L.P., confirming that they are independent certified public
accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating in effect that:
(i) in their opinion, the financial statements and schedules of the
Company audited by them and included in the prospectus contained in the
registration statement relating to the Registered Securities, as
amended at the date of such letter, comply as to form in all material
respects with the applicable accounting requirements of the Act and the
related published Rules and Regulations;
(ii) on the basis of performing the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in Statement on Auditing
Standards No. 71, Interim Financial Information ("SAS No. 71") on any
unaudited interim condensed consolidated financial statements of the
Company included in such prospectus, inquiries of officials of the
Company who have responsibility for financial and accounting matters
and other specified procedures, nothing came to their attention that
caused them to believe that (A) the unaudited interim condensed
consolidated financial statements, if any, of the Company included in
such prospectus do not comply as to form in all material respects with
the applicable accounting requirements of the Exchange Act as it
applies to Quarterly Reports on Form 10-Q and the related published
Rules and Regulations or (B) that any material modifications should be
made for them to be in conformity with generally accepted accounting
principles;
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(iii) on the basis of a reading of any unaudited pro forma condensed
combined financial statements of the Company included in such
prospectus, inquiries of officials of the Company who have
responsibility for financial and accounting matters and other specified
procedures, nothing came to their attention that caused them to believe
that the unaudited pro forma condensed combined financial statements
included in such prospectus do not comply in form in all material
respects with the applicable accounting requirements of Rule 11-02 of
Regulation S-X and that the pro forma adjustments, if any, have not
been properly applied to the historical amounts in the compilation of
those statements; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in such prospectus (in each case to the extent that such
dollar amounts, percentages and other financial information are
obtained from accounting records that are subject to the internal
control structure, policies and procedures of the Company's accounting
system or are derived directly from such accounting records by analysis
or computation) with the results obtained from procedures specified in
such letter and have found such dollar amounts, percentages and other
financial information to be in agreement with such results, except as
otherwise specified in such letter.
All financial statements and schedules included in material incorporated by
reference into such prospectus shall be deemed included in such prospectus
for purposes of this subsection.
(b) No stop order suspending the effectiveness of the Registration
Statement or, if any Currency Warrants are being issued, the Form 8-A, or
of any part thereof shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Company or
any Underwriter, shall be contemplated by the Commission.
(c) Subsequent to the execution of the Terms Agreement, there shall not
have occurred (i) any change in the capital stock or long-term debt of the
Company and its subsidiaries or any change, or any development involving a
prospective change, in or affecting the general affairs, financial
position, stockholders' equity or results of operations of the Company and
its subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, the effect of which is, in the judgment of the Representatives,
so material and adverse as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Securities on the
terms and in the manner contemplated in the Prospectus; (ii) any
downgrading in the rating of the Company's debt securities by any
"nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the Act), and no such organization shall have
publicly announced that it has under surveillance or review, with possible
negative implications, its rating of such debt securities; (iii) any
suspension or limitation of trading in securities generally on the New York
Stock Exchange or, if any Currency Warrants are being issued, the Exchange,
or any setting of minimum prices for trading on the New York Stock Exchange
or, if applicable, the Exchange, or any suspension of trading of any
securities of the Company on any United States exchange or in the over-the-
counter market; (iv) any banking moratorium declared by Federal or New York
authorities, or the authorities of any country which is the issuer of a
Base Currency or in whose currency any Purchased Debt Securities or Debt
Warrants are denominated under the applicable Terms Agreement; (v) any
outbreak or escalation of major hostilities in which the United States or
any country which is the issuer of a Base Currency or in whose currency any
Purchased Debt Securities or Debt Warrants are denominated under the
applicable Terms Agreement is involved, any declaration of war by Congress
or any other substantial national or international calamity or emergency
if, in the judgment of the Representatives, the effect of any such
outbreak, escalation, declaration, calamity or emergency makes it
impractical or inadvisable to proceed with completion of the sale of and
payment for the Securities; or (vi) any action by any governmental
authority or any change, or any development involving a prospective change,
involving currency exchange rates or exchange controls, which makes it
impracticable or inadvisable in the reasonable judgment of the
Representatives to proceed with the public offering or delivery of the
Securities on the terms and in the manner contemplated in the Prospectus.
(d) The Representatives shall have received an opinion, dated the Closing
Date, of Hunton & Williams, counsel for the Company, to the effect that:
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(i) the Company has been duly incorporated and is an existing
corporation in good standing under the laws of the Commonwealth of
Virginia, with corporate power and authority to own its properties and
conduct its business as described in the Prospectus; and the Company is
duly qualified to do business as a foreign corporation in good standing
in all other jurisdictions in which it owns or leases substantial
properties or in which the conduct of its business requires such
qualification and in which the failure to so qualify would have a
material adverse effect on the Company;
(ii) Philip Morris Incorporated, Philip Morris International Inc. and
Kraft Foods, Inc. have been duly incorporated and are existing
corporations in good standing under the laws of their respective
jurisdictions of incorporation, with corporate power and authority to
own their respective properties and conduct their respective businesses
as described in the Prospectus; all outstanding shares of capital stock
of Philip Morris Incorporated, Philip Morris International Inc. and
Kraft Foods, Inc. are owned by the Company, free and clear of any lien,
pledge and encumbrance or claim of any third party;
(iii) the Indenture, any Debt Warrant Agreement and any Currency
Warrant Agreement have been duly authorized, executed and delivered by
the Company; the Indenture has been duly qualified under the Trust
Indenture Act; the Securities have been duly authorized; the Purchased
Securities other than any Contract Securities have been duly executed,
authenticated, issued and delivered; the Indenture, any Debt Warrant
Agreement, any Currency Warrant Agreement and the Securities other than
any Warrant Debt Securities and any Contract Securities constitute, and
any Warrant Debt Securities, when executed, authenticated, issued and
delivered in the manner provided in the Indenture and sold pursuant to
any Debt Warrant Agreement, and any Contract Securities, when executed,
authenticated, issued and delivered in the manner provided in the
Indenture and sold pursuant to Delayed Delivery Contracts, will
constitute, valid and legally binding obligations of the Company,
enforceable in accordance with their terms, subject to the effects of
bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors'
rights generally, to general equity principles and an implied covenant
of good faith and fair dealing; and the Securities other than any
Warrant Debt Securities and any Contract Securities conform, and any
Warrant Debt Securities and any Contract Securities, when so issued and
delivered and sold, will conform, to the description thereof contained
in the Prospectus;
(iv) no consent, approval, authorization or order of, or filing with,
any governmental agency or body or any court is required for the
consummation of the transactions contemplated by the Terms Agreement
(including the provisions of this Agreement) in connection with the
issuance or sale of the Purchased Securities by the Company, except
such as have been obtained and made under the Act and the Trust
Indenture Act and such as may be required under state securities laws;
(v) the execution, delivery and performance of the Indenture, the
Terms Agreement (including the provisions of this Agreement), any Debt
Warrant Agreement, any Currency Warrant Agreement and any Delayed
Delivery Contracts and the issuance and sale of the Securities and
compliance with the terms and provisions thereof will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, the charter or by-laws of the Company,
Philip Morris Incorporated, Philip Morris International Inc. or Kraft
Foods, Inc., or, to the best of the knowledge of such counsel, the
charter or by-laws of any other subsidiary of the Company, any statute,
any rule, regulation or order of any governmental agency or body or any
court having jurisdiction over the Company or any subsidiary of the
Company or any of their properties or any agreement or instrument to
which the Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject, and the
Company has full power and authority to authorize, issue and sell the
Securities as contemplated by the Terms Agreement (including the
provisions of this Agreement);
(vi) the Registration Statement has become effective under the Act,
and, to the best of the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement or of any
part thereof has been issued and no proceedings for that purpose have
been instituted or
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are pending or contemplated under the Act, and the registration
statement relating to the Registered Securities, as of its effective
date, the Registration Statement and the Prospectus, as of the date of
the Terms Agreement, and any amendment or supplement thereto, as of its
date, complied as to form in all material respects with the
requirements of the Act, the Trust Indenture Act and the Rules and
Regulations; such counsel have no reason to believe that such
registration statement, as of its effective date, or any amendment or
supplement thereto, as of its date, contained any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading or that the Prospectus or any amendment or supplement
thereto contains any untrue statement of a material fact or omits to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; the descriptions in the Registration Statement and
Prospectus of statutes, legal and governmental proceedings and
contracts and other documents are accurate and fairly present the
information required to be shown; and such counsel do not know of any
legal or governmental proceedings required to be described in the
Prospectus which are not described as required or of any contracts or
documents of a character required to be described in the Registration
Statement or Prospectus or to be filed as exhibits to the Registration
Statement which are not described and filed as required; it being
understood that such counsel need express no opinion as to the
financial statements or other financial data contained in the
Registration Statement or the Prospectus or any such amendment or
supplement; and
(vii) the Terms Agreement (including the provisions of this
Agreement) and any Delayed Delivery Contracts have been duly
authorized, executed and delivered by the Company.
In rendering such opinion, Hunton & Williams may state that (1) in clause (iii)
with respect to the validity and enforceability of the Indenture, any Debt
Warrant Agreement, any Currency Warrant Agreement and the Securities, and in
clause (iv) and in clause (v) with respect to any statute, rule, regulation or
order of any governmental agency, body or court and the power and authority of
the Company to authorize, issue and sell the Securities, such counsel has
assumed that under the laws of any country in whose currency (or whose currency
is a component currency of a currency unit in which) any Securities are
denominated or payable, if other than in U.S. dollars, or of any other
governmental authority having jurisdiction over any such currency unit, that no
consent, approval, authorization, or order of, or filing with any governmental
agency, body or court is required for the consummation of the transactions
contemplated hereunder in connection with the issuance and sale of the
Securities and compliance with the terms and provisions thereof will not result
in any breach or violation of any of the terms and provisions in any statute,
rule, regulation or order of any governmental agency or body or any court, and
(2) in clause (iii) with respect to the enforceability of the Indenture, no
opinion is expressed with respect to Section 516 thereof. Such counsel may note
that (a) a New York statute provides that with respect to a foreign currency
obligation a court of the State of New York shall render a judgment or decree
in such foreign currency and such judgment or decree shall be converted into
currency of the United States at the rate of exchange prevailing on the date of
entry of such judgment or decree and (b) with respect to a foreign currency
obligation a United States Federal court in New York may award judgment in
United States dollars, provided that such counsel expresses no opinion as to
the rate of exchange such court would apply.
(e) The Representatives shall have received from Simpson Thacher &
Bartlett, counsel for the Underwriters, such opinion or opinions, dated the
Closing Date, with respect to the incorporation of the Company, the
validity of the Securities, the Registration Statement, the Prospectus and
other related matters as they may require, and the Company shall have
furnished to such counsel such documents as they request for the purpose of
enabling them to pass upon such matters. In rendering such opinion, Simpson
Thacher & Bartlett may rely as to the incorporation of the Company and all
other matters governed by Virginia law upon the opinion of Hunton &
Williams referred to above.
(f) The Representatives shall have received a certificate, dated the
Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to
the best of their knowledge after reasonable investigation, shall state
that the representations and warranties of the Company in this Agreement
are true and correct, that the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied hereunder
at or prior to the Closing Date, that no stop order suspending the
effectiveness of the Registration Statement
7
<PAGE>
or of any part thereof has been issued and no proceedings for that purpose
have been instituted or are contemplated by the Commission and that,
subsequent to the date of the most recent financial statements in the
Prospectus, there has been no material adverse change in the financial
position or results of operation of the Company and its subsidiaries except
as set forth in or contemplated by the Prospectus or as described in such
certificate.
(g) The Representatives shall have received a letter, dated the Closing
Date, of Coopers & Lybrand L.L.P., which reconfirms the matters set forth
in their letter delivered pursuant to subsection (a) of this Section and
states in effect that:
(i) in their opinion, any financial statements or schedules examined
by them and included in the Prospectus and not covered by their letter
delivered pursuant to subsection (a) of this Section comply in form in
all material respects with the applicable accounting requirements of
the Act and the related published Rules and Regulations;
(ii) on the basis of performing the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in SAS No. 71, on any
unaudited interim condensed consolidated financial statements of the
Company included in the Prospectus and not covered by their letter
delivered pursuant to subsection (a) of this Section, reading the
latest available interim financial statements of the Company, inquiries
of officials of the Company who have responsibility for financial and
accounting matters and other specified procedures, nothing came to
their attention that caused them to believe that:
(A) the unaudited interim condensed consolidated financial
statements of the Company, if any, included in the Prospectus do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published Rules
and Regulations or require any material modifications to be made for
them to be in conformity with generally accepted accounting
principles;
(B) at the date of the latest available consolidated balance sheet
of the Company read by such accountants, and at a subsequent
specified date not more than five business days prior to the Closing
Date, there was any decrease in the outstanding common stock, or
consolidated earnings reinvested in the business of the Company
other than any decrease resulting from the declaration of regular
quarterly cash dividends, or any issuance or assumption of long-term
debt by the Company, Philip Morris Incorporated, Philip Morris
International Inc., Kraft Foods, Inc. or Philip Morris Capital
Corporation (exclusive of any short-term borrowings reclassified as
long-term based upon the Company's ability and intention to
refinance these short-term borrowings on a long-term basis), and, at
the date of the latest available consolidated balance sheet of the
Company read by such accountants, there was any decrease in
consolidated net current assets or net assets, all as compared with
amounts shown on or included in the latest balance sheet of the
Company included in the Prospectus; or
(C) for the period from the date of the latest consolidated
statement of earnings of the Company included in the Prospectus to
the date of the latest available consolidated statement of earnings
of the Company read by such accountants there were any decreases, as
compared with the corresponding period of the previous year, in
consolidated operating revenues, operating income, net earnings or
the historical ratio of earnings to fixed charges of the Company and
consolidated subsidiaries;
except in all cases set forth in clauses (B) and (C) above for
issuances or assumptions or decreases which the Prospectus discloses
have occurred or may occur or which are described in such letter;
(iii) with respect to the unaudited capsule information of the
Company, if any, included in the Prospectus:
(A) on the basis of performing the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in SAS No. 71 on the
unaudited interim condensed consolidated financial statements of the
Company from which such unaudited capsule information was derived,
reading such unaudited capsule information, inquiries of officials of the
Company who have responsibility for financial and
8
<PAGE>
accounting matters and other specified procedures, nothing came to
their attention that caused them to believe that:
(1) the amounts contained in the unaudited capsule information
included in the Prospectus do not agree with the amounts set
forth in the unaudited interim condensed consolidated financial
statements of the Company from which such amounts were derived;
and
(2) the amounts contained in the unaudited capsule information
included in the Prospectus were not determined on a basis
substantially consistent with that of the corresponding
financial information in the latest audited financial statements
of the Company included in the Prospectus; or
(B) if the procedures specified by the American Institute of
Certified Public Accountants for a review of interim financial
information as described in SAS No. 71 have not been performed on
the unaudited interim condensed consolidated financial statements of
the Company from which such unaudited capsule information was
derived, they have:
(1) read the unaudited capsule information and agreed the
amounts contained therein with the Company's accounting records
from which it was derived; and
(2) inquired of certain officials of the Company who have
responsibility for financial and accounting matters whether the
unaudited capsule information was determined on a basis
substantially consistent with that of the corresponding
financial information in the latest audited financial statements
of the Company included in the Prospectus; and
(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
included in the Prospectus and not covered by their letter delivered
pursuant to subsection (a) of this Section (in each case to the extent
that such dollar amounts, percentages and other financial information
are obtained from accounting records that are subject to the internal
control structure, policies and procedures of the Company's accounting
system or are derived directly from such accounting records by analysis
or computation) with the results obtained from procedures specified in
such letter and have found such dollar amounts, percentages and other
financial information to be in agreement with such results, except as
otherwise specified in such letter.
All financial statements and schedules included in material incorporated by
reference into the Prospectus shall be deemed included in the Prospectus
for the purposes of this subsection.
(h) The Representatives shall have received, so long as financial
statements audited by any independent accountants for or with respect to
any entity acquired by the Company are included in the Prospectus, a
letter, dated the Closing Date, of such accountants confirming that as of a
specified date immediately prior to such acquisition and during the period
covered by the financial statements on which they reported, they were
independent accountants with respect to such entity within the meaning of
the Act and the applicable published Rules and Regulations thereunder and
stating in effect that:
(i) in their opinion, the consolidated financial statements audited
by them and included in the Prospectus comply in form in all material
respects with the applicable accounting requirements of the Act and the
Exchange Act and the related published Rules and Regulations, with
respect to Registration Statements on Form S-3; and
(ii) on the basis of performing the procedures specified by the
American Institute of Certified Public Accountants for a review of
interim financial information as described in SAS No. 71, inquiries of
officials of the Company who have responsibility for financial and
accounting matters and other specified procedures, nothing came to
their attention that caused them to believe that the unaudited
financial statements of such entity at any date and for any period
ending on or prior to the date of the latest unaudited balance sheet of
such entity included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act
9
<PAGE>
and the related published Rules and Regulations or any material
modifications should be made for them to be in conformity with
generally accepted accounting principles.
All financial statements and schedules included in material incorporated by
reference into the Prospectus shall be deemed included in the Prospectus
for purposes of this subsection.
(i) The Representatives shall have received from counsel, satisfactory to
the Representatives, such opinion or opinions, dated the Closing Date, with
respect to compliance with the laws of any country, other than the United
States, in whose currency Purchased Debt Securities or Debt Warrants are
denominated or which is the issuer of a Base Currency, the validity of the
Securities, the Prospectus and other related matters as they may require,
and the Company shall have furnished to such counsel such documents as they
request for the purpose of enabling them to pass upon such matters.
(j) If any Currency Warrants are to be purchased, no order suspending
trading or striking or withdrawing such Currency Warrants from listing and
registration under the Exchange Act shall be in effect, and no proceedings
for such purpose shall be pending before or threatened by the Commission or
by the Exchange.
(k) If applicable to the offering of any Securities, the Representatives
shall have received an opinion from Sutherland, Asbill & Brennan, special
tax counsel for the Company, dated the Closing Date, confirming their
opinion as to United States tax matters set forth in the Prospectus.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as they reasonably request.
7. Indemnification and Contribution. (a) The Company will indemnify and hold
harmless each Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject, under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, the Prospectus, or any amendment or supplement thereto, or any
related preliminary prospectus or preliminary prospectus supplement, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement in or omission or alleged omission from any of such documents in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives, if any, specifically
for use therein; and provided further that as to any preliminary prospectus
this indemnity agreement shall not inure to the benefit of any Underwriter or
any person controlling that Underwriter on account of any loss, claim, damage
or liability arising from the sale of Purchased Securities to any person by
that Underwriter if that Underwriter failed to send or give a copy of the
Prospectus, as the same may be amended or supplemented, to that person within
the time required by the Act, and the untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact in such preliminary prospectus was corrected in the Prospectus,
unless such failure resulted from non-compliance by the Company with Section
4(d). For purposes of the second proviso to the immediately preceding sentence,
the term Prospectus shall not be deemed to include the documents incorporated
therein by reference, and no Underwriter shall be obligated to send or give any
supplement or amendment to any document incorporated by reference in a
preliminary prospectus or the Prospectus to any person other than a person to
whom such Underwriter has delivered such incorporated documents in response to
a written request therefor.
(b) Each Underwriter will indemnify and hold harmless the Company against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement,
10
<PAGE>
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus or preliminary prospectus supplement, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through the Representatives, if any,
specifically for use therein, and will reimburse any legal or other expenses
reasonably incurred by the Company in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses
are incurred.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall (i) without the prior written consent of the indemnified parties
(which consent shall not be unreasonably withheld), settle or compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified parties
are actual or potential parties to such claim or action) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action, suit or
proceeding, or (ii) be liable for any settlement of any such action effected
without its written consent (which consent shall not be unreasonably withheld),
but if settled with its written consent or if there be a final judgment for the
plaintiff in any such action, the indemnifying party agrees to indemnify and
hold harmless any indemnified party from and against any loss or liability by
reason of such settlement or judgment.
(d) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other from the offering of the
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and the Underwriters on the other
in connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities referred to in the first sentence of this subsection (d) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any action or
claim which is the subject of this subsection (d). Notwithstanding the
provisions of this
11
<PAGE>
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section shall be in addition to
any liability which the Company may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company, to each officer of the Company who
has signed the Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
8. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Purchased Securities under the Terms Agreement
and the aggregate amount of the Purchased Securities that such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 10%
of the aggregate amount of the Purchased Securities, the Representatives may
make arrangements satisfactory to the Company for the purchase of such
Purchased Securities by other persons, including any of the Underwriters, but
if no such arrangements are made by the Closing Date, the non-defaulting
Underwriters shall be obligated severally, in proportion to their respective
commitments under this Agreement and the Terms Agreement, to purchase the
Purchased Securities that such defaulting Underwriters agreed but failed to
purchase. If any Underwriter or Underwriters so default and the aggregate
amount of the Purchased Securities with respect to which such default or
defaults occur exceeds 10% of the aggregate amount of the Purchased Securities
and arrangements satisfactory to the Representatives and the Company for the
purchase of such Purchased Securities by other persons are not made within 36
hours after such default, such Terms Agreement will terminate without liability
on the part of any non-defaulting Underwriter or the Company, except as
provided in Section 9. As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this Section. As used
in this Section only, the "aggregate amount" of Purchased Securities shall mean
the aggregate principal amount of any Purchased Debt Securities plus the public
offering price of any Debt Warrants or Currency Warrants included in the
relevant offering of Purchased Securities. Nothing herein will relieve a
defaulting Underwriter from liability for its default. The respective
commitments of the several Underwriters for the purposes of this Section shall
be determined without regard to reduction in the respective Underwriters'
obligations to purchase the amount of Purchased Debt Securities set forth
opposite their names in the Terms Agreement as a result of Delayed Delivery
Contracts entered into by the Company.
The foregoing obligations and agreements set forth in this Section will not
apply if the Terms Agreement specifies that such obligations and agreements
will not apply.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of
the Company or its officers and of the several Underwriters set forth in or
made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation, or statement as to the results thereof, made
by or on behalf of any Underwriter, the Company or any of their respective
representatives, officers or directors or any controlling person and will
survive delivery of and payment for the Purchased Securities. If the
obligations of the Underwriters with respect to any offering of Securities are
terminated pursuant to Section 8 or if for any reason the purchase of the
Purchased Securities by the Underwriters under a Terms Agreement is not
consummated, the Company shall remain responsible for the expenses to be paid
or reimbursed by it pursuant to Section 4 and the respective obligations of the
Company and the Underwriters pursuant to Section 7 shall remain in effect. If
for any reason the purchase of the Purchased Securities by the Underwriters is
not consummated other than because of the termination of this Agreement
pursuant to Section 8 or a failure to satisfy the conditions set
12
<PAGE>
forth in Section 6(c), the Company shall reimburse the Underwriters, severally,
for all out-of-pocket expenses (including fees and disbursements of counsel)
reasonably incurred by them in connection with the offering of the Securities.
10. Notices. All communications hereunder will be in writing and, if sent to
the Underwriters, will be mailed, delivered or telegraphed and confirmed to
them at their addresses furnished to the Company in writing for the purpose of
communications hereunder or, if sent to the Company, will be mailed, delivered
or telegraphed and confirmed to it at 120 Park Avenue, New York, New York
10017, Attention: Dede Thompson Bartlett, Vice President and Secretary.
11. Successors. This Agreement will inure to the benefit of and be binding
upon the Company and such Underwriters as are identified in Terms Agreements
and their respective successors and the officers and directors and controlling
persons referred to in Section 6, and no other person will have any right or
obligation hereunder.
12. Applicable Law. This Agreement and the Terms Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York.
13
<PAGE>
ANNEX I
(Three copies of this Delayed Delivery Contract should be signed and returned
to the address shown below so as to arrive not later than 9:00 A.M.,
New York time, on .......... ........, 19....*.)
DELAYED DELIVERY CONTRACT
-------------------------
[Insert date of initial public offering]
Philip Morris Companies Inc.
c/o [Insert name and address of lead Underwriter]
Attention:
Gentlemen:
The undersigned hereby agrees to purchase from Philip Morris Companies Inc.,
a Virginia corporation ("Company"), and the Company agrees to sell to the
undersigned, [If one delayed closing, insert--as of the date hereof, for
delivery on , 19 ("Delivery Date"),]
$........................................
principal amount of the Company's [Insert title of debt securities] ("Debt
Securities") and
........................................
of the Company's [Insert title of warrants] ("Debt Warrants") (collectively,
the "Securities"), offered by the Company's Prospectus dated , 19 and a
Prospectus Supplement dated , 19 relating thereto, receipt of copies of
which is hereby acknowledged, at % of the principal amount of the Debt
Securities plus accrued interest, if any, and on the further terms and
conditions set forth in this Delayed Delivery Contract ("Contract").
[If two or more delayed closings, insert the following:
The undersigned will purchase from the Company as of the date hereof, for
delivery on the dates set forth below, Debt Securities and Debt Warrants in the
principal amounts and number, respectively, set forth below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT NUMBER
OF DEBT OF DEBT
DELIVERY DATE SECURITIES WARRANTS
------------- ---------------- --------
<S> <C> <C>
........................ .... ....
........................ .... ....
</TABLE>
Each of such delivery dates is hereinafter referred to as a Delivery Date.]
Payment for the Securities that the undersigned has agreed to purchase for
delivery on [the] [each] Delivery Date shall be made to the Company or its
order by certified or official bank check in New York Clearing House (next day)
funds at the office of at .M. on [the] [such] Delivery
Date upon delivery to the undersigned of the Securities to be purchased by the
undersigned [for delivery on such Delivery Date] in definitive fully registered
form and in such denominations or numbers and registered in such names as the
undersigned may designate by written or telegraphic communication addressed to
the Company not less than five full business days prior to [the] [such]
Delivery Date.
- --------
* Insert date which is third full business day prior to Closing Date under
the Terms Agreement.
14
<PAGE>
It is expressly agreed that the provisions for delayed delivery and payment
are for the sole convenience of the undersigned; that the purchase hereunder of
Securities is to be regarded in all respects as a purchase as of the date of
this Contract; that the obligation of the Company to make delivery of and
accept payment for, and the obligation of the undersigned to take delivery of
and make payment for, Securities on [the] [each] Delivery Date shall be subject
only to the conditions that (1) investment in the Securities shall not at [the]
[such] Delivery Date be prohibited under the laws of any jurisdiction in the
United States to which the undersigned is subject and (2) the Company shall
have sold to the Underwriters the total principal amount of the Debt Securities
less the principal amount thereof covered by this and other similar Contracts.
The undersigned represents that its investment in the Securities is not, as of
the date hereof, prohibited under the laws of any jurisdiction to which the
undersigned is subject and which governs such investment.
Promptly after completion of the sale to the Underwriters the Company will
mail or deliver to the undersigned at its address set forth below notice to
such effect, accompanied by a copy of the opinion of counsel for the Company
delivered to the Underwriters in connection therewith.
This Contract will inure to the benefit of and be binding upon the parties
hereto and their respective successors, but will not be assignable by either
party hereto without the written consent of the other.
It is understood that the acceptance of any such Contract is in the Company's
sole discretion and, without limiting the foregoing, need not be on a first-
come, first-served basis. If this Contract is acceptable to the Company, it is
requested that the Company sign the form of acceptance below and mail or
deliver one of the counterparts hereof to the undersigned at its address set
forth below. This will become a binding contract between the Company and the
undersigned when such counterpart is so mailed or delivered.
Yours very truly,
..........................................
(Name of Purchaser)
By .......................................
.......................................
(Title of Signatory)
.......................................
.......................................
(Address of Purchaser)
Accepted, as of the above date.
Philip Morris Companies Inc.
By ..................................
(Insert Title)
15
<PAGE>
PHILIP MORRIS COMPANIES INC.
("COMPANY")
DEBT SECURITIES, WARRANTS TO PURCHASE
DEBT SECURITIES AND CURRENCY WARRANTS
TERMS AGREEMENT
---------------
, 199
Philip Morris Companies Inc.
120 Park Avenue
New York, New York 10017
Attention: Hans G. Storr,
Executive Vice President and Chief Financial Officer
Dear Sirs:
On behalf of the several Underwriters named in Schedule A hereto and for
their respective accounts, we offer to purchase, on and subject to the terms
and conditions of the Underwriting Agreement relating to Debt Securities,
Warrants to Purchase Debt Securities and Currency Warrants dated as of February
1, 1996 ("Underwriting Agreement"), the following securities ("Securities") on
the following terms:
DEBT SECURITIES
Title:
Principal Amount: $
Interest Rate: % from , 199 , payable:
Maturity:
Currency of Denomination:
Currency of Payment:
Form and Denomination:
Overseas Paying Agents:
Optional Redemption:
Sinking Fund:
Delayed Delivery Contracts: [authorized] [not authorized]
Delivery Date:
Minimum Contract:
Maximum aggregate principal amount:
Fee: %
Purchase Price: %, plus accrued interest, or amortized original issue
discount, if any, from 19 .
Expected Reoffering Price:
<PAGE>
DEBT WARRANTS
Number of Debt Warrants to be issued:
Debt Warrant Agreement:
Form of Debt Warrants: Registered
Issuable jointly with Debt Securities: [Yes] [No]
[Number of Debt Warrants issued with each $ principal amount of Debt
Securities:]
[Detachable Date:]
Date from which Debt Warrants are exercisable:
Date on which Debt Warrants expire:
Exercise price of Debt Warrants:
Expected Reoffering price: $
Purchase price: $
Title of Warrant Debt Securities:
Principal amount of Warrant Debt Securities purchaseable upon exercise of one
Debt Warrant:
Interest Rate: % from , 199 , payable:
Maturity:
Currency of Denomination:
Currency of Payment:
Form and Denomination:
Overseas Paying Agents:
Optional Redemption:
Sinking Fund:
<PAGE>
CURRENCY WARRANTS
Title of Currency Warrants:
Type of Currency Warrant:
Number of Currency Warrants to be issued:
Base Currency:
Currency Warrant Agreement:
Number of Warrants issued with each $ principal amount of Debt Securities:
Date from which Currency Warrants are exercisable:
Date on which Currency Warrants expire:
Circumstances causing automatic exercise:
Minimum exercise amount:
Base Currency Amount:
Cash Settlement Value Formula:
Strike price(s) of Currency Warrants:
Expected Reoffering price: $
Purchase price: $
----------------
Names and Addresses of Representatives:
The respective principal amounts of the Debt Securities and number of Debt
Warrants and or Currency Warrants to be purchased by each of the Underwriters
are set forth opposite their names in Schedule A hereto.
The provisions of the Underwriting Agreement are incorporated herein by
reference.
The Closing will take place at A.M., New York City time, on , 199 ,
at the offices of Philip Morris Companies Inc., 120 Park Avenue, New York, New
York.
The Securities will be made available for checking and packaging at the
office of Chemical Bank at least 24 hours prior to the Closing Date.
Please signify your acceptance by signing the enclosed response to us in the
space provided and returning it to us.
Very truly yours,
<PAGE>
SCHEDULE A
DEBT SECURITIES
UNDERWRITER PRINCIPAL AMOUNT
----------- ----------------
DEBT WARRANTS
NUMBER OF DEBT
UNDERWRITER WARRANTS
----------- --------------
CURRENCY WARRANTS
NUMBER OF CURRENCY
UNDERWRITER WARRANTS
----------- ------------------
<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,
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings before
income taxes and
cumulative effect
of accounting change $ 9,347 $8,216 $6,196 $ 8,608 $6,971
Add (Deduct):
Equity in net earnings of
less than 50% owned
affiliates (246) (184) (164) (107) (95)
Dividends from less than
50% owned affiliates 202 165 151 125 72
Fixed charges 1,495 1,537 1,716 1,736 1,899
Interest capitalized, net
of amortization 2 (1) (13) (3) (11)
------- ------ ------ ------- ------
Earnings available for
fixed charges $10,800 $9,733 $7,886 $10,359 $8,836
======= ====== ====== ======= ======
Fixed charges:
Interest incurred:
Consumer products $ 1,281 $1,317 $1,502 $ 1,525 $1,711
Financial services and
real estate 84 78 87 95 83
------- ------ ------ ------- ------
$ 1,365 $1,395 $1,589 $1,620 $1,794
Portion of rent expense
deemed to represent
interest factor 130 142 127 116 105
------- ------ ------ ------- ------
Fixed charges $ 1,495 $1,537 $1,716 $ 1,736 $1,899
======= ====== ====== ======= ======
Ratio of earnings to
fixed charges 7.2 6.3 4.6 6.0 4.7
======= ====== ====== ======= ======
</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, 33-48781, 33-59109, 33-63975 and 33-63977), of our report, dated January
29, 1996 (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 February 1, 1996, as indicated in item 7 herein.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
February 1, 1996
<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,
1995 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-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,138
<SECURITIES> 0
<RECEIVABLES> 4,677
<ALLOWANCES> 169
<INVENTORY> 7,862
<CURRENT-ASSETS> 14,879
<PP&E> 18,601
<DEPRECIATION> 7,485
<TOTAL-ASSETS> 53,811
<CURRENT-LIABILITIES> 14,273
<BONDS> 13,107
<COMMON> 935
0
0
<OTHER-SE> 13,050
<TOTAL-LIABILITY-AND-EQUITY> 53,811
<SALES> 66,071
<TOTAL-REVENUES> 66,071
<CGS> 26,685
<TOTAL-COSTS> 39,617
<OTHER-EXPENSES> 15,928
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,179
<INCOME-PRETAX> 9,347
<INCOME-TAX> 3,869
<INCOME-CONTINUING> 5,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (28)
<NET-INCOME> 5,450
<EPS-PRIMARY> 6.48
<EPS-DILUTED> 6.48
</TABLE>
<PAGE>
Exhibit 99
PHILIP MORRIS COMPANIES INC.
and SUBSIDIARIES
Consolidated Financial Statements
for the period ended December 31, 1995
<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, 1995 and 1994, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
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 29, 1996
<PAGE>
PHILIP MORRIS COMPANIES INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS, at December 31,
(in millions of dollars, except per share data)
__________
<TABLE>
<CAPTION>
ASSETS
1995 1994
------- -------
<S> <C> <C>
CONSUMER PRODUCTS
Cash and cash equivalents $ 1,138 $ 184
Receivables, net 4,508 4,382
Inventories:
Leaf tobacco 3,332 3,029
Other raw materials 1,721 1,943
Finished product 2,809 3,015
------- -------
7,862 7,987
Other current assets 1,371 1,355
------- -------
Total current assets 14,879 13,908
Property, plant and equipment, at cost:
Land and land improvements 726 743
Buildings and building equipment 4,976 4,834
Machinery and equipment 11,542 11,248
Construction in progress 1,357 1,429
------- -------
18,601 18,254
Less accumulated depreciation 7,485 7,083
------- -------
11,116 11,171
Goodwill and other intangible assets
(less accumulated amortization of
$3,873 and $3,342) 19,319 19,744
Other assets 2,866 2,633
------- -------
TOTAL CONSUMER PRODUCTS ASSETS 48,180 47,456
FINANCIAL SERVICES AND REAL ESTATE
Finance assets, net 4,991 4,519
Real estate held for development and sale 339 401
Other assets 301 273
------- -------
TOTAL FINANCIAL SERVICES AND
REAL ESTATE ASSETS 5,631 5,193
------- -------
TOTAL ASSETS $53,811 $52,649
======= =======
<CAPTION>
1995 1994
------- -------
LIABILITIES
<C> <C> <C>
CONSUMER PRODUCTS
Short-term borrowings $ 122 $ 181
Current portion of long-term debt 1,926 712
Accounts payable 3,364 3,789
Accrued liabilities:
Marketing 2,114 2,086
Taxes, except income taxes 1,075 948
Employment costs 995 926
Other 2,706 2,290
Income taxes 1,137 1,325
Dividends payable 834 708
------- -------
Total current liabilities 14,273 12,965
Long-term debt 12,324 14,085
Deferred income taxes 356 385
Accrued postretirement health care costs 2,273 2,164
Other liabilities 5,643 5,609
------- -------
TOTAL CONSUMER PRODUCTS LIABILITIES 34,869 35,208
FINANCIAL SERVICES AND REAL ESTATE
Short-term borrowings 671 604
Long-term debt 783 890
Deferred income taxes 3,382 3,010
Other liabilities 121 151
------- -------
TOTAL FINANCIAL SERVICES AND
REAL ESTATE LIABILITIES 4,957 4,655
------- -------
Total liabilities 39,826 39,863
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 19,779 17,489
Currency translation adjustments 467 (47)
------- -------
21,181 18,377
Less cost of repurchased stock
(104,150,433 and 82,461,374 shares) 7,196 5,591
------- -------
Total stockholders' equity 13,985 12,786
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $53,811 $52,649
======= =======
</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>
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Operating revenues $66,071 $65,125 $60,901
Cost of sales 26,685 28,351 26,771
Excise taxes on products 12,932 11,349 10,280
------- ------- -------
Gross profit 26,454 25,425 23,850
Marketing, administration and research costs 15,337 15,372 15,694
Amortization of goodwill 591 604 569
------- ------- -------
Operating income 10,526 9,449 7,587
Interest and other debt expense, net 1,179 1,233 1,391
------- ------- -------
Earnings before income taxes and
cumulative effect of accounting changes 9,347 8,216 6,196
Provision for income taxes 3,869 3,491 2,628
------- ------- -------
Earnings before cumulative effect
of accounting changes 5,478 4,725 3,568
Cumulative effect of changes in method
of accounting (28) (477)
------- ------- -------
Net earnings $ 5,450 $ 4,725 $ 3,091
======= ======= =======
Per share data:
Earnings before cumulative effect of
accounting changes $ 6.51 $ 5.45 $ 4.06
Cumulative effect of changes in
method of accounting (.03) (.54)
------- ------- -------
Net earnings $ 6.48 $ 5.45 $ 3.52
======= ======= =======
</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
Common Reinvested in Translation Repurchased Stockholders'
Stock the Business Adjustments Stock Equity
------ -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1993 $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 repurchased (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 repurchased (1,600) (1,600)
Net unrealized depreciation on securities (114) (114)
----- -------- ------ ------- --------
Balances, December 31, 1994 935 17,489 (47) (5,591) 12,786
Net earnings 5,450 5,450
Exercise of stock options and issuance
of other stock awards (77) 470 393
Cash dividends declared
($3.65 per share) (3,065) (3,065)
Redemption of stock rights (9) (9)
Currency translation adjustments 514 514
Stock repurchased (2,075) (2,075)
Net unrealized depreciation on securities (9) (9)
----- -------- ------ ------- --------
Balances, December 31, 1995 $935 $19,779 $ 467 $(7,196) $13,985
===== ======== ====== ======= ========
</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>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - CONSUMER PRODUCTS $ 5,345 $ 4,591 $ 2,960
- FINANCIAL SERVICES AND REAL ESTATE 105 134 131
------- ------- -------
Net earnings 5,450 4,725 3,091
Adjustments to reconcile net earnings to operating cash flows:
CONSUMER PRODUCTS
Depreciation and amortization 1,671 1,722 1,619
Deferred income tax provision (benefit) 15 237 (430)
(Gains) losses on sales of businesses (275) 19 (46)
Cumulative effect of accounting changes 46 774
Restructuring charge 741
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (466) (239) 105
Inventories (5) (387) 396
Accounts payable (260) 582 700
Income taxes 504 202 158
Other working capital items (482) (288) (736)
Other 354 180 203
FINANCIAL SERVICES AND REAL ESTATE
Deferred income tax provision 299 376 461
Decrease (increase) in real estate receivables 35 (30) 34
Decrease (increase) in real estate held for development and sale 61 86 (2)
Other (22) (82) (64)
------- ------- -------
Operating cash flow before income taxes on sales of
businesses and interest payment on zero coupon bonds 6,925 7,103 7,004
Income taxes on sales of businesses (238) (8) (37)
Interest payment on zero coupon bonds - financial
services and real estate (156)
------- ------- -------
Net cash provided by operating activities 6,687 6,939 6,967
------- ------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
CONSUMER PRODUCTS
Capital expenditures (1,621) (1,726) (1,592)
Purchase of businesses, net of acquired cash (217) (146) (3,161)
Proceeds from sales of businesses 2,202 300 553
Other 17 28 49
FINANCIAL SERVICES AND REAL ESTATE
Investments in finance assets (613) (582) (597)
Proceeds from finance assets 123 889 527
------- ------- -------
Net cash used in investing activities (109) (1,237) (4,221)
------- ------- -------
Net cash provided by operating and investing activities $ 6,578 $ 5,702 $ 2,746
------- ------- -------
</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>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
CONSUMER PRODUCTS
Net (repayment) issuance of short-term borrowings $ (21) $ 172 $ 1,220
Long-term debt proceeds 564 97 1,027
Long-term debt repaid (1,302) (1,817) (2,154)
FINANCIAL SERVICES AND REAL ESTATE
Net issuance (repayment) of short-term borrowings 67 (325) 171
Long-term debt proceeds 185
Long-term debt repaid (139) (44) (290)
Repurchase of outstanding stock (2,111) (1,532) (1,218)
Dividends paid (2,939) (2,487) (2,291)
Stock rights redemption (9)
Issuance of shares 291 54 39
Other (28) (20) (34)
------- ------- -------
Net cash used in financing activities (5,627) (5,717) (3,530)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents 3 17 (55)
------- ------- -------
Cash and cash equivalents:
Increase (decrease) 954 2 (839)
Balance at beginning of year 184 182 1,021
------- ------- -------
Balance at end of year $ 1,138 $ 184 $ 182
======= ======= =======
Cash paid: Interest - Consumer products $ 1,293 $ 1,340 $ 1,391
======= ======= =======
- Financial services and real estate $ 89 $ 229 $ 81
======= ======= =======
Income taxes $ 3,067 $ 2,449 $ 2,092
======= ======= =======
</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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of operating revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
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 expensed generally as incurred.
Depreciation, amortization and goodwill valuation:
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. The Company periodically evaluates
the recoverability of goodwill and measures any impairment by comparison
to estimated undiscounted cash flows from future operations.
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 as 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 recognized
in income as the related transaction is realized.
Continued
7
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Accounting changes:
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("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. The
application of SFAS No. 116 did not materially reduce earnings before
cumulative effect of accounting changes.
The Company's adoption of SFAS No. 106 for non-U.S. postretirement benefits
other than pensions, effective January 1, 1995, is discussed in Note 14.
The Company's adoption of SFAS No. 112 for postemployment benefits,
effective January 1, 1993, is discussed in Note 13.
SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" will be adopted by
the Company on January 1, 1996. The Company estimates that the effect of
adoption will not be material.
Note 2. Divestitures and Acquisitions:
_______________________________________
During 1995, the Company sold its bakery businesses and its North American
margarine, specialty oils, marshmallows, caramels and Kraft Foodservice
distribution businesses. In addition, several smaller international food
businesses were sold. Operating revenues and operating income of these
businesses for the period owned in 1995 were $2.0 billion and $107 million,
respectively, and for the year ended December 31, 1994 were $5.9 billion
and $267 million, respectively. Net assets of the businesses sold were
$1.8 billion. Total proceeds and net pretax gains from the sales of these
businesses were $2.1 billion and $275 million, respectively. As part of
this divestiture program, the Company offered an early retirement program
and is downsizing or closing other food facilities. The cost of these
actions offset the gains from businesses sold.
During 1994, the Company sold The All American Gourmet Company (frozen dinners
business) for $170 million. The effect of this disposition, and other
smaller acquisitions and dispositions, was not material to the Company's
1994 results of operations.
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.
Continued
8
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
During 1993, the Company sold its North American ice cream and frozen
vegetables businesses and beer can manufacturing plants. The proceeds from
the sales of these businesses aggregated $498 million. The effects of
these sales of businesses were not material to the Company's 1993 results
of operations.
Note 3. Restructuring:
_______________________
In 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.
Note 4. Inventories:
_____________________
The cost of approximately 50% of inventories in 1995 and 48% of inventories in
1994 was determined using the LIFO method. The stated LIFO values of
inventories were approximately $750 million and $870 million lower than the
current cost of inventories at December 31, 1995 and 1994, 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>
1995 1994
---------------------- ----------------------
(in millions)
Average Average
Amount Year-End Amount Year-End
Outstanding Rate Outstanding Rate
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Consumer products:
Bank loans $ 209 13.1% $ 215 12.0%
Commercial paper 2,495 5.8% 2,505 5.9%
Amount reclassified
as long-term debt (2,582) (2,539)
------- -------
$ 122 $ 181
======= =======
Financial services and
real estate:
Commercial paper $ 671 5.9% $ 604 5.9%
======= =======
</TABLE>
The fair values of the Company's short-term borrowings at December 31, 1995
and 1994, based upon market rates, approximate the amounts disclosed above.
Continued
9
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The Company and its subsidiaries maintain credit facilities with a number of
lending institutions, amounting to approximately $15.4 billion at December
31, 1995. Approximately $15.3 billion of these facilities were unused at
December 31, 1995. Certain of these facilities are used to support
commercial paper borrowings, are available for acquisitions and other
corporate purposes and require the maintenance of a fixed charges coverage
ratio.
The Company's credit facilities include revolving bank credit agreements
totaling $12.0 billion. An agreement for $4.0 billion expires in October
1996, and an agreement for $8.0 billion expires in 2000 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.
Note 6. Long-Term Debt:
________________________
At December 31, the Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
(in millions)
<S> <C> <C>
Consumer products:
Short-term borrowings, reclassified $ 2,582 $ 2,539
Notes, 6.15% to 9.75% (average effective
rate 8.20%), due through 2004 8,598 9,760
Debentures, 6.0% to 8.5%
(average effective rate 10.71%),
$1.3 billion face amount,
due through 2017 1,018 995
Foreign currency obligations:
Swiss franc, 2.0% to 7.0%
(average effective rate 6.03%),
due through 2000 1,303 942
Deutsche mark, 2.75% to 6.38%
(average effective rate 6.12%),
due through 2000 392 182
Other 102 118
Other 255 261
------- -------
14,250 14,797
Less current portion of long-term debt (1,926) (712)
------- -------
$12,324 $14,085
======= =======
</TABLE>
Continued
10
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
<TABLE>
<CAPTION>
1995 1994
---- ----
(in millions)
<S> <C> <C>
Financial services and real estate:
Eurodollar notes, 6.75% and 6.625%,
(average effective rate 6.7%)
due 1997 and 1999 $ 400 $ 400
Foreign currency obligations:
Swiss franc, 4.75%, due 1996 - 123
ECU notes, 9.25% and 8.50%, due
1997 and 1998 383 367
----- -----
$ 783 $ 890
===== =====
</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>
1996 $1,926
1997 1,852 $392
1998 1,555 192
1999 1,789 199
2000 874
2001-2005 3,283
2006-2010 169
Thereafter 487
</TABLE>
The revolving credit facility under which the consumer products short-term
debt was reclassified as long-term debt expires in 2000 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, 1995 and 1994 was $15.9 billion and $15.7
billion, respectively.
Continued
11
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Note 7. Capital Stock:
_______________________
Shares of authorized common stock are 4 billion; issued, repurchased and
outstanding were as follows:
<TABLE>
<CAPTION>
Net
Shares Shares Shares
Issued Repurchased Outstanding
----------- ------------- ------------
<S> <C> <C> <C>
Balances, January 1, 1993 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
Repurchased (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
Repurchased (28,801,356) (28,801,356)
------------ ----------- -----------
Balances, December 31, 1994 935,320,439 (82,461,374) 852,859,065
Exercise of stock options
and issuance of other
stock awards 6,470,262 6,470,262
Repurchased (28,159,321) (28,159,321)
------------ ----------- -----------
Balances, December 31, 1995 935,320,439 (104,150,433) 831,170,006
=========== ============ ===========
</TABLE>
At December 31, 1995, 42,021,339 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 were not exercisable until ten days after public
announcement that any person had acquired 10% or more of the Company's
common stock or ten business days after any person announced a tender offer
for 10% or more of the Company's common stock. In 1995, the Company
redeemed the rights for $.01 per right, at a total cost of $9 million.
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 of not less than
fair value on the date of the grant.
At December 31, 1995 and 1994, options under the 1992 plan and previous plans
were exercisable for 20,700,934 shares and 27,253,547 shares, respectively.
Shares available to be granted at December 31, 1995 and 1994 were
12,639,175 and 20,064,190, respectively.
Options activity was as follows for the years ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- --------------
<S> <C> <C> <C>
Balances, beginning of year 27,765,157 30,035,681 23,802,744
Granted 7,983,200 511,610 8,433,540
Exercised (6,750,112) (2,394,089) (1,821,944)
Cancelled (590,121) (388,045) (378,659)
-------------- -------------- -------------
Balances, end of year 28,408,124 27,765,157 30,035,681
============== ============== =============
Range of exercise prices
at year-end $18.44-$100.00 $10.66-$100.00 $8.67-$100.00
Price range of shares
exercised during
the year $10.66-$77.81 $8.67-$49.06 $7.26-$63.69
Weighted average grant
price per share $74.78 $69.73 $49.09
</TABLE>
Continued
13
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The Company may grant 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
1995 and 1994, the Company granted 212,000 shares and 2,636,940 shares,
respectively, of restricted stock to eligible U.S. based employees and also
issued to eligible non-U.S. employees rights to receive 48,000 and
1,034,320 like shares, respectively. 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. At December 31, 1995,
restrictions on the stock, net of forfeitures, lapse as follows: 1996-
295,110 shares; 1997-2,912,270 shares; 1998-50,000 shares; 1999-20,000
shares; 2000-225,000 shares and 2001 and thereafter-163,000 shares.
The fair value of the restricted shares and rights at the date of grant is
amortized to expense ratably over the restriction period. At December 31,
1995 the unamortized portion of $103 million is reported as a reduction of
earnings reinvested in the business.
In June 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". The Statement allows companies
to measure compensation cost in connection with employee stock compensation
plans using a fair value based method or to continue to use an intrinsic
value based method, which generally does not result in compensation cost.
The Company currently plans to continue using the intrinsic value based
method.
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 841,558,296,
867,288,869 and 878,120,884 for 1995, 1994 and 1993, respectively.
Continued
14
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Note 10. Pretax Earnings and Provision for Income Taxes:
_________________________________________________________
Pretax earnings and provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(in millions)
<S> <C> <C> <C>
Pretax earnings:
United States $6,622 $5,781 $4,078
Outside United States 2,725 2,435 2,118
------ ------ ------
Total pretax earnings $9,347 $8,216 $6,196
====== ====== ======
Provision for income taxes:
United States federal:
Current $1,946 $1,540 $1,199
Deferred 97 458 278
------ ------ ------
2,043 1,998 1,477
State and local 434 419 311
------ ------ ------
Total United States 2,477 2,417 1,788
------ ------ ------
Outside United States:
Current 1,175 919 830
Deferred 217 155 10
------ ------ ------
Total outside United States 1,392 1,074 840
------ ------ ------
Total provision for
income taxes $3,869 $3,491 $2,628
====== ====== ======
</TABLE>
At December 31, 1995 applicable United States federal income taxes and foreign
withholding taxes have not been provided on approximately $4.7 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
$285 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>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Provision computed at U.S. federal
statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes, net of
federal tax benefit 3.0 3.3 3.3
Rate differences - foreign operations 1.9 1.0 0.6
Goodwill amortization 2.1 2.4 3.0
Other (0.6) 0.8 0.5
---- ---- ----
Provision for income taxes 41.4% 42.5% 42.4%
==== ==== ====
</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,
1995 1994
-------- --------
(in millions)
<S> <C> <C>
Deferred income tax assets:
Accrued postretirement and postemployment
benefits $ 968 $ 925
Accrued liabilities 451 542
Restructuring, strategic and other reserves 331 315
Other 814 754
------- -------
Gross deferred income tax assets 2,564 2,536
Valuation allowance (125) (108)
------- -------
Total deferred income tax assets 2,439 2,428
------- -------
Deferred income tax liabilities:
Property, plant and equipment (1,687) (1,691)
Prepaid pension costs (197) (223)
------- -------
Total deferred income tax liabilities (1,884) (1,914)
------- -------
Net deferred income tax assets $ 555 $ 514
======= =======
</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 major products are
cigarettes, cheese, coffee, chocolate confections, processed meat products,
various packaged grocery products and beer. 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
divestitures and acquisitions 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>
1995 1994 1993
------- ------- -------
(in millions)
<S> <C> <C> <C>
Operating revenues:
Tobacco $32,316 $28,671 $25,973
Food 29,074 31,669 30,372
Beer 4,304 4,297 4,154
Financial services and real estate 377 488 402
------- ------- -------
Total operating revenues $66,071 $65,125 $60,901
======= ======= =======
Operating profit:
Tobacco $ 7,177 $ 6,162 $ 4,910
Food 3,188 3,108 2,608
Beer 444 413 215
Financial services and real estate 164 208 249
------- ------- -------
Total operating profit 10,973 9,891 7,982
Unallocated corporate expenses 447 442 395
------- ------- -------
Operating income $10,526 $ 9,449 $ 7,587
======= ======= =======
Identifiable assets:
Tobacco $11,196 $ 9,926 $ 9,523
Food 33,447 34,822 33,253
Beer 1,751 1,706 1,706
Financial services and real estate 5,632 5,193 5,659
------- ------- -------
52,026 51,647 50,141
Other assets 1,785 1,002 1,064
------- ------- -------
Total assets $53,811 $52,649 $51,205
======= ======= =======
Depreciation expense:
Tobacco $ 350 $ 360 $ 342
Food 556 539 538
Beer 101 108 140
Financial services and real estate 1 2
Capital expenditures:
Tobacco $ 525 $ 529 $ 527
Food 948 1,072 944
Beer 115 121 92
</TABLE>
Continued
18
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Data by Geographic Region for the years ended December 31,
----------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(in millions)
<S> <C> <C> <C>
Operating revenues:
United States - domestic $32,479 $35,936 $34,282
- export 5,920 4,942 4,105
Europe 23,076 19,888 18,304
Other 4,596 4,359 4,210
------- ------- -------
Total operating revenues $66,071 $65,125 $60,901
======= ======= =======
Operating profit:
United States $ 8,031 $ 7,306 $ 5,695
Europe 2,366 1,914 1,689
Other 576 671 598
------- ------- -------
Total operating profit 10,973 9,891 7,982
Unallocated corporate expenses 447 442 395
------- ------- -------
Operating income $10,526 $ 9,449 $ 7,587
======= ======= =======
Identifiable assets:
United States $32,521 $33,622 $34,522
Europe 15,981 14,845 12,766
Other 3,524 3,180 2,853
------- ------- -------
52,026 51,647 50,141
Other assets 1,785 1,002 1,064
------- ------- -------
Total assets $53,811 $52,649 $51,205
======= ======= =======
</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 laws 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 cost (income) consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------ ------
(in millions)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 110 $ 130 $ 151
Interest cost on projected benefit obligation 367 342 362
(Return) loss on assets - actual (1,344) 94 (796)
- deferred gain (loss) 848 (605) 314
Amortization of net gain upon
adoption of SFAS No. 87 (26) (28) (28)
Other cost (income) 75 49 (47)
------- ----- -----
Net pension cost (income) $ 30 $ (18) $ (44)
======= ===== =====
</TABLE>
During 1995, 1994 and 1993, the Company sold businesses and instituted early
retirement and workforce reduction programs resulting in other pension
expense of $103 million and curtailment gains of $28 million in 1995,
additional pension expense of $49 million in 1994 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>
1995 1994
------- -------
(in millions)
<S> <C> <C>
Actuarial present value of accumulated
benefit obligation - vested $4,116 $3,491
- nonvested 354 270
------ ------
4,470 3,761
Benefits attributable to projected salaries 786 549
------ ------
Projected benefit obligation 5,256 4,310
Plan assets at fair value 6,649 5,735
------ ------
Excess of assets over projected
benefit obligation 1,393 1,425
Unamortized net gain upon
adoption of SFAS No. 87 (140) (169)
Unrecognized prior service cost 131 140
Unrecognized net gain from
experience differences (807) (802)
------ ------
Prepaid pension cost $ 577 $ 594
====== ======
</TABLE>
The projected benefit obligation at December 31, 1995, 1994 and 1993 was
determined using an assumed discount rate of 7.25%, 8.5% and 7.5%,
respectively, and assumed compensation increases of 4.5%, 5.0% and 4.0% at
December 31, 1995, 1994 and 1993, respectively. The assumed long-term rate
of return on plan assets was 9% at December 31, 1995, 1994 and 1993. 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 $201 million, $191 million
and $214 million in 1995, 1994 and 1993, respectively.
Continued
21
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Non-U.S. Plans
______________
Net pension cost consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
(in millions)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 80 $ 72 $ 63
Interest cost on projected benefit obligation 160 136 138
(Return) loss on assets - actual (195) 4 (153)
- deferred gain (loss) 74 (113) 55
Amortization of net loss (gain) upon adoption
of SFAS No. 87 1 (1) (1)
------ ----- ------
Net pension cost $ 120 $ 98 $ 102
====== ===== ======
<CAPTION>
The funded status of the non-U.S. plans at December 31 was as follows:
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
-------------------- --------------------
1995 1994 1995 1994
------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C>
Actuarial present value of
accumulated benefit
obligation - vested $1,257 $1,046 $ 703 $ 606
- nonvested 46 76 69 63
------ ------ ----- ------
1,303 1,122 772 669
Benefits attributable to
projected salaries 324 316 125 115
------ ------ ----- ------
Projected benefit obligation 1,627 1,438 897 784
Plan assets at fair value 1,780 1,532 59 51
------ ------ ----- ------
Plan assets in excess of (less
than) projected benefit
obligation 153 94 (838) (733)
Unamortized net loss (gain)
upon adoption of SFAS No. 87 11 (13) 14 6
Unrecognized net gain from
experience differences (42) (34) (12)
------ ------ ----- ------
Prepaid (accrued) pension cost $ 122 $ 81 $(858) $ (739)
====== ====== ===== ======
</TABLE>
Continued
22
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The assumptions used in 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Discount rates 4.5% to 10.0% 5.0% to 13.0% 5.0% to 12.0%
Compensation increases 3.5% to 9.0% 3.5% to 11.0% 3.5% to 11.0%
Long-term rates of
return on plan assets 4.5% to 11.0% 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 changes.
Note 14. Postretirement Benefits Other Than Pensions:
______________________________________________________
Since January 1, 1991, the Company has accrued 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.
Effective January 1, 1995, the Company adopted SFAS No. 106 for its Canadian
retiree benefit plans. Consistent with the transition methodology for U.S.
plans adopted in 1991, the Company recognized this change in accounting on
the immediate recognition basis. The cumulative effects as of January 1,
1995 of adopting SFAS No. 106 for the Canadian 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 for Canadian
employees during the year ended December 31, 1995 did not materially reduce
earnings before cumulative effect of accounting changes. Prior to January
1, 1995, the cost of postretirement health care benefits for Canadian
employees was expensed as incurred and was not significant for the years
ended December 31, 1994 and 1993.
Health care benefits for retirees outside the United States and Canada are
generally covered through local government plans. The Company and its U.S.
and Canadian 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 costs consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(in millions)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 46 $ 57 $ 59
Interest cost on accumulated postretirement
benefit obligation 179 165 159
Amortization of unrecognized net (gain) loss
from experience differences (2) 6
Amortization of unrecognized prior service cost (13) (15) (16)
Other (income) cost (13) 32 (59)
----- ----- -----
Net postretirement health care costs $ 197 $ 245 $ 143
===== ===== =====
</TABLE>
During 1995, 1994 and 1993, the Company sold businesses and instituted early
retirement and workforce reduction programs resulting in other pension
expense of $21 million and curtailment gains of $34 million in 1995,
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>
1995 1994
------- ------
(in millions)
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $1,353 $1,165
Fully eligible active plan participants 253 133
Other active plan participants 927 804
------ ------
2,533 2,102
Unrecognized net (loss) gain from experience
differences (303) 14
Unrecognized prior service cost 140 186
------ ------
Accrued postretirement health care costs $2,370 $2,302
====== ======
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for U.S. plans was 9.5% in 1994, 9.0% in
1995 and 8.5% in 1996, gradually declining to 5.0% by the year 2003 and
remaining at that level thereafter. For Canadian plans, the assumed health
care cost trend rate was 15.0% in 1995 and 14.0% in 1996, gradually
declining to 5.0% by the year 2005 and remaining at that level thereafter.
A one-percentage-point increase in the assumed health care cost trend rates
for each year would increase the accumulated postretirement benefit
obligation as of December 31, 1995 and net postretirement health care cost
for the year then ended by approximately 11% and 17%, respectively.
Continued
24
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The accumulated postretirement benefit obligations for U.S. plans at December
31, 1995, 1994 and 1993 were determined using assumed discount rates of
7.25%, 8.5% and 7.5%, respectively. The accumulated postretirement benefit
obligation at December 31, 1995 for Canadian plans was determined using an
assumed discount rate of 9.75%.
Note 15. Contingencies:
________________________
Legal proceedings covering a wide range of matters are pending in various U.S.
and foreign jurisdictions against the Company and its subsidiaries,
including Philip Morris Incorporated ("PM Inc.").
In certain of the proceedings pending against PM Inc. and, in some cases, the
Company and/or certain of its other subsidiaries, plaintiffs allege injury
resulting from cigarette smoking, addiction to cigarette smoking or
exposure to environmental tobacco smoke ("ETS") and seek compensatory and,
in some cases, punitive damages. As of December 31, 1995, there were 125
such smoking and health cases pending in the United States. Of these
cases, 88 were filed in the state of Florida and served between April 28,
1995 and December 31, 1995. One-hundred nine of the smoking and health
cases involve allegations of various injuries allegedly related to
cigarette smoking, four of which purport to be class actions. Eleven of
the smoking and health cases, including one which purports to be a class
action, involve allegations of various personal injuries allegedly related
to exposure to environmental tobacco smoke. Five of these cases involve
states that have commenced actions seeking reimbursement for Medicaid and
other expenditures claimed to have been made to treat diseases allegedly
caused by cigarette smoking. In addition, a purported class action
involving allegations of various personal injuries allegedly related to
cigarette smoking is pending in Canada against, among others, an entity in
which the Company has a 40% indirect ownership interest, and another such
action is pending in Brazil against a subsidiary of the Company, among
others. In addition, other tobacco related litigation includes five
lawsuits arising from the recall of certain of PM Inc.'s products, one of
which purports to be a class action. In addition, there is one lawsuit
pending, which purports to be a class action, involving allegations of
defective filtered products. There are also three lawsuits pending in
which plaintiffs have alleged that PM Inc. failed to manufacture a fire-
safe cigarette, including one which purports to be a class action.
Continued
25
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The plaintiffs' allegations of liability in those cases in which individuals
seek recovery for personal injuries allegedly caused by cigarette smoking
are based on various theories of recovery, including negligence, gross
negligence, strict liability, fraud, misrepresentation, design defect,
failure to warn, breach of express and implied warranties, conspiracy,
concert of action, unjust enrichment, common law public nuisance,
indemnity, market share liability, and violations of deceptive trade
practices laws and antitrust statutes. Plaintiffs also seek punitive
damages in many of these cases. Defenses raised by defendants in these
cases include lack of proximate cause, assumption of the risk, comparative
fault and/or contributory negligence, lack of design defect, statutes of
limitations or repose, equitable defenses such as "unclean hands" and lack
of benefit, failure to state a claim and 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, were enacted. It is not possible to predict
whether any such legislation will be enacted.
A description of pending class action and state Medicaid litigation follows.
SMOKING AND HEALTH CLASS ACTION AND MEDICAID LITIGATION
-------------------------------------------------------
In 1991, a purported class action was filed against the leading United States
cigarette manufacturers, in which certain flight attendants, claiming to
represent a class of approximately 60,000 individuals, alleged personal
injury caused by exposure to ETS aboard aircraft. Broin, et al. v. Philip
Morris Incorporated, et al., Circuit of the Eleventh Judicial Circuit in
and for Dade County Florida, Case No. 91-49738-CA-20. In December 1994,
the trial court certified a class consisting of "all non-smoking flight
attendants who are or have been employed by airlines based in the United
States and are suffering from diseases and disorders caused by their
exposure to second hand cigarette smoke in airline cabins." Defendants
appealed the class certification decision and order to the Florida Third
District Court of Appeals. On January 3, 1996, the Florida Third District
Court of Appeals affirmed the trial court's class certification decision.
On January 18, 1996, defendants filed with the Florida Third District Court
of Appeals, a motion for rehearing, rehearing en banc or certification of
the case to the Florida Supreme Court.
Continued
26
<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, including the Company, by
plaintiffs alleging injury and purporting to represent a class of certain
smokers, certain former smokers and their heirs. Engle, et al. v. R.J.
Reynolds Tobacco Company, et al., Circuit Court of the Eleventh Judicial
Circuit in and for Dade County, Florida, Case No. 94-08273-CA-20.
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 appealed
the class certification decision and order to the Florida Third District
Court of Appeals. Oral argument on the appeal was held in September 1995
at which time the court took the matter under advisement.
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. Two
lawsuits are presently pending relating to the statute: (1) In June 1994,
PM Inc. and others filed suit in Florida state court challenging the
constitutionality of the statute. Associated Industries of Florida, Inc.,
et al. v. State of Florida Agency for Health Care Administration, et al.,
Circuit Court of the Second Judicial Circuit in and for Leon County,
Florida, Case No. 94-3128. In June 1995, the Court declared certain parts
of the statute to be unconstitutional and declared other parts to be
constitutional. The Court also declared that the agency charged with
enforcing the statute was unconstitutional. In July, the State of Florida
appealed the ruling and PM Inc. then cross-appealed. In August 1995, the
Florida Supreme Court accepted the appeal. The Florida Supreme Court heard
oral arguments on the appeal in November 1995 and took the matter under
advisement; (2) In February 1995, the State of Florida filed an action
against the tobacco industry under the statute, attempting to recover
certain Medicaid costs and seeking certain injunctive relief, the funding
of certain programs and the disgorging of profits from the sale of
cigarettes in Florida. The State of Florida, et al. v. The American
Tobacco Company, et al., Circuit Court of the Fifteenth Judicial Circuit in
and for Palm Beach County, Florida, Case No. CL 95 1466 AO. This action
had been stayed by the trial court pending further order of the court. In
October 1995, the court partially lifted the stay to allow the entry of a
case management order and to permit plaintiffs to file a motion seeking
permission to take discovery. In addition to these two lawsuits, during
the second quarter of 1995, legislation repealing the statute was passed by
the Florida legislature and vetoed by the Governor of Florida after the
legislature had adjourned. At its next session, the legislature may
consider overriding the veto.
Continued
27
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
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 purported 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. Castano, et al. v. The
American Tobacco Company Inc., et al., United States District Court,
Eastern District of Louisiana, Case No. 94-1044. Plaintiffs allege that
the cigarette manufacturers concealed and/or misrepresented information
regarding the addictive nature of nicotine and manipulated the levels of
nicotine in their tobacco products to make such products addictive.
Plaintiffs' motion for class certification was heard in December 1994, and
in February 1995, the court conditionally certified the class for certain
issues relating to allegations of 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, asked the District Court to certify its
class certification decision for immediate appeal to the United States
Court of Appeals for the Fifth Circuit. The Court granted that request and
the Fifth Circuit has agreed to hear the appeal.
In March 1994, an action was filed in an Alabama state court against three
leading United States cigarette manufacturers, including PM Inc. Lacey, et
al. v. Lorillard Tobacco Company, Inc., et al., Circuit Court of Fayette
County, Alabama, Case No. CV-94-024. Plaintiff, claiming to represent all
smokers who have smoked or are smoking cigarettes 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 and filed a motion to dismiss
the complaint. 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 proceedings until the court rules upon the motion to
remand was granted in June 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 diseases allegedly caused by cigarette smoking. Moore
v. The American Tobacco Company, et al., Chancery Court of Jackson County,
Mississippi, Case No. 94-1429. Plaintiff also seeks punitive damages and
an injunction barring defendants from selling or encouraging the sale of
cigarettes to minors. In February 1995, the Court granted plaintiff's
motion to strike certain of defendants' challenges to the sufficiency of
the complaint and denied defendants' motion for judgement on the pleadings.
The court subsequently denied defendants' motion for partial summary
judgment, which asserted that the Attorney General lacked the authority to
bring those claims seeking Medicaid reimbursement. In July 1995,
plaintiffs filed a motion seeking to preclude defendants, including PM
Inc., from asserting their "set off" defenses which seek reduction or
elimination of damages based on benefits arising to the state through the
sale of cigarettes. That motion is still pending.
Continued
28
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
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 plaintiffs claimed to
have been made to treat diseases allegedly caused by cigarette smoking.
Minnesota, et al. v. Philip Morris Incorporated, et al., Minnesota District
Court, Second Judicial District, County of Ramsey, Case No. C1-94-8565.
Plaintiffs' asserted causes of action include negligent performance of a
voluntary undertaking, violation of Minnesota antitrust laws, violation of
consumer protection statutes, restitution, and conspiracy. Plaintiffs also
seek injunctive relief, as well as treble damages for the alleged antitrust
violations. In August 1995, defendants requested that the Minnesota
Supreme Court determine whether Blue Cross/Blue Shield of Minnesota has
standing to bring a direct cause of action against defendants to recover
alleged increased health care cost. In September 1995, the Supreme Court
accepted review of this matter, and oral argument was heard on January 29,
1996.
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 diseases allegedly caused by cigarette smoking.
McGraw v. The American Tobacco Company, et al., Circuit Court of Kanawha
County, West Virginia, Case 94-1707. 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 and in October 1995, the Court
issued a final order entering judgment on behalf of defendants as to those
eight counts. The Court did not rule on the antitrust and consumer fraud
counts. In October 1995, the Court granted defendants' motion to prohibit
prosecution of this case pursuant to a contingent fee agreement with
private counsel ruling that the Attorney General lacked the authority to
enter into such an agreement.
Continued
29
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
_________
In November 1995, PM Inc., the other leading United States cigarette
manufacturers and the Tobacco Institute filed a lawsuit in the District
Court of Travis County, Texas against the Attorney General of the State of
Texas, the Health and Human Services Commission of the State of Texas, the
Department of Health of the State of Texas, and the Department of Human
Services of the State of Texas. The suit seeks to obtain declaratory
relief to enjoin the filing and prosecution of a lawsuit, which the
Attorney General has threatened to bring against plaintiffs seeking to
recover Medicaid costs related to medical conditions allegedly caused by
cigarette smoking. The complaint asserts that the threatened lawsuit would
violate the United States Constitution and federal law as well as the Texas
Constitution and Texas statutory and common law. Philip Morris
Incorporated, et al. v. Dan Morales, Attorney General of the State of
Texas, et al., District Court of Travis County, Texas, No. 94-14807.
In November 1995, PM Inc., along with four other tobacco manufacturers,
commenced an action in the United States District Court of Massachusetts
against the Attorney General of Massachusetts seeking declaratory and
injunctive relief in connection with, inter alia, the constitutionality of
two recently enacted Massachusetts statutory provisions (as construed by
the Attorney General). The complaint alleges that the Attorney General of
Massachusetts had threatened to bring a lawsuit seeking to recover Medicaid
costs against plaintiffs purportedly pursuant to these statutory
provisions. The complaint asserts claims based upon the United States
Constitution and federal law, as well as certain Massachusetts state
constitutional, statutory and common law claims. Philip Morris
Incorporated, et al. v. Scott Harshbarger, United States District Court,
District of Massachusetts, Case No. 95-12574-GAO. In December 1995, the
Attorney General moved to dismiss the complaint.
In December 1995, the Commonwealth of Massachusetts filed a complaint in the
Superior Court, Middlesex County, Massachusetts against PM Inc. and nine
other parties. The Commonwealth's complaint seeks certain declaratory and
equitable relief, damages, and restitution, including recovery of "the
smoking-related costs to the Commonwealth", such as increased expenditures
for medical assistance provided under Massachusetts' Medicaid
program...[and] medical assistance provided under the Common Health
Program. The Commonwealth's complaint asserts five counts: undertaking of
special duty, breach of warranty, conspiracy and concert of action,
restitution, and unjust enrichment. By letters dated the date of the
complaint, the Massachusetts Attorney General advised PM Inc. and certain
other parties that the Attorney General intended to add claims under a
Massachusetts "Consumer Protection" Act, demanded that $1,372,440,000 be
paid, and asserted that if that sum were not paid (or if a reasonable
written settlement offer were not made), "double or treble damages,
together with interest, costs, and attorneys' fees" could be sought. On
January 2, 1996, defendants removed the Commonwealth's action to the United
States District Court for the District of Massachusetts. Commonwealth of
Massachusetts v. Philip Morris Inc., et al., United States District Court,
the District of Massachusetts, Case No. 96-10014-GAD.
Continued
30
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
On January 22, 1996, PM Inc., four other leading United States cigarette
manufacturers, the Tobacco Institute and a local retailer, commenced an
action in the Circuit Court of Talbot County, Maryland against the Governor
and Attorney General of the State of Maryland and the Department of Health
and Mental Hygiene of Maryland seeking certain declaratory relief. The
action was commenced in response to the Governor and Attorney General's
threatened lawsuit against the cigarette manufacturers seeking to recover
Medicaid costs related to medical conditions allegedly caused by cigarette
smoking. The complaint seeks a declaration that, under Maryland law, any
contingent fee contract between the Attorney General and private attorneys
to be appointed assistant counsel for the State and compensated in such a
manner is an unauthorized exercise of the Attorney General's constitutional
and statutory powers, and is illegal and void as against the laws and
public policy of the State. Philip Morris Incorporated, et al. v. Parris
N. Glendening, Governor of the State of Maryland, et al., Circuit Court for
Talbot County, Maryland, Case No. CG 2829.
In February 1995, Rothman's, Benson & Hedges, Inc. (in which the Company,
through subsidiaries, owns a 40% interest) was served with a statement of
claim commencing a purported class action in the Ontario Court of Justice,
Toronto, Canada, against Imperial Tobacco Limited, RJR-MacDonald Inc., and
Rothman's, Benson & Hedges. LeTourneau v. Rothman's et al., Ontario Court
of Justice, Toronto, Canada. Court File No. 95-CU-82186. The lawsuit
seeks damages in the amount of $1,000,000 and punitive and exemplary
damages and an order requiring the funding of rehabilitation centers.
Plaintiffs seek certification of a class of persons who have suffered loss
as a result of their alleged nicotine addiction and their estates and
persons with related Family Law Act claims. Defendants have requested a
more particular statement of claim prior to delivering their statement of
defense. In July 1995, the court granted Mr. LeTourneau's motion to
withdraw as a class representative and two new class representatives have
been substituted.
In July 1995, a purported class action on behalf of all Brazilian smokers and
former smokers was filed in State Court in Sao Paulo, Brazil, naming Philip
Morris Marketing, S.A. ("PM Marketing") as a codefendant. The Smoker
Health Defense Association, et al. v. Souza Cruz, S.A. and Philip Morris
Marketing, S.A., 19th Lower Civil Court of the Central Courts of the
Judiciary District of Sao Paulo, Brazil. Plaintiffs allege that defendants
failed to warn that smoking is "addictive" and engaged in misleading
advertising. Plaintiffs have obtained an ex-parte order reversing the
burden of proof and placing the burden on defendants. PM Marketing has
appealed the order and has denied all material allegations in the
complaint. In October 1995, PM Marketing requested that the action be
dismissed based on plaintiffs' lack of standing and failure to follow
proper filing procedures. In December 1995, the court denied PM
Marketing's request for dismissal as well as its request to seek recusal
of the judge assigned to this matter.
Continued
31
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
OTHER TOBACCO RELATED CLASS ACTION LITIGATION
---------------------------------------------
In June 1995, a complaint was filed in the United States District Court for
the District of Maryland naming PM Inc. as the sole defendant. Sacks, et
al. v. Philip Morris Inc., United States District Court, District of
Maryland, Case No. WMN-95-1840. The lawsuit seeks certification of a class
consisting of "all persons and estates injured as a result of the
defendant's alleged failure to manufacture a fire safe cigarette since
1987." Plaintiffs allege in their complaint that PM Inc. intentionally
withheld and suppressed material information relating to technology to
produce a cigarette less likely to cause fires and failed to design and
sell its cigarettes using the alleged technology. Causes of action are
asserted based on federal and state consumer protection statutes, strict
liability, negligence and breach of implied warranties. Compensatory and
punitive damages are sought. In September 1995, PM Inc. filed a motion to
dismiss the complaint based on plaintiffs' failure to state a claim.
In May 1995, PM Inc. announced a recall of certain of its products and in June
and July four purported class actions relating to the recall were filed,
one in New Jersey, one in Texas and two in Louisiana. Netherland, et al.
v. Philip Morris USA, et al., United States District Court, Western
District of Louisiana, Monroe Division, Case No. CV95-1249-M; Sansone, et
al. v. Hoechst Celanese Corporation, et al., Superior Court of New Jersey,
Hudson County, Case No. HUD-L-4342-95; Tijerina, et al. v. Philip Morris,
Inc., et al., United States District Court, Northern District of Texas,
Amarillo Division, Case No. 2-95-CV-120; and Walton, et al. v. Philip
Morris, Inc., United States District Court, Middle District of Louisiana,
Case No. 95-693. The actions alleged, among other things, that PM Inc.
sold defective products that caused injury to plaintiffs. In the Louisiana
cases, PM Inc. has removed the cases to federal court. In the Sansone
action in New Jersey, PM Inc., in July 1995, filed an answer denying the
material allegations of the complaint and filed a motion to dismiss
portions of plaintiffs' complaint. In September 1995, a consent order was
entered with the court dismissing all of plaintiffs' claims except strict
liability. In December 1995, a consent order dismissing the remaining
claim in the Sansone action was submitted to the court. In the Walton
action in Louisiana, plaintiff voluntarily dismissed the case in November
1995.
In September 1995, plaintiffs in the Tijerina action (referenced above), filed
a second amended complaint to change the scope of the complaint to allege
that PM Inc., has, for many years, knowingly manufactured filtered products
that are defective because they contain "defective filters". The second
amended complaint also names two additional plaintiffs. The second amended
complaint also purports to be brought on behalf of a class of all persons
who have used filtered products manufactured by PM Inc. and who have
suffered adverse health effects. Tijerina, et al v. Philip Morris, Inc.,
et al., United States District Court, Northern District of Texas, Amarillo
Division, Case No. 2-95-CV-120. Plaintiffs allege that the filters in
these products contain hazardous chemicals, that cellulose acetate fibers
break away from the filters and are inhaled and ingested by the consumer
when the filtered products are used and that the tobacco in these products
contains harmful pesticide residues. Plaintiffs further allege that they
relied on PM Inc.'s false and fraudulent misrepresentations, made through
advertising, regarding the safety of the use of the filters. Motions to
dismiss certain of plaintiffs' claims and their putative expert witness
designations are pending.
Continued
32
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
OTHER CLASS ACTION LITIGATION
-----------------------------
In April 1993, the Company and certain officers and directors 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. San Leandro Emergency Medical Group Profit
Sharing Plan, et al. v. Philip Morris Companies Inc., et al., United States
District Court for the Southern District of New York, Case No. 93 Civ.
2131. 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' appeal was argued before
the United States Court of Appeals for the Second Circuit in September
1995. On January 25, 1996, the Second Circuit affirmed the District
Court's dismissal of the complaint against the Company, but reinstated a
claim of alleged insider trading against one of the individual defendants.
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in a complaint filed as a purported class action in the
United States District Court in the Eastern District of New York.
Lawrence, et al. v. Philip Morris Companies Inc., et al., United States
District Court, Eastern District of New York, Case No. 94 Civ. 1494 (JG).
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. In
August 1995, the Court granted plaintiffs' motion for class certification,
certifying this action as a class action on behalf of all persons (other
than persons associated with defendants) who purchased common stock of the
Company during the period July 10, 1991 through April 1, 1993, inclusive,
and who held such stock at the close of business on April 1, 1993. In
December 1995, the Court denied the Company's motion to amend the court's
class certification order to permit the Company to take an interlocutory
appeal from that order to the United States Court of Appeals for the Second
Circuit.
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in several purported class actions that have been
consolidated in the United States District Court in the Southern District
of New York. Kurzweil, et al. v. Philip Morris Companies Inc., et al.,
United States District Court for the Southern District of New York, Case
Nos. 94 Civ. 2373 (MBM) and 94 Civ. 2546 (MBM) and State Board of
Administration of Florida, et al. v. Philip Morris Companies Inc., et al.,
United States District Court for the Southern District of New York, Case
No. 94 Civ. 6399 (MBM). In those cases, plaintiffs assert that defendants
violated federal securities laws by, among other things, making allegedly
false and misleading statements regarding the allegedly addictive qualities
of cigarettes. In each case, plaintiffs claim to have been misled by
defendants' knowing and intentional failure to disclose material
information. In September 1995, the court granted defendants' motion to
dismiss the two complaints in their entirety. The court granted plaintiff
in the State Board action leave to replead one of its claims.
Continued
33
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
In March 1995, an antitrust action was filed in California state court against
four 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. McIver, et al. v. General Mills, Inc., et al.,
Superior Court of the State of California, County of Santa Barbara, Case
No. 206666. Plaintiffs seek treble damages and the return of profits
resulting from defendants' alleged conspiracy to fix and raise prices of
cereal products sold to California consumers. In April 1995, a second
purported class action similar to the earlier action was filed in the same
court. In August 1995, the two cases were consolidated. In September
1995, the court granted defendants' motions for summary judgment. In
December 1995, plaintiffs filed an appeal of that decision with the
California Court of Appeals.
The Company and each of its subsidiaries named as a defendant believes, and
each has been so advised by counsel handling the respective cases, that it
has a number of valid defenses to all litigation pending against it. 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 adverse legislative,
regulatory, political and other developments concerning cigarette smoking
and the tobacco industry. 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.
Continued
34
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
<TABLE>
<CAPTION>
Note 16. Additional Information:
_________________________________
1995 1994 1993
------ ------ ------
(in millions)
<S> <C> <C> <C>
Years ended December 31:
Depreciation expense $1,024 $1,027 $1,042
====== ====== ======
Rent expense $ 390 $ 426 $ 380
====== ====== ======
Research and development expense $ 481 $ 435 $ 421
====== ====== ======
Advertising expense $3,724 $3,358 $2,970
====== ====== ======
Interest and other debt expense, net:
Interest expense $1,259 $1,288 $1,478
Interest income (80) (55) (87)
------ ------ ------
$1,179 $1,233 $1,391
====== ====== ======
Interest expense of financial services
and real estate operations included
in cost of sales $ 84 $ 78 $ 87
====== ====== ======
</TABLE>
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 activities in California and Colorado.
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 1995,
1994 or 1993.
Continued
35
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Condensed balance sheet data at December 31, follow:
<TABLE>
<CAPTION>
1995 1994
------ ------
(in millions)
<S> <C> <C>
Assets
Finance leases $6,858 $6,048
Other investments 471 542
------ ------
7,329 6,590
Less unearned income and allowances 2,336 2,067
------ ------
Finance assets, net 4,993 4,523
Real estate held for development and sale 339 401
Goodwill, net of accumulated amortization 35 36
Other assets 267 276
------ ------
Total assets $5,634 $5,236
====== ======
Liabilities and stockholder's equity
Short-term borrowings $ 671 $ 604
Long-term debt 783 890
Deferred income taxes 3,382 3,010
Other liabilities 121 151
Stockholder's equity 677 581
------ ------
Total liabilities
and stockholder's equity $5,634 $5,236
====== ======
</TABLE>
The amounts shown above include receivables and payables with the Company and
its other subsidiaries. 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, net of related deferred tax effects.
Continued
36
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Other investments also include real estate and commercial receivables, the
total estimated fair values of which, at December 31, 1995 and 1994,
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.
Condensed income statement data follow for the years ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(in millions)
<S> <C> <C> <C>
Revenues:
Financial services $ 197 $ 257 $ 276
Real estate 184 236 134
----- ----- -----
Total revenues 381 493 410
Expenses:
Financial services 107 114 105
Real estate 129 190 90
----- ----- -----
Total expenses 236 304 195
Equity in earnings of limited
partnership investments 15 17 8
----- ----- -----
Earnings before income taxes
and cumulative adjustment 160 206 223
Cumulative pretax adjustment
related to leveraged leases 23
----- ----- -----
Earnings before income taxes 160 206 246
Provision for income taxes:
Current year 55 72 75
Cumulative adjustment
related to leveraged leases 40
----- ----- -----
Total provision for income taxes 55 72 115
----- ----- -----
Net earnings $ 105 $ 134 $ 131
===== ===== =====
</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
37
<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, 1995 and 1994, the
notional principal amounts of these agreements were $2.0 billion and $1.6
billion, respectively. Aggregate maturities at December 31, 1995 were as
follows (in millions): 1996-$489; 1997-$737; 1998-$185; 1999-$350 and 2000-
$215. 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 and third party transactions. At December 31, 1995 and 1994,
the Company had forward exchange contracts, with maturities of less than
one year, of $1.2 billion and $1.6 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, 1995, 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
at December 31, 1995 was $16.7 billion as compared to its carrying value of
$15.8 billion. The aggregate fair value of the Company's total debt did
not differ materially from its carrying value at December 31, 1994. The
estimated fair value of financial services and real estate other
investments, including commercial and real estate receivables, approximated
their carrying values at December 31, 1995 and 1994.
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
38
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Note 19. Quarterly Financial Data (Unaudited):
- -----------------------------------------------
<TABLE>
<CAPTION>
1995 Quarters
-------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Operating revenues $16,517 $17,129 $16,689 $15,736
======= ======= ======= =======
Gross profit $ 6,467 $ 6,816 $ 6,764 $ 6,407
Earnings before cumulative
effect of accounting
changes $ 1,363 $ 1,410 $ 1,433 $ 1,272
Cumulative effect of
changes in method of
accounting
(See Notes 1 and 14) (28)
------- ------- ------- -------
Net earnings $ 1,335 $ 1,410 $ 1,433 $ 1,272
======= ======= ======= =======
Per share data:
Earnings before cumulative
effect of accounting
changes $ 1.60 $ 1.67 $ 1.71 $ 1.53
Cumulative effect of
changes in method of
accounting (.03)
------- ------- ------- -------
Net earnings $ 1.57 $ 1.67 $ 1.71 $ 1.53
======= ======= ======= =======
Dividends declared $ .825 $ .825 $ 1.00 $ 1.00
======= ======= ======= =======
Market price - high $68 $76-5/8 $84-1/8 $94-3/8
- low $55-3/4 $65-1/4 $71-3/8 $82-5/8
</TABLE>
During the year, the Company sold its bakery businesses and its
North American margarine, specialty oils, marshmallows, caramels and Kraft
Foodservice distribution businesses. In addition, several smaller
international food businesses were sold. Pretax net gains from the sales
of these businesses were $275 million, most of which were reflected in
fourth quarter earnings. In the fourth quarter of 1995, the Company also
recorded provisions in connection with these divestitures, primarily for an
early retirement program and the write-down of assets of food facilities to
be downsized or closed. The net impact of these divestitures and
provisions was not material to fourth quarter operating income, pretax
earnings or earnings per share.
Continued
39
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Concluded
__________
<TABLE>
<CAPTION>
1994 Quarters
-------------------------------------
1st 2nd 3rd 4th
-------- ------- ------- -------
(in millions, except per share data)
<S> <C> <C> <C> <C>
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>
40
