<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8940
Philip Morris Companies Inc.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Virginia 13-3260245
________________________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Park Avenue, New York, New York 10017
________________________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 880-5000
______________________________
________________________________________________________________________________
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
________ ________
At October 31, 1996, there were 814,399,021 shares outstanding of the
registrant's common stock, par value $1 per share.
<PAGE>
PHILIP MORRIS COMPANIES INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
<S> <C> <C>
Condensed Consolidated Balance Sheets at
September 30, 1996 and December 31, 1995 3 - 4
Condensed Consolidated Statements of Earnings for the
Nine Months Ended September 30, 1996 and 1995 5
Three Months Ended September 30, 1996 and 1995 6
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 1995 and
for the Nine Months Ended September 30, 1996 7
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1996 and 1995 8 - 9
Notes to Condensed Consolidated Financial Statements 10 - 23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 24 - 38
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 39
Item 6. Exhibits and Reports on Form 8-K. 39
Signature 40
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
CONSUMER PRODUCTS
Cash and cash equivalents $ 459 $ 1,138
Receivables, net 5,105 4,508
Inventories:
Leaf tobacco 3,483 3,332
Other raw materials 1,964 1,721
Finished product 3,154 2,809
------- -------
8,601 7,862
Other current assets 1,215 1,371
------- -------
Total current assets 15,380 14,879
Property, plant and equipment, at cost 19,493 18,601
Less accumulated depreciation 8,081 7,485
------- -------
11,412 11,116
Goodwill and other intangible assets
(less accumulated amortization of
$4,275 and $3,873) 18,764 19,319
Other assets 3,378 2,866
------- -------
Total consumer products assets 48,934 48,180
FINANCIAL SERVICES AND REAL ESTATE
Finance assets, net 5,205 4,991
Real estate held for development and sale 326 339
Other assets 256 301
------- -------
Total financial services and
real estate assets 5,787 5,631
------- -------
TOTAL ASSETS $54,721 $53,811
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
LIABILITIES
CONSUMER PRODUCTS
Short-term borrowings $ 320 $ 122
Current portion of long-term debt 1,755 1,926
Accounts payable 2,457 3,364
Accrued marketing 2,112 2,114
Accrued taxes, except income taxes 1,485 1,075
Other accrued liabilities 3,394 3,701
Income taxes 1,318 1,137
Dividends payable 982 834
------- -------
Total current liabilities 13,823 14,273
Long-term debt 13,093 12,324
Deferred income taxes 562 356
Accrued postretirement health care costs 2,356 2,273
Other liabilities 5,466 5,643
------- -------
Total consumer products liabilities 35,300 34,869
FINANCIAL SERVICES AND REAL ESTATE
Short-term borrowings 221 671
Long-term debt 1,140 783
Deferred income taxes 3,505 3,382
Other liabilities 180 121
------- -------
Total financial services and
real estate liabilities 5,046 4,957
------- -------
Total liabilities 40,346 39,826
Contingencies (Note 2)
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share
(935,320,439 shares issued) 935 935
Earnings reinvested in the business 21,976 19,779
Currency translation adjustments 282 467
------- -------
23,193 21,181
Less cost of repurchased stock
(119,876,150 and 104,150,433 shares) 8,818 7,196
------- -------
Total stockholders' equity 14,375 13,985
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $54,721 $53,811
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1996 1995
------- -------
<S> <C> <C>
Operating revenues $52,414 $50,335
Cost of sales 20,001 20,345
Excise taxes on products 11,232 9,943
------- -------
Gross profit 21,181 20,047
Marketing, administration and research costs 11,724 11,498
Amortization of goodwill 443 443
------- -------
Operating income 9,014 8,106
Interest and other debt expense, net 824 916
------- -------
Earnings before income taxes
and cumulative effect of
accounting changes 8,190 7,190
Provision for income taxes 3,358 2,984
------- -------
Earnings before cumulative effect
of accounting changes 4,832 4,206
Cumulative effect of changes in method of
accounting (Note 3) (28)
------- -------
Net earnings $ 4,832 $ 4,178
======= =======
Weighted average number of shares 824 844
======= =======
Per share data:
Earnings before cumulative effect of
accounting changes $ 5.87 $ 4.98
Cumulative effect of changes in
method of accounting (.03)
------- -------
Net earnings $ 5.87 $ 4.95
======= =======
Dividends declared $ 3.20 $ 2.65
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
--------------------------
1996 1995
------- -------
<S> <C> <C>
Operating revenues $17,414 $16,689
Cost of sales 6,596 6,565
Excise taxes on products 3,726 3,360
------- -------
Gross profit 7,092 6,764
Marketing, administration and research costs 3,871 3,876
Amortization of goodwill 150 149
------- -------
Operating income 3,071 2,739
Interest and other debt expense, net 281 290
------- -------
Earnings before income taxes 2,790 2,449
Provision for income taxes 1,144 1,016
------- -------
Net earnings $ 1,646 $ 1,433
======= =======
Weighted average number of shares 818 839
======= =======
Per share data:
Net earnings $ 2.01 $ 1.71
======= =======
Dividends declared $ 1.20 $ 1.00
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1995 and for
the Nine Months Ended September 30, 1996
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Earnings Total
Reinvested Currency Cost of Stock-
Common in the Translation Repurchased holders'
Stock Business Adjustments Stock Equity
------ ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995 $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
Net earnings 4,832 4,832
Exercise of stock options
and issuance of other stock
awards (25) 463 438
Cash dividends declared
($3.20 per share) (2,631) (2,631)
Currency translation adjustments (185) (185)
Stock repurchased (2,085) (2,085)
Net unrealized appreciation
on securities 21 21
---- ------- ----- ------- -------
Balances, September 30, 1996 $935 $21,976 $ 282 $(8,818) $14,375
==== ======= ===== ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1996 1995
------- ------
<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $ 4,744 $ 4,101
- Financial services and real estate 88 77
------- -------
Net earnings 4,832 4,178
Adjustments to reconcile net earnings to
operating cash flows:
CONSUMER PRODUCTS
Depreciation and amortization 1,259 1,283
Deferred income tax provision 220 87
Gains on sales of businesses (68) (19)
Cumulative effect of accounting changes 46
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (630) (791)
Inventories (617) 281
Accounts payable (915) (1,364)
Income taxes 334 490
Other working capital items (240) (98)
Other 207 95
FINANCIAL SERVICES AND REAL ESTATE
Deferred income tax provision 110 186
Decrease in real estate receivables 24 33
Decrease in real estate held for development and sale 13 55
Other 67
------- -------
Operating cash flow before income taxes on
sales of businesses 4,596 4,462
Income taxes on sales of businesses (74) (25)
------- -------
Net cash provided by operating activities 4,522 4,437
------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
CONSUMER PRODUCTS
Capital expenditures (1,108) (1,054)
Purchases of businesses, net of acquired cash (515) (96)
Proceeds from sales of businesses 154 1,177
Other 12 (92)
FINANCIAL SERVICES AND REAL ESTATE
Investments in finance assets (306) (398)
Proceeds from finance assets 154 105
------- -------
Net cash used in investing activities (1,609) (358)
------- -------
Net cash provided by operating and
investing activities $ 2,913 $ 4,079
------- -------
</TABLE>
See notes to condensed consolidated financial statements.
-8-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------
1996 1995
------- -------
<S> <C> <C>
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
CONSUMER PRODUCTS
Net issuance of short-term borrowings $ 329 $ 49
Long-term debt proceeds 1,966 530
Long-term debt repaid (1,487) (420)
FINANCIAL SERVICES AND REAL ESTATE
Net repayment of short-term borrowings (450) (121)
Long-term debt proceeds 363
Repurchase of outstanding stock (2,097) (1,513)
Dividends paid (2,483) (2,101)
Issuance of shares 341 208
Stock rights redemption (9)
Other (31) (16)
------- -------
Net cash used in financing activities (3,549) (3,393)
Effect of exchange rate changes on cash and
cash equivalents (43) 8
------- -------
Cash and cash equivalents:
(Decrease) increase (679) 694
Balance at beginning of period 1,138 184
------- -------
Balance at end of period $ 459 $ 878
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
-9-
<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Accounting Policies:
_____________________________
The interim condensed consolidated financial statements of Philip Morris
Companies Inc. (the "Company") are unaudited. It is the opinion of the
Company's management that all adjustments necessary for a fair statement of the
interim results presented have been reflected therein. All such adjustments
were of a normal recurring nature. Operating revenues and net earnings for any
interim period are not necessarily indicative of results that may be expected
for the entire year.
These statements should be read in conjunction with the consolidated
financial statements and related notes which appear in the Company's annual
report to stockholders and which are incorporated by reference into the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
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.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 2. 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."), a wholly-owned subsidiary of
the Company.
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 September 30, 1996, there were 240 such smoking and
health cases pending in the United States. Of these cases, 153 were filed in the
state of Florida and served between April 28, 1995 and September 30, 1996. Two
hundred nineteen of the smoking and health cases pending as of September 30,
1996, involve allegations of various injuries allegedly related to cigarette
smoking. There are 15 purported class actions that have been served involving
allegations of various injuries allegedly related to cigarette smoking. Ten of
the smoking and health cases that have been served, including one that purports
to be a class action, involve allegations of various personal injuries allegedly
related to exposure to ETS. Twenty three cases currently pending involve state
and local governments and others that have commenced actions seeking
reimbursement for Medicaid and other health care expenditures 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. There are also three lawsuits
pending, including one which purports to be a class action, in which plaintiffs
have alleged that PM Inc. failed to manufacture a fire-safe cigarette. In
California individuals purportedly acting as "private attorneys general" have
filed two suits seeking, among other things, injunctive relief, restitution and
disgorgement of profits for alleged violations of California's consumer
protection statutes.
In August 1996, a jury awarded a former smoker and his spouse $750,000 in a
smoking and health case against another leading United States cigarette
manufacturer (Carter v. American Tobacco Co., et al.). Neither PM Inc. nor the
Company was a party to that litigation. The defendant in that action has filed a
motion for judgment notwithstanding the verdict. Later that month, a jury
returned a verdict for the defendants in a smoking and health case in Indiana
against leading United States cigarette manufacturers, including PM Inc. (Rogers
v. R.J. Reynolds Tobacco Company, et al.) Plaintiff has appealed the verdict.
During 1997, a number of individual smoking and health cases against the
industry and PM Inc. are scheduled to go to trial. In addition, the Broin class
action discussed below, and three Medicaid recovery actions are scheduled to go
to trial in 1997. Two individual smoking and health cases against the industry,
including PM Inc., and the Mississippi Medicaid recovery suit discussed below
are scheduled to go to trial during the first quarter of 1997. Trial dates,
however, are subject to change.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
A description of certain pending class action and Medicaid and health care
recovery litigation follows.
SMOKING AND HEALTH CLASS ACTION LITIGATION
------------------------------------------
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,
violations of deceptive trade practice laws, consumer protection 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,
statutes of limitations or repose, and preemption by the Federal Cigarette
Labeling and Advertising Act, as amended (the "Labeling Act"). In June 1992,
the United States Supreme Court held that the Labeling Act, as enacted in 1965,
does not preempt common law damage claims but that the Labeling 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 Labeling 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 legislation to eliminate the federal preemption defense, proposed
in Congress in recent years, were to be enacted. It is not possible to predict
whether any such legislation will be enacted.
In 1991, a purported class action was filed in Florida state court 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." Various challenges to the trial court's
class certification decision have been denied by the Florida Third District
Court of Appeal and the Florida Supreme Court. This case is currently set for
trial in June 1997.
In May 1994, an action was filed in Florida state court against the leading
United States cigarette manufacturers and others, 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. 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." In January 1996, the Florida
Third District Court of Appeal affirmed the trial court's class certification
order, with the modification that the subject class
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
be restricted to Florida citizens and residents rather than United States
citizens and residents. A motion by defendants requesting that the Florida
Supreme Court exercise its discretionary authority to review the lower court's
class certification decision was denied in October 1996. Plaintiffs have
notified the trial court that they believe that the case is ready to be set for
trial.
In March 1994, an action was filed in Alabama state court against three
leading United States cigarette manufacturers, including PM Inc. Defendants
subsequently removed the case to federal court. Lacey, et al. v. Lorillard
Tobacco Company, Inc. et al., United States District Court, Northern District of
Alabama, Jasper Division, Civil Action No. CV94-B-0901-J. Plaintiffs, claiming
to represent all smokers who have smoked or are smoking cigarettes sold by
defendants in the State of Alabama, seek 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 August 1996, the judge orally granted the defendants' motion for summary
judgment on the grounds that the suit is preempted by the Labeling Act.
In March 1994, an action was filed in federal court in 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 alleged 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. In May 1996, the Court of Appeals reversed the
district court's earlier certification of the class and remanded the case with
instructions that the district court dismiss the class allegations. Summary
judgment motions against the two remaining named plaintiffs in this case are
pending.
Since the announcement of the Court of Appeals' class decertification
decision in Castano, purported statewide class action suits based on claims
similar to those in Castano (a "nicotine-dependence class action") and, in some
cases, claims of physical injury as well (a "physical injury class action") have
been filed in several states as described below. Lawyers for the plaintiffs in
Castano announced that they intend to file similar class actions and actions on
behalf of individual plaintiffs in other state courts.
Immediately prior to the Court of Appeals' decision in the Castano case, a
purported nicotine-dependence class action suit was filed in Indiana state court
against the leading United States cigarette manufacturers and others. In June
1996, defendants removed the case to federal court. Norton, et al. v. RJR
Nabisco Holdings Corporation, et al., United States District Court for the
Southern District of Indiana, Case No. IP96-0798-C-M/S. Plaintiffs' motion to
remand the case to state court is pending.
In May 1996, a purported physical injury class action suit was filed in
Maryland state court against the leading United States cigarette manufacturers
and others, including the Company. The case was removed by defendants to federal
court and plaintiffs have moved to remand the case to state court. Richardson,
et al., v. Philip Morris Incorporated, et al., United States District Court,
District of Maryland, Civil Action No. CCB-96-1963.
In May 1996, a purported nicotine-dependence class action suit was filed in
Louisiana state court against four leading United States cigarette manufacturers
and others, including the Company. The case was removed by defendants to the
United States District Court for the Eastern District of Louisiana in June 1996
and was subsequently remanded to state court. Scott, et al. v. The American
Tobacco Company,
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Inc., et al., Civil District Court for the Parish of Orleans, State of
Louisiana, Docket No. 96-8461.
In June 1996, a purported nicotine-dependence class action suit was filed in
New York state court against PM Inc., the Company, the Tobacco Institute and the
Council for Tobacco Research--U.S.A., Inc. Frosina, et al. v. Philip Morris
Inc., et al., Supreme Court of the State of New York, County of New York, Case
No. 96110950.
In June 1996, a purported physical injury class action suit was filed in the
Superior Court of the District of Columbia against the leading United States
cigarette manufacturers and others, including the Company. Reed v. Philip Morris
Incorporated, et al., Superior Court of the District of Columbia, Case No. CA-
05070-96. A hearing on whether plaintiff can pursue a class action has been
scheduled for June 1997.
In August 1996, a purported nicotine-dependence class action suit was filed
in Pennsylvania state court against the leading United States cigarette
manufacturers and others, including the Company. The case was subsequently
removed by defendants to federal court. Arch, et al., v. American Tobacco
Company Inc. et al., United States District Court for the Eastern District of
Pennsylvania, Case No. 96-5903-CN.
In August 1996, a purported nicotine-dependence class action suit was filed
in Alabama state court, on behalf of Alabama and North Carolina residents,
against four leading United States cigarette manufacturers and others, including
the Company. In September 1996, the case was removed by defendants to federal
court. Lyons, et al. v. The American Tobacco Co., Inc., et al., United States
District Court for the Southern District of Alabama, Southern Division, Civil
Action No. 96-0881-BH-S. Plaintiffs' motion to remand the case to state court is
pending.
In August 1996, a purported nicotine-dependence class action suit was filed
in Ohio state court against the leading United States cigarette manufacturers
and others, including the Company. The case was removed by defendants to federal
court. Chamberlain, et al. v. The American Tobacco Co., et al., United States
District Court, Northern District of Ohio, Case No. 1:96CV2005. Plaintiffs'
motion to remand the case to state court is pending.
In August 1996, a purported physical injury class was filed in Florida state
court against the leading United States cigarette manufacturers, and others.
Walters, et al. v. Brown & Williamson Tobacco Corp., et al., Circuit Court,
Fourth Judicial District, Duval County, Florida.
In September 1996, a purported nicotine-dependence class action suit was
filed in Minnesota state court against four leading United States cigarette
manufacturers and others, including the Company. The case was removed by
defendants to United States District Court for the District of Minnesota in
September 1996. Masepohl, et al. v. The American Tobacco Co., Inc., et al.,
United States District Court, District of Minnesota, Third Division, Case No.
CV3-96-888. Plaintiff has filed a motion to remand the case to the state court.
In October 1996, a purported nicotine-dependence class action suit was filed
in New Mexico state court against four leading United States cigarette
manufacturers and others, including the Company. Connor, et al. v. The American
Tobacco Co., et al., Second Judicial District Court, County of Bernalillo, State
of New Mexico, Case No. CV-96-9422. A similar action captioned Connor, et al. v.
The American Tobacco Co., et al., which was filed in September 1996, was
voluntarily dismissed by plaintiffs in October 1996.
In October 1996, a purported nicotine-dependence class action suit was filed
in federal court in Puerto Rico against four leading United States cigarette
manufacturers and others. Ruiz v. The American Tobacco Co.,
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
et al., United States District Court for the District of Puerto Rico, Civil
Action No. 96-2300.
In November 1996, a purported nicotine-dependence class action was filed in
federal court in Arkansas against the leading United States cigarette
manufacturers, and others, including the Company. McGinty, et al., v. The
American Tobacco Co., et al., United States District Court for the Eastern
District of Arkansas, Case No. LRC 96-881.
In February 1995, Rothmans, 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 Rothmans,
Benson & Hedges. LeTourneau v. Rothmans et al., Ontario Court of Justice,
Toronto, Canada. Court File No. 95-CU-82186 (now captioned Caputo v. Imperial
Tobacco Limited, et al.). The lawsuit seeks damages in the amount of $1,000,000
(Canadian) per class member 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' request for a more particular statement of claim prior to
delivering their statement of defense was partially granted and partially denied
in April 1996. Defendants have appealed that order.
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 co-defendant. 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 order, which was upheld on appeal, reversing the burden of proof and placing
the burden on defendants.
Pro se prisoners have filed two purported class actions against the leading
United States cigarette manufacturers and others seeking, in one case, class
certification on behalf of prisoners in two Mississippi prisons based on alleged
exposure to ETS (Lyle, et al. v. Brown & Williamson Tobacco Corporation, et al.,
United States District Court for the Northern District of Mississippi, Civil
Action No. 3:96-CV-268WS) and, in the other, on behalf of all allegedly
nicotine-persons in the United States (Harris, et al. v. Philip Morris
Incorporated, et al., United States District Court for the Eastern District of
Pennsylvania, Civil Action No. 3:96-CV 652). In October 1996, the court issued
an order dismissing the Lyle action.
MEDICAID AND HEALTH CARE RECOVERY LITIGATION
--------------------------------------------
In certain of the pending proceedings, state and local government entities
and others seek reimbursement for Medicaid and other health care expenditures
allegedly caused by tobacco products. The claims asserted in these Medicaid
recovery actions vary. All plaintiffs assert the equitable claim that the
tobacco industry was "unjustly enriched" by plaintiffs' payment of health care
costs allegedly attributable to smoking and seek reimbursement of those costs.
Other claims made by some but not all plaintiffs include the equitable claim of
indemnity, common law claims of negligence, strict liability, breach of express
and implied warranty, violation of a voluntary undertaking or special duty,
fraud, negligent misrepresentation, conspiracy, public nuisance, claims under
state and federal statutes governing consumer fraud, antitrust, deceptive
trade practices and false advertising, and claims under the Federal Racketeer
Influenced and Corrupt Organization Act ("RICO").
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Each plaintiff seeks reimbursement of Medicaid and/or other health care
costs. Other relief sought by some but not all plaintiffs includes punitive
damages, treble damages for alleged antitrust law violations, injunctions
prohibiting alleged marketing and sales to minors, disclosure of research,
disgorgement of profits, funding of anti-smoking programs, disclosure of
nicotine yields and payment of attorneys and expert witness fees.
Defenses raised by defendants include failure to state a valid claim, lack
of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs
cannot recover because they participated in, and benefited from, the sale of
cigarettes), lack of antitrust injury, federal preemption, lack of proximate
cause and statute of limitations. In addition, defendants argue that they should
be entitled to "set-off" any alleged damages to the extent a state benefits
economically from the sale of cigarettes through the receipt of excise taxes or
otherwise. Defendants also argue that all of these cases are improper because
plaintiffs must proceed under principles of subrogation and assignment. Under
traditional theories of recovery, a payor of medical costs (such as an insurer
or a state) can seek recovery of health care costs from a third party solely by
"standing in the shoes" of the injured party. Defendants argue that plaintiffs
should be required to bring an action on behalf of each individual Medicaid
recipient and should be subject to all defenses available against the injured
party. In certain of these cases, defendants have also challenged the ability of
the plaintiffs to use contingency fee counsel to prosecute these actions.
Further, certain cigarette companies, including PM Inc., have filed related
declaratory judgment actions in several states seeking to block the Medicaid
recovery actions in those states and/or to prevent the state from hiring
contingency fee counsel.
The following is a summary of certain developments in each of the Medicaid
and health care recovery suits pending against PM Inc. and, in some cases, the
Company and the related declaratory judgment actions filed by tobacco companies.
Florida -- In May 1994, the State of Florida enacted a statute which purports,
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among other things, to abolish affirmative defenses in Medicaid recovery
actions. 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 1996, the Florida Supreme Court, by a 4 to 3
plurality opinion, ruled that the provisions of the statute that permitted the
state to pursue its action without identifying individual Medicaid recipients
violated defendants' due process rights under the Florida constitution and that
defendants may rebut the state's claims of causation and damages on a recipient-
by-recipient basis. The court held constitutional on its face the statutory
provision abolishing affirmative defenses normally available to a third party,
including assumption of the risk. However, the court stated that while this
provision is constitutional on its face, it might be unconstitutional as applied
in the state's case. The court also held that the state's independent cause of
action created by statutory amendment could apply only to Medicaid costs paid
after the amendment became effective in July 1994, that defendants could be held
individually liable under a market share theory, that the state could use
statistical evidence to present its case, and that the agency charged with
enforcing the statute was constitutionally established. In September 1996,
plaintiffs' petition for rehearing on the Florida Supreme Court's rulings on
abrogation of affirmative defenses and application of the statute to conduct
occurring before July 1994 was denied.
In February 1995, the State of Florida filed a Medicaid recovery action
under the statute in Florida state court. 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. In
September 1996, the trial court dismissed all of the state's claims except for
its negligence and strict liability counts arising from Medicaid payments made
after July 1, 1994, and its
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
count for injunctive relief. The court also ordered the state to disclose the
identity of the Medicaid recipients within 30 days of its order. The state has
filed a notice of appeal of the court's order. In October 1996, the state filed
a coded listing (without names) for all Medicaid recipients with alleged
smoking-related illnesses. Defendants' motion to strike the state's list for
noncompliance with the Florida Supreme Court's order was denied and PM Inc., as
a party in the Associated Industries case described above, filed a petition with
the Florida Supreme Court challenging the sufficiency of the state's purported
identification of Medicaid recipients. The trial in this case is scheduled to
begin in August 1997.
Mississippi -- In May 1994, the Attorney General of Mississippi filed a Medicaid
- -----------
recovery action in Mississippi state court. Moore v. The American Tobacco
Company, et al., Chancery Court of Jackson County, Mississippi, Case No. 94-
1429. 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 judgment 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, plaintiff filed a motion seeking to preclude
defendants from asserting their "set off" defenses. That motion is pending. In
April 1996, the Mississippi Supreme Court directed the Attorney General to
respond to the Governor of Mississippi's petition requesting that the court
issue a writ requiring the Attorney General to cease and desist from actions for
recovery of Medicaid funds on the grounds the Attorney General has no authority
to pursue such an action. Pursuant to the Supreme Court's order, the Attorney
General responded to defendants' petition which requested that the Mississippi
Supreme Court instruct the trial judge to dismiss those portions of the Attorney
General's lawsuit that seek recovery of Medicaid funds due to lack of authority
to bring such an action. The Mississippi Supreme Court heard arguments on both
petitions in September 1996, but has not issued a decision on either petition.
The trial has been scheduled to begin in March 1997.
Minnesota -- In August 1994, the Attorney General of Minnesota and Blue Cross
- ---------
and Blue Shield of Minnesota filed a Medicaid recovery action in Minnesota state
court. Minnesota, et al. v. Philip Morris Incorporated, et al., Minnesota
District Court, Second Judicial District, County of Ramsey, Case No. C1-94-8565.
In July 1996, the Minnesota Supreme Court ruled that Blue Cross did not have
standing to pursue its tort claims against defendants, but that it could proceed
against defendants for claims brought under antitrust and consumer protection
statutes. The Supreme Court also held that Blue Cross could pursue directly its
equitable claims, but only for injunctive (not monetary) relief. The case is
scheduled to go to trial in 1998, but a specific date has not yet been set.
West Virginia -- In September 1994, the Attorney General of West Virginia filed
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a Medicaid recovery action in West Virginia state court. McGraw v. The American
Tobacco Company, et al., Circuit Court of Kanawha County, West Virginia, Case
No. 94-1707. In October 1995, the court issued a final order dismissing eight
of ten counts of the complaint on the grounds that the Attorney General did not
have standing to assert the common law counts of the complaint. The court also
granted defendants' motion to prohibit prosecution of this case pursuant to a
contingent fee agreement with private counsel. In June 1996, the Attorney
General filed an amended complaint adding the Public Employees' Insurance Agency
as a party plaintiff. In July 1996, defendants filed motions to dismiss all of
the counts of the second amended complaint. Hearings on these motions are set
for December 1996 and February 1997. In November 1996, plaintiffs filed a third
amended complaint which added the West Virginia Department of Health and Human
Resources as a plaintiff, and three law firms as defendants, and which asserts
additional counts under theories of indemnity, negligent misrepresentation,
negligence, and strict product liability.
Texas -- In November 1995, PM Inc., the other leading United States cigarette
- -----
manufacturers and the Tobacco Institute filed a lawsuit in state court in Texas
seeking a declaration that the Attorney General cannot pursue a Medicaid
recovery
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
action, which the Attorney General subsequently brought, as discussed below.
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. The
complaint asserts that the lawsuit violates the United States Constitution and
federal law as well as the Texas Constitution and Texas statutory and common
law, and includes a request for a declaration that the Attorney General has no
authority to enter into contingent fee agreements with private attorneys. In
February 1996, plaintiffs filed a motion for partial summary judgment seeking a
declaration that the Attorney General has no authority under Texas law to seek
reimbursement of Medicaid expenditures from plaintiffs outside of the
subrogation remedy provided by statute and that subrogation is the exclusive
remedy for recovery of Medicaid expenditures from third parties. In June 1996,
the court denied the Attorney General's challenge to the court's jurisdiction,
but decided to hold the state court action in abeyance pending the action filed
by the Attorney General in federal court in March 1996. The State of Texas v.
The American Tobacco Company, et al., United States District Court, Eastern
District of Texas, Civil No. 5-96CV91. In June 1996, defendants filed a number
of motions, including a motion to dismiss the RICO claims of the complaint. The
trial is set for September 1997.
Massachusetts -- In November 1995, PM Inc., along with four other tobacco
- -------------
manufacturers, commenced an action in federal court in Massachusetts against the
Attorney General of Massachusetts seeking declaratory and injunctive relief in
connection with the constitutionality of two recently enacted Massachusetts
statutory provisions (as construed by the Attorney General). Philip Morris
Incorporated, et al. v. Scott Harshbarger, United States District Court,
District of Massachusetts, Case No. 95-12574-GAO. The complaint alleges that
the Attorney General of Massachusetts had threatened to bring a Medicaid
recovery action, which was subsequently brought, as discussed below. 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. In July, 1996, oral argument was heard on the Attorney General's
motion to dismiss the complaint, which is still pending. In December 1995, the
Commonwealth of Massachusetts filed a Medicaid recovery suit in Massachusetts
state court. Commonwealth of Massachusetts v. Philip Morris Inc., et al.,
Superior Court, Middlesex County, Civil Action No. 95-7378. In October 1996,
defendants in the state court action moved to dismiss the Commonwealth's
complaint.
Maryland -- In January 1996, PM Inc., four other leading United States cigarette
- --------
manufacturers, the Tobacco Institute and a local retailer, commenced an action
in Maryland state court seeking 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
invalid. 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. The action was commenced in response to threats by the
Governor and Attorney General to file a Medicaid recovery action, which was
subsequently brought, as discussed below. In August 1996, the court denied
plaintiffs' motion for summary judgment, granted defendants' motion for summary
judgment and dismissed the case. Plaintiffs have appealed the Circuit Court's
decision. In May 1996, the State of Maryland filed a Medicaid recovery action
in Maryland state court. State of Maryland v. Philip Morris Incorporated, et
al., Circuit Court for Baltimore County, Maryland, Case No. 96-122017/CL211017.
In September 1996, defendants filed a motion to dismiss the state's complaint.
Louisiana -- In March 1996, the Attorney General of Louisiana filed a Medicaid
- ---------
recovery action in Louisiana state court. Ieyoub, et al. v. The American Tobacco
Company, et al., 14th Judicial District Court, Parish of Calcasieu, Louisiana,
Case No. 96-1204. A hearing on defendants' argument that the Attorney General
lacks capacity to bring this action is scheduled for December 1996.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
San Francisco -- This action for recovery of health care expenses was filed in
- -------------
June 1996 by the City and County of San Francisco in California federal court
and was since joined by ten other California counties. City and County of San
Francisco, et al. v. Philip Morris, Inc. et al., United States District Court,
Northern District of California, Civil No. C 96-2090. Defendants have filed a
motion to dismiss the complaint and a motion to disqualify contingency-fee
counsel for plaintiffs. In September 1996, plaintiffs in the federal court
action, joined by several medical associations and one other California county,
filed an action in California state court seeking, among other things,
injunctive relief and disgorgement of profits for alleged violations of
California's consumer protection statutes. People of the State of California,
et al. v. Philip Morris, Inc. et al., San Francisco Superior Court, County of
San Francisco, Case No. 980864.
Washington -- This Medicaid recovery action was filed in June 1996 by the
- ----------
Attorney General of the State of Washington in Washington state court. State of
Washington v. American Tobacco Co., Inc., et al., Superior Court of Washington,
King County, No. 96-2-15056-8. Defendants' motion to dismiss several causes of
action in the complaint, including those alleging violations of Washington's
antitrust laws and equitable claims of unjust enrichment and breach of a special
duty, was argued before the court in September 1996 and is still pending. The
trial is scheduled for September 1998.
Connecticut -- In June 1996, PM Inc., along with three other tobacco
- -----------
manufacturers, commenced an action in federal court in Connecticut against the
Attorney General of Connecticut seeking declaratory and injunctive relief.
Philip Morris Inc., et al. v. Richard Blumenthal, United States District Court,
District of Connecticut, Case No. 396CV01221 (PCD). The complaint alleges that
the Attorney General threatened to bring a Medicaid recovery action, which was
subsequently brought, as discussed below. The complaint asserts claims based
upon the United States Constitution and federal law, as well as certain
Connecticut state constitutional, statutory and common law claims. In July
1996, the Attorney General moved to dismiss the complaint, which motion was
denied without prejudice. Also in July 1996, the State of Connecticut filed a
Medicaid recovery action in Connecticut state court. Defendants subsequently
removed the case to federal court. In October 1996, the case was remanded to
state court, whereupon the Attorney General renewed his motion to dismiss the
federal action. State of Connecticut v. Philip Morris Inc., et al., Superior
Court, Judicial District of Litchfield, Case No. CV-96-01534405. In October
1996, defendants moved to have portions of the complaint or the entire complaint
deleted, subject to proper repleading under Connecticut rules.
Utah -- In July 1996, PM Inc. and the other leading United States cigarette
- ----
manufacturers filed a lawsuit in state court in Utah seeking a declaration that
the Attorney General of the State of Utah is not authorized by Utah law to hire
special counsel and compensate them on a contingent fee basis for bringing a
Medicaid recovery action. Philip Morris Incorporated, et al. v. Janet C.
Graham, Attorney General of the State of Utah, et al., Third Judicial District
Court of Salt Lake County, Utah, No. 960904948CV. The suit also challenges the
right of the Attorney General to bring the threatened lawsuit, which was
subsequently filed, as discussed below, as a matter of federal constitutional
law and statutes and under the Utah constitution and Utah statutes and common
law. In September 1996, the Utah Attorney General filed a Medicaid recovery
action in federal court in Utah. State of Utah v. R.J. Reynolds Tobacco
Company, et al., United States District Court, District of Utah, Case No. 2:96CV
0829W. As a result of this filing, the parties have agreed that the state court
action will be stayed with the exception of defendants' claim regarding the
Attorney General's retention of attorneys on a contingent fee basis.
Los Angeles -- This action for the recovery of health care expenses was filed in
- -----------
August 1996 by the County of Los Angeles in California state court. County of
Los Angeles v. R.J. Reynolds Tobacco Company, et al., Superior Court of
California, Los Angeles County, Case No. BC155068.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Alabama -- This Medicaid recovery action was filed in Alabama state court in
- -------
August 1996 as a putative class action on behalf of taxpayers of the State of
Alabama. In August 1996, following local rules, the state court entered an
order conditionally certifying the class. This action was subsequently removed
by defendants to federal court. Crozier, et al. v. The American Tobacco Company,
et al., United States District Court for the Middle District of Alabama, Case
No. 96-A-1403-N. Plaintiffs' motion to remand to state court is pending.
Kansas -- In August 1996, the Attorney General of Kansas filed a Medicaid
- ------
recovery action in Kansas state court. State of Kansas, ex rel. Carla J.
Stovall, Attorney General v. R.J. Reynolds Tobacco Co., et al., District Court
of Shawnee County, Kansas, Case No. 96-CV-919. In November 1996, defendants
moved to dismiss this case.
Michigan -- This Medicaid recovery action was filed in August 1996 by the
- --------
Attorney General of Michigan in Michigan state court. Frank J. Kelley, Attorney
General, ex rel. State of Michigan v. Philip Morris Incorporated, et al.,
Circuit Court for the 30th Judicial Circuit, Ingham County, Michigan, Case No.
96-84281-CZ. In October 1996, defendants moved to dismiss certain counts of the
complaint and to strike claims for compensatory and punitive damages.
Oklahoma -- In August 1996, the Attorney General of Oklahoma filed a Medicaid
- --------
recovery action in Oklahoma state court. State of Oklahoma, et al. v. R.J.
Reynolds Tobacco Co., et al., District Court for Cleveland County, Oklahoma,
Case No. CJ-96-1499-L.
Arizona -- In August 1996, the Attorney General of Arizona filed a Medicaid
- -------
recovery action in Arizona state court. State of Arizona, et al. v. American
Tobacco Co., Inc., et al., Superior Court, Maricopa County, Arizona, No. CV 96-
14769. The Governor of Arizona has instructed the Attorney General to dismiss
the case. Subsequently, the Attorney General filed an amended complaint that
abandons the claims for Medicaid payments, but seeks recovery of other health
care costs as well as other damages and forms of relief.
Hawaii -- In August 1996, PM Inc. and three other cigarette manufacturers filed
- ------
suit against the Hawaii Attorney General in federal district court in Hawaii
seeking declaratory and injunctive relief invalidating a threatened Medicaid
reimbursement action by Hawaii on the grounds that it would violate federal law.
Philip Morris Inc., et al. v. Margery Bronster, U.S. District Court, Hawaii,
Civ. No. 96-00722 HG.
Ohio -- In September 1996, two Ohio local officials filed a Medicaid recovery
- ----
action in Ohio state court, purportedly on behalf of the State of Ohio and all
Ohio taxpayers. Defendants removed the case to federal court in Ohio. State
ex rel. Coyne, Jr., et al. v. The American Tobacco Co., et al., United States
District Court, Northern District of Ohio, Case No. 96-2247.
New Jersey -- In August 1996, PM Inc., along with three other tobacco
- ----------
manufacturers, commenced an action in New Jersey state court, seeking a
declaration that New Jersey law does not authorize and in fact prohibits the
retention of special counsel who will be compensated on a contingency fee basis
for bringing the state's Medicaid recovery action. Philip Morris Incorporated,
et al. v. Peter Verniero, Attorney General of the State of New Jersey, et al.,
Superior Court of New Jersey, Chancery Division, Mercer County, Case No. MER-C-
000114-96. The suit also challenges the right of the Attorney General to bring
the threatened Medicaid reimbursement lawsuit, which was subsequently filed, as
discussed below, as a matter of federal constitutional law and statutes and
under the New Jersey constitution, statutes and common law. In October 1996,
defendants in this action moved to dismiss the complaint. In September 1996, the
State of New Jersey filed its Medicaid recovery action in New Jersey state
court. The State of New Jersey, v. R.J. Reynolds Tobacco Company, et al.,
Chancery Court, Middlesex County, Case No. C-254-96.
New York City -- This action for the recovery of health care expenses (including
- -------------
Medicaid) was filed in October 1996 by the City of New York and the New York
City Health and Hospitals Corporation in New York state court. City of New York,
et al. v.
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Tobacco Institute, et al., Supreme Court of the State of New York,
County of New York, Case No. 406225/96.
Illinois -- In November 1996, the Attorney General of Illinois filed a
--------
Medicaid recovery action in Illinois state court. People of the State of
Illinois v. Philip Morris, Inc., et al., Circuit Court of Cook County, Illinois,
Case No. 96 L 13146.
Other state and local government entities have announced that they are
considering similar proceedings to those discussed above.
OTHER TOBACCO RELATED CLASS ACTION LITIGATION
---------------------------------------------
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.
Three of these cases have been dismissed. In September 1995, plaintiffs in the
remaining action, 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, filed an amended complaint alleging that PM Inc. has,
for many years, knowingly manufactured filtered products that are defective
because they contain "defective filters." Plaintiffs purport to bring this
action on behalf of all persons who "are Texas residents and who have smoked
Philip Morris filtered cigarettes manufactured with Hoechst Celanese filter
materials" and who have suffered adverse health effects. Plaintiffs allege that
the filters in these products contain hazardous chemicals and that cellulose
acetate fibers break away from the filters and are inhaled and ingested by the
consumer when the filtered products are used. 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 motions for summary judgment are pending. In
October 1996, the court denied plaintiffs' motion for class certification.
In June 1995, an action was filed in federal court in Maryland against PM
Inc. seeking certification of a purported 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." Sacks, et al. v. Philip Morris Inc., United
States District Court, District of Maryland, Case No. WMN-95-1840. Plaintiffs
alleged 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. Compensatory and punitive damages were sought. In September 1996, an
order was entered denying plaintiffs' motion for leave to file an amended
complaint and granting defendant's motion to dismiss. Plaintiffs have appealed
the order.
In September 1996, a purported class action was filed in Tennessee state
court against four leading United States cigarette manufacturers and others, on
behalf of all individuals and entities in the United States who have paid
premiums to a Blue Cross or Blue Shield organization for medical insurance. The
complaint alleges that defendants' actions have resulted in increased medical
insurance premiums for all class members and seeks recovery under various
consumer protection statutes as well as under theories of breach of special duty
and unjust enrichment. Perry, et al. v. Philip Morris Incorporated, et al., The
Circuit Court for Coffee County, Tennessee, Civil Action No. 27,960.
OTHER CLASS ACTION LITIGATION
-----------------------------
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 federal
court in 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
August 1995, the court granted plaintiffs'
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 February 1996, the Company filed a Petition for Writ of
Mandamus with the United States Court of Appeals for the Second Circuit
requesting the Court of Appeals to direct the trial court to withdraw its order
granting class certification. In July 1996, an alleged class member moved to
intervene in the action and to be named a class representative. In September
1996, the United States Court of Appeals for the Second Circuit denied
defendants' Petition for Writ of Mandamus.
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in several purported class actions that were 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 asserted
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 claimed 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. In April 1996, the court entered an
order stipulating the dismissal of the State Board claims. In August 1996, the
court entered judgment dismissing the claims in Kurzweil. In September 1996, the
Kurzweil plaintiffs filed a motion in the district court to vacate the judgment
and for leave to amend their complaint. Also in September 1996, the Kurzweil
plaintiffs filed an appeal from the judgment in the United States Court of
Appeals for the Second Circuit. Both the motion and the appeal are pending.
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. ("Kraft"), by plaintiffs purporting to represent
all California residents who purchased defendants' cereal products 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.
In April 1996, an antitrust action was filed in federal court in Wisconsin
against Kraft as a purported class action. Stuart, et al. v. Kraft Foods, Inc.,
et al., United States District Court, Eastern District of Wisconsin, Case No.
96-C-391. An amended complaint filed in July 1996, named two other leading
dairy products manufacturers and the National Cheese Exchange as defendants.
Plaintiff purports to represent all persons and entities in the United States
(excluding governmental entities and political subdivisions) that sold milk
and/or bulk cheese directly to Kraft or any of its alleged co-conspirators at
any time since January 1, 1988. Plaintiff alleges that defendants engaged in a
conspiracy to fix and depress the prices of bulk cheese and milk through their
trading activity on the National Cheese Exchange and failed to deal in good
faith with their bulk cheese and milk suppliers by paying them prices based on
the National Cheese Exchange opinion. Plaintiff seeks injunctive and equitable
relief and treble damages. Plaintiffs' motion for class certification and
defendants' motion to dismiss plaintiffs' action are pending.
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<PAGE>
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In September 1996, a second antitrust action was filed in federal court in
Wisconsin against Kraft as a purported class action. Sheeks, et al. v. Kraft
Foods, Inc., et al., United States District Court, Eastern District of
Wisconsin, Case No. 96-C-1100. Plaintiffs are dairy farmers and assert virtually
identical claims to those in the Stuart case discussed above. Plaintiffs are
seeking to consolidate this action with the Stuart case.
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, such as the Carter
case discussed above, 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.
Note 3. Recent Financial Accounting Pronouncements:
- ----------------------------------------------------
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of." This statement
requires that certain assets be reviewed for impairment and, if necessary,
remeasured at fair value, whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. The adoption of
SFAS No. 121 at January 1, 1996 and its application during 1996, had no material
impact on the Company's financial position or results of operations for the
three and nine months ended September 30, 1996.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which allows companies either 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. The Company
will continue to use the intrinsic value based method, which generally does not
result in compensation cost.
Effective January 1, 1995, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for its non-U.S.
retiree benefit plans and SFAS No. 116, "Accounting for Contributions Received
and Contributions Made." The adoption of these Statements reduced 1995 net
earnings by $21 million ($.02 per share) and $7 million ($.01 per share),
respectively.
In October 1996, the AICPA's Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities,"
which requires adoption by the Company as of January 1, 1997. The Company is
currently evaluating SOP 96-1 and has not yet estimated the impact of adoption,
if any.
-23-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
________________________________________________________________________
CONSOLIDATED OPERATING RESULTS
- ------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
Operating Revenues Operating Income
------------------ ----------------
(in millions)
1996 1995 1996 1995
------- ------- ------ ------
<S> <C> <C> <C> <C>
Tobacco $27,837 $24,704 $6,356 $5,523
Food 20,888 21,950 2,909 2,834
Beer 3,418 3,396 392 398
Financial services
and real estate 271 285 139 120
Amortization of goodwill (443) (443)
Unallocated
corporate expenses (339) (326)
------- ------- ------ ------
Total $52,414 $50,335 $9,014 $8,106
======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------
Operating Revenues Operating Income
------------------ ----------------
(in millions)
1996 1995 1996 1995
------- ------- ------ ------
<S> <C> <C> <C> <C>
Tobacco $ 9,497 $ 8,433 $2,226 $1,921
Food 6,710 7,001 941 921
Beer 1,118 1,163 117 119
Financial services
and real estate 89 92 49 39
Amortization of goodwill (150) (149)
Unallocated
corporate expenses (112) (112)
------- ------- ------ ------
Total $17,414 $16,689 $3,071 $2,739
======= ======= ====== ======
</TABLE>
-24-
<PAGE>
1996 COMPARED WITH 1995
Operating revenues for the first nine months of 1996 increased $2.1 billion
(4.1%) and operating income for the first nine months increased $908 million
(11.2%) over the comparable 1995 period. Operating revenues for the third
quarter increased $725 million (4.3%) and operating income for the third quarter
increased $332 million (12.1%) over the comparable 1995 period. Operating
revenues increased in the first nine months and third quarter over the
comparable 1995 periods due primarily to increases in tobacco revenues partially
offset by the impact of divestitures of food businesses. Operating income
increased in the first nine months and third quarter over the comparable 1995
periods due primarily to increases in the tobacco and food segments.
Excluding the results of divested North American food businesses (discussed
below in Food--Business Environment), operating revenues and operating income
increased $4.0 billion (8.3%) and $1.0 billion (12.7%), respectively, in the
first nine months over the comparable 1995 period and increased $1.2 billion
(7.3%) and $380 million (14.1%), respectively, in the third quarter over the
comparable 1995 period.
Currency movements, primarily the Japanese yen, decreased operating income
by $109 million and $74 million in the first nine months and third quarter of
1996, respectively, versus the comparable 1995 periods. Although the Company
cannot predict future movements in currency rates, it currently estimates that
currency movements, primarily the Japanese yen, will continue to have an
unfavorable impact on 1996 operating income and, at current rates, will continue
to unfavorably impact operating income in 1997.
Excluding the cumulative effect of accounting changes discussed below, net
earnings increased by $626 million (14.9%) in the first nine months of 1996 over
the comparable 1995 period due to increased operating income ($908 million) and
lower interest expense ($92 million), partially offset by a higher income tax
provision ($374 million). Net earnings increased $213 million (14.9%) in the
third quarter of 1996 over the comparable 1995 period due to increased operating
income ($332 million) and lower interest expense ($9 million), partially offset
by a higher income tax provision ($128 million).
Excluding the cumulative effect of accounting changes discussed below,
earnings per share of $5.87 in the first nine months of 1996 increased by 17.9%
over the comparable 1995 period, due to an increase in earnings and fewer shares
outstanding. Similarly, net earnings per share of $2.01 in the third quarter of
1996 increased 17.5% as compared to the prior year. As a result of the
Company's share repurchase program, the weighted average number of shares
outstanding decreased to 824 million in the first nine months of 1996 from 844
million in the first nine months of 1995. The weighted average number of shares
outstanding decreased to 818 million in the third quarter of 1996 from 839
million in the third quarter of 1995.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," for its non-U.S. retiree benefit plans and SFAS
No. 116, "Accounting for Contributions Received and Contributions Made." The
adoption of these Statements reduced 1995 net earnings by $21 million ($.02 per
share) and $7 million ($.01 per share), respectively.
As described in Note 3 to the Condensed Consolidated Financial Statements,
effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and
SFAS No. 123, "Accounting for Stock-Based Compensation." The adoption and
application of SFAS No. 121 and SFAS No. 123 as of January 1, 1996 had no impact
on the Company's financial position or results of operations for the three and
nine months ended September 30, 1996.
-25-
<PAGE>
In October 1996, the AICPA's Accounting Standards Executive Committee issued
Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities,"
which requires adoption by the Company as of January 1, 1997. The Company is
currently evaluating SOP 96-1 and has not yet estimated the impact of adoption,
if any.
OPERATING RESULTS BY BUSINESS SEGMENT
_____________________________________
TOBACCO
_______
BUSINESS ENVIRONMENT
As discussed below, the tobacco industry, including PM Inc., the Company's
domestic tobacco subsidiary, and Philip Morris International Inc. ("PMI"), the
Company's international tobacco subsidiary, have faced, and continue to face, a
number of issues which may adversely affect volume, operating revenues and
operating income.
In the United States, these issues include proposed federal regulatory
controls (including, as discussed below, the issuance of final regulations by
the United States Food and Drug Administration (the "FDA") which purport to
regulate tobacco products as "drugs" or "medical devices"); actual and proposed
excise tax increases; federal, state and local governmental and private
restrictions on smoking (including restrictions imposed by airlines); new and
proposed restrictions on tobacco manufacturing, marketing, advertising
(including decisions by certain companies to limit or not accept tobacco
advertising) and sales; new and proposed regulations to ban or severely restrict
smoking in workplaces and in buildings permitting public access, to require
substantial additional health warning and product content information on
cigarette packages and in advertising, and to eliminate the tax deductibility of
tobacco advertising and promotional costs; increased assertions of adverse
health effects associated with both smoking and exposure to environmental
tobacco smoke; legislation or other governmental action seeking to ascribe to
the industry responsibility and liability for the purported adverse health
effects associated with both smoking and exposure to environmental tobacco
smoke; the diminishing social acceptance of smoking; increased pressure from
anti-smoking groups; unfavorable press reports; governmental and grand jury
investigations; private plaintiff class action litigation; and actions by states
and local governments seeking Medicaid and health care reimbursement and
existing and proposed laws to help facilitate such recoveries. See Note 2 to the
Condensed Consolidated Financial Statements regarding certain litigation in
which the Company and/or its subsidiaries (including PM Inc.) are defendants.
In August 1996, the FDA issued final regulations purportedly designed to
prevent minors from smoking. In the regulations, the FDA asserted that it has
jurisdiction over nicotine as a "drug" and purports to regulate cigarettes as a
"medical device" (a "nicotine delivery system") under the provisions of the
Food, Drug and Cosmetic Act. The final regulations include severe restrictions
on the distribution, marketing and advertising of cigarettes and would require
the industry to comply with a wide range of labeling, reporting, recordkeeping,
manufacturing and other requirements applicable to medical devices and their
manufacturers. For the most part, the regulations are scheduled to become
effective on August 28, 1997. The FDA's assertion of jurisdiction, if not
reversed by judicial or legislative action, could lead to more expansive FDA-
imposed restrictions on cigarette operations than those set forth in the final
regulations and could adversely affect the volume, operating revenues and
operating income of PM Inc. in amounts that cannot be determined. PM Inc. and
other domestic cigarette manufacturers and an advertising firm have sued the
FDA, seeking a judicial declaration that the FDA has no authority to regulate
cigarettes and asking the court to permanently enjoin the FDA from enforcing its
regulations. Similar suits have been filed against the FDA by manufacturers of
-26-
<PAGE>
smokeless tobacco products, by a trade association of cigarette retailers and by
advertising agency associations. A hearing on plaintiffs' motion for summary
judgment has been scheduled for February 1997. The outcome of the litigation
challenging the FDA regulations cannot be predicted.
In August 1996, the Governor of Massachusetts signed legislation that would
require cigarette manufacturers to disclose, for cigarettes sold in the Common-
wealth, the flavorings and other ingredients used in each brand of such
cigarettes, and to provide "nicotine-yield ratings" for their products based on
standards to be established by the Massachusetts Department of Public Health. PM
Inc. and PMI believe that enforcement of the statute could require the
disclosure of valuable proprietary information concerning their brands. PM Inc.
and three other domestic cigarette manufacturers have filed suit in federal
district court in Boston challenging the ingredient-disclosure provision of the
legislation as preempted by the Federal Cigarette Labeling and Advertising Act
and as violating the commerce, full faith and credit, due process and takings
clauses of the U.S. Constitution. A hearing on plaintiffs' motion for summary
judgment has been scheduled for December 3, 1996. The outcome of this lawsuit
cannot be predicted. The enactment of this legislation may encourage efforts in
other states to enact similar legislation.
Some foreign countries have also taken steps to restrict or prohibit
cigarette advertising and promotion, to increase taxes on cigarettes, to control
prices, to restrict imports, to propose disclosure of product ingredients, to
impose maximum constituent levels and to discourage cigarette smoking.
It is not possible to predict what, if any, other foreign or domestic
governmental legislation or regulations will be adopted relating to the
manufacturing, advertising, sale or use of cigarettes or to the tobacco
industry generally.
In June 1995, PM Inc. announced that it had voluntarily undertaken a program
to limit minors' access to cigarettes. Elements of the program include
discontinuing free cigarette sampling to consumers in the United States,
discontinuing the distribution of cigarettes by mail to consumers in the United
States, placing a notice on cigarette cartons and packs for sale in the United
States stating "Underage Sale Prohibited," working with others in support of
state legislation to prevent youth access to tobacco products, taking measures
to encourage retailer compliance with minimum-age laws, and independent auditing
of the program.
In May 1996, PM Inc. proposed that comprehensive federal legislation be
enacted to respond to concerns by the President and others regarding the use of
tobacco products by minors. The proposed legislation would establish a federal
minimum age of 18 for the sale of tobacco products and would ban, restrict or
otherwise limit the following among other things: cigarette vending machines;
tobacco product brand names, logos, characters and selling messages on non-
tobacco-related items such as hats or T-shirts; tobacco product sponsorship of
events with significant youth audiences; outdoor advertisements for tobacco
products within 1,000 feet of any playground or elementary or secondary school,
including outward-facing window display advertising; advertisements for tobacco
products in or on trains, buses, subways and taxis, and in terminals, stations,
platforms or stops for these vehicles; and advertisements for tobacco products
in youth-oriented publications. The proposed legislation would restrict youth
access to tobacco products by calling for a ban on the sale of single cigarettes
or packs with fewer than 20 cigarettes; requiring all tobacco sales to be face-
to-face, where proof of age can be verified for anyone appearing to be under age
21; mandating that tobacco products in retail establishments be displayed within
the control or line of sight of an employee; banning sampling except in
locations where minors are denied access; and requiring retailers and their
employees to certify that they understand and will comply with minimum-age laws.
To ensure compliance, the proposed legislation calls for penalties of up to
$50,000 for violations by a tobacco manufacturer. The proposed legislation also
calls for a $250 million contribution from the tobacco industry (based on market
share) over a five-year period to assist the government and others in
implementation and enforcement. The proposed legislation would preclude the FDA
from regulating tobacco products. As of the date of this filing, this
legislation has not been introduced in either house of Congress.
-27-
<PAGE>
PM Inc. has received requests for information (including, in some cases,
grand jury subpoenas or Civil Investigative Demands) in connection with
governmental investigations of the tobacco industry, and is cooperating with
respect to such requests. Certain present and former employees of PM Inc. have
testified or have been asked to testify in connection with certain of these
matters. The investigations are as follows:
An investigation by the United States Department of Justice relating to the
possibility of alleged joint activity to restrain competition in the manufacture
and sale of cigarettes, including possible joint activity to restrict research
and development or product innovations;
An investigation by the United States Attorney for the Eastern District of
New York relating to The Council for Tobacco Research-U.S.A., Inc., a research
organization of which PM Inc. is a sponsor;
An investigation by the United States Attorney for the Eastern District of
Virginia relating to Healthy Buildings International, Inc.; and
An investigation by the United States Department of Justice relating to
issues raised in testimony provided by tobacco industry executives before
Congress.
PM Inc. has been informed that an investigation by the United States Attorney
for the Southern District of New York, which had been initiated following the
publication of an article in The New York Times that made allegations about PM
Inc. documents and supposedly secret research relating to nicotine, has been
consolidated with the United States Department of Justice investigation
discussed immediately above.
While the outcomes of these investigations cannot be predicted, PM Inc.
believes it has acted lawfully.
In July 1996, PMI learned of a criminal investigation of certain employees
and officers of certain affiliates of PMI by the Criminal Prosecutors Office in
Naples, Italy, regarding an alleged conspiracy to avoid the payment of taxes.
Subsequently, PMI's Italian affiliate, Intertaba, s.p.a. ("Intertaba"), was
served with tax assessments relating to value added taxes on royalties paid to
affiliates of PMI by Amministrazione Autonoma Dei Monopoli di Stato, the Italian
state cigarette monopoly, for the years 1989 to 1994. The aggregate amount of
taxes alleged to be due, together with interest and penalties, is $104.5
million. PMI anticipates that Intertaba may receive further value added tax
assessments for 1995 and 1996, as well as income tax assessments, the aggregate
amount of which could be substantial. However, PMI and its affiliates believe
they have complied with applicable Italian tax laws and intend to vigorously
contest the assessments.
Also in July 1996, an affiliate of PMI received a request for information
from the Competition Directorate of the European Commission concerning the
relationship of certain affiliates of PMI with the Italian state cigarette
monopoly. PMI and its affiliates believe that they have acted in accordance
with European Community law.
In March 1996, Liggett Group, Inc., a United States manufacturer and seller
of cigarettes ("Liggett"), announced an agreement to settle the Castano case
described in Note 2 to the Condensed Consolidated Financial Statements. The
agreement is subject to court approval. Liggett also announced an agreement to
settle the Medicaid reimbursement actions brought by the states of Florida,
Louisiana, Massachusetts, Mississippi and West Virginia. As part of each
settlement, Liggett agreed to comply with certain aspects of the regulations
proposed by the FDA, to make certain payments and to cooperate in limited ways
with otherwise adverse parties in certain investigations and lawsuits. The
terms of the settlements would be available to any other defendant that has a
share of the United States domestic cigarette market of less than 30% if it
acquires or is acquired by Liggett, and each settlement can be terminated by
Liggett upon the
-28-
<PAGE>
occurrence of specified events. Liggett's sales account for approximately 2% of
the United States domestic cigarette market. The major cigarette manufacturers
in the United States, including PM Inc., have stated that they do not intend to
settle any smoking and health litigation and that they will continue to defend
all such actions vigorously.
Press reports have discussed a proposal to forge a comprehensive legislative
solution to smoking and health claims against the tobacco industry. The Company
did not initiate the proposal and believes it is unrealistic. The Company
believes that any such legislation would involve significant and perhaps
insurmountable difficulties in reconciling the views of many competing
interests. However, the Company will explore all reasonable measures that may be
in the best interests of its shareholders.
A recent issue of the journal Science reported the results of a study that
-------
suggest that a metabolite of a chemical found in cigarette smoke may be involved
in a cellular mechanism leading to lung cancer. The Company believes that the
study merits careful review.
In addition to the foregoing, there is litigation pending against the Company
and its subsidiaries which is discussed in Note 2 to the Condensed Consolidated
Financial Statements. The Company's position with regard to this litigation is
set forth therein.
1996 COMPARED WITH 1995
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
Operating Revenues Operating Income
------------------ ----------------
(in millions)
1996 1995 1996 1995
------- ------- ------ ------
<S> <C> <C> <C> <C>
Domestic tobacco $ 9,251 $ 8,504 $3,131 $2,797
International tobacco 18,586 16,200 3,225 2,726
------- ------- ------ ------
Total $27,837 $24,704 $6,356 $5,523
======= ======= ====== ======
</TABLE>
DOMESTIC TOBACCO. During the first nine months of 1996, PM Inc.'s operating
revenues increased 8.8% over the comparable 1995 period, due to higher volume
($382 million), pricing ($305 million) and improved product mix ($60 million).
Operating income for the first nine months of 1996 increased 11.9% over 1995,
due to price increases, net of product cost increases ($253 million), higher
volume ($238 million), improved product mix ($53 million) and lower fixed
manufacturing expense ($88 million, due primarily to the costs of a product
recall in the second quarter of 1995), partially offset by higher marketing,
administration and research expense ($298 million).
The premium and discount segments (based on shipments) accounted for
approximately 71.5% and 28.5%, respectively, of domestic cigarette industry
volume in the first nine months of 1996, versus approximately 69.7% for the
premium segment and 30.3% for the discount segment in the first nine months of
1995.
PM Inc.'s volume (based on shipments) for the first nine months of 1996 was
172.2 billion units, an increase of 4.6% over 1995, compared with an industry
increase of 0.5%, over the comparable period in 1995. While 1996 industry
volume increased, due in part to one extra shipping day in 1996, PM Inc.
estimates that, over the long-term, industry shipments should continue to
decline at their historical average of 1% to 2% per annum.
PM Inc.'s market share (based on shipments) for the first nine months of 1996
was 47.6%, an increase of 1.8 share points from the first nine months of 1995.
In the premium segment, volume in PM Inc.'s brands increased 6.7%, compared with
a
-29-
<PAGE>
3.1% increase for the industry, resulting in a premium segment share of 56.1%,
an increase of 1.9 share points from the first nine months of 1995. Marlboro
volume was up 9.3 billion units (8.7%) for a 32.1% share of the total industry,
an increase of 2.4 share points from 1995. In the discount segment, PM Inc.'s
shipments decreased 5.6%, to 27.2 billion units, in the first nine months of
1996 compared with an industry decline of 5.4%, resulting in a discount segment
share of 26.4%, unchanged from the first nine months of 1995.
Retail sales data (compiled by the A.C. Nielsen Company) indicate PM Inc. and
Marlboro market shares of 49.3% and 33.2%, respectively, in the first nine
months of 1996, compared with 47.1% and 30.4%, respectively, in the first nine
months of 1995. The market share for PM Inc.'s other premium brands as a group
was 9.0% in 1996, up slightly from the comparable period in 1995. In the
discount segment, Basic increased its segment share to 17.3%, an increase of 1.8
share points from the first nine months of 1995.
PM Inc. cannot predict change or rates of change in the relative sizes of the
premium and discount segments or in PM Inc.'s shipments, market share (based on
shipments) or retail market share.
During the second quarter of 1996, PM Inc. implemented a $2.00 per thousand
cigarettes increase in the price of its domestic premium and discount brands.
PM Inc. previously increased the price of its domestic brands by $1.50 per
thousand cigarettes in the second quarter of 1995.
INTERNATIONAL TOBACCO. During the first nine months of 1996, tobacco
operating revenues of PMI increased 14.7%, due primarily to higher foreign
excise taxes ($1.2 billion, including those for previously unconsolidated and
newly acquired subsidiaries), favorable volume/mix ($831 million) and pricing
($308 million), and the impact of previously unconsolidated and newly acquired
subsidiaries ($240 million, excluding excise taxes), partially offset by
unfavorable currency movements ($204 million). Operating income increased 18.3%,
due primarily to favorable volume/mix ($416 million) and pricing ($308 million),
partially offset by unfavorable currency movements ($121 million) and higher
marketing, administration and research costs.
Total international volume grew 54.1 billion units (11.7%) in the first nine
months of 1996 over the comparable 1995 period to 517.8 billion units. Volume
includes local brands manufactured by ZPT-Krakow, a Polish cigarette
manufacturer, in which PMI acquired a controlling interest during the first
quarter of 1996. Volume advanced in most major markets, including Germany,
Italy, Spain, the Benelux countries, Eastern Europe, the Middle East, Turkey,
Japan, Korea, Singapore and Argentina. Volume continued to decline in Mexico,
as consumers continued to trade down to lower-priced brands.
PMI's market shares also rose in most major markets, with significant
increases recorded in Germany, Italy, Spain, the Benelux countries, Switzerland,
Turkey, Japan, Korea, Singapore and Hong Kong.
-30-
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------
Operating Revenues Operating Income
------------------ ----------------
(in millions)
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Domestic tobacco $3,284 $2,928 $1,098 $ 972
International tobacco 6,213 5,505 1,128 949
------ ------ ------ ------
Total $9,497 $8,433 $2,226 $1,921
====== ====== ====== ======
</TABLE>
DOMESTIC TOBACCO. During the third quarter of 1996, PM Inc.'s operating
revenues increased 12.2% over the comparable 1995 period, due to higher volume
($221 million), pricing ($111 million) and improved product mix ($24 million).
Operating income for the 1996 third quarter increased 13.0% from 1995, due to
higher volume ($139 million), price increases, net of product cost increases
($91 million) and improved product mix ($20 million), partially offset by higher
marketing, administration and research costs ($108 million) and higher fixed
manufacturing expense ($16 million).
The premium and discount segments (based on shipments) accounted for
approximately 71.9% and 28.1%, respectively, of domestic cigarette industry
volume in the third quarter of 1996, versus approximately 69.8% for the premium
segment and 30.2% for the discount segment in the third quarter of 1995.
PM Inc.'s volume (based on shipments) for the third quarter of 1996 was 60.4
billion units, an increase of 7.8% over 1995, compared with an industry increase
of 2.1%, from the comparable period in 1995. A portion of the volume gain was
due to a favorable comparison against 1995's third quarter, when three major
factors reduced volume: wholesalers shifted a portion of 1995 third quarter
shipments to the second quarter in advance of an extended July 4th holiday
weekend; distributor buying patterns resulted in lower 1995 third quarter-end
wholesaler inventories; and the 1995 third quarter had one less shipping day.
While industry volume grew in the third quarter of 1996 from the comparable 1995
period, due primarily to the previously-discussed favorable comparison, PM Inc.
estimates that, over the long-term, industry shipments should continue to
decline at their historical average of 1% to 2% per annum.
PM Inc.'s market share (based on shipments) for the third quarter of 1996 was
48.1%, an increase of 2.5 share points from the third quarter of 1995. In the
premium segment, volume in PM Inc.'s brands increased 10.7%, compared with a
5.1% increase for the industry, resulting in a premium segment share of 56.6%,
an increase of 2.8 share points from the third quarter of 1995. Marlboro volume
was up 4.7 billion units (13.0%) for a 32.8% share of the total industry, an
increase of 3.2 share points from 1995. In the discount segment, PM Inc.'s
shipments decreased 5.9%, to 9.3 billion units, in the third quarter of 1996
compared with an industry decline of 4.9%, resulting in a discount segment share
of 26.3%, a decrease of 0.3 share points from the third quarter of 1995.
Retail sales data (compiled by the A.C. Nielsen Company) indicate PM Inc. and
Marlboro market shares of 49.7% and 33.7%, respectively, in the third quarter of
1996, compared with 47.1% and 30.6%, respectively, in the third quarter of 1995.
The market share for PM Inc.'s other premium brands as a group was 9.0% in 1996,
up slightly from the comparable period in 1995. In the discount segment, Basic
increased its segment share 1.8 points, to 17.7%, in the third quarter of 1996.
-31-
<PAGE>
PM Inc. cannot predict change or rates of change in the relative sizes of the
premium and discount segments or in PM Inc.'s shipments, market share (based on
shipments) or retail market share.
INTERNATIONAL TOBACCO. During the third quarter of 1996, tobacco operating
revenues of PMI increased 12.9%, due to higher foreign excise taxes ($325
million, including those for previously unconsolidated and newly acquired
subsidiaries), favorable volume/mix ($299 million) and pricing ($162 million),
and the impact of previously unconsolidated and newly acquired subsidiaries ($75
million, excluding excise taxes), partially offset by unfavorable currency
movements ($153 million). Operating income increased 18.9% due primarily to
favorable pricing ($162 million) and volume/mix ($140 million), partially offset
by unfavorable currency movements ($72 million) and higher marketing,
administration and research costs.
Total international volume grew 15.8 billion units (9.8%) in the third
quarter of 1996 over the comparable 1995 period to 177.1 billion units. Volume
includes local brands manufactured by ZPT-Krakow, a Polish cigarette
manufacturer, in which PMI acquired a controlling interest during the first
quarter of 1996. Volume advanced in virtually all major markets, including
Germany, Italy, Spain, the Benelux countries, Eastern Europe, the Middle East,
Turkey, Japan and Argentina. Volume continued to decline in Mexico, as
consumers continued to trade down to lower-priced brands.
PMI's market shares rose in most major markets, with significant increases in
Germany, Italy, Spain, the Benelux countries, Switzerland, Turkey, Japan, Korea,
Singapore and Hong Kong.
FOOD
____
BUSINESS ENVIRONMENT
Several steps have been taken to build the value of premium brands, reduce
costs and increase profitability in the food businesses. Effective January
1995, the North American food business was reorganized to combine the operations
of Kraft USA and General Foods USA. The combined organization, named Kraft
Foods, Inc. ("Kraft"), has streamlined operations and improved effectiveness and
customer response. In December 1995, the international food business, Kraft
Foods International, Inc. ("KFI"), was realigned to capitalize on future growth
opportunities and reorganized into separate regional units: Western Europe;
Northern Europe; Central and Eastern Europe, Middle East and Africa; and
Asia/Pacific. In Latin America, where certain subsidiaries and affiliates of
PMI manufacture and market a wide variety of food products, PMI acquired nearly
all of the remaining voting shares of Industrias de Chocolate Lacta S.A.
("Lacta"), a Brazilian chocolate confectionery company, in the second quarter of
1996.
Kraft and KFI have sold certain non-strategic businesses. In 1995, Kraft
sold its bakery and margarine businesses during the fourth quarter, its
specialty oils, marshmallows and caramels businesses during the third quarter
and substantially all of the distribution businesses of Kraft Foodservice during
the first quarter. In addition, KFI sold several smaller international food
businesses in 1995.
During 1996, Kraft and KFI have continued to realign their portfolios of
businesses and focus on higher-margin premium products. During the third
quarter of 1996, KFI recorded gains of $70 million, primarily on the sales of
its margarine businesses in the U.K. and Italy. KFI also recorded a charge for
cost reduction initiatives during the quarter. The net impact of these items
was immaterial to 1996 third quarter results of operations. KFI has also
negotiated an agreement to sell Malaco, a Scandinavian sugar confectionery
business, subject to government approval; the sale may be completed in the
fourth quarter of 1996. In addition, Kraft and KFI have sold several smaller
food businesses in 1996. These divestitures are not expected to have a material
effect on their 1996 or future results of operations.
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<PAGE>
Both Kraft and KFI have been affected by green coffee bean cost volatility,
which began with frosts in Brazil in 1994. Throughout 1995, green coffee bean
prices remained volatile, significantly affecting consumer buying patterns and
leading to intense price competition among coffee companies in some markets. In
1996, intense competition has continued as green coffee bean prices declined.
The green coffee bean price decline has lowered 1996 operating revenues as
prices charged to consumers have been reduced. Kraft has also been affected by
record high cheese commodity costs, as well as other higher dairy commodity
costs, arising from low U.S. milk production. The increased commodity costs
have led to an increase in prices charged to consumers. Additionally, Kraft's
cereal business has been affected by intense price competition from low-priced
brands. In response, Kraft implemented price reductions and simplified couponing
of its cereal products. Several competitors followed with similar pricing
strategies.
1996 COMPARED WITH 1995
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
Operating Revenues Operating Income
------------------ ----------------
(in millions)
1996 1995 1996 1995
------- ------- ------ ------
<S> <C> <C> <C> <C>
North American food $12,509 $13,913 $2,062 $2,022
International food 8,379 8,037 847 812
------- ------- ------ ------
Total $20,888 $21,950 $2,909 $2,834
======= ======= ====== ======
</TABLE>
NORTH AMERICAN FOOD. During the first nine months of 1996, operating
revenues decreased 10.1% from the comparable 1995 period, due to the impact of
divestitures ($1.9 billion), product mix ($93 million) and pricing ($56
million), partially offset by volume increases in on-going operations ($608
million) and the impact of acquisitions ($46 million). Operating income
increased 2.0% over the comparable 1995 period due primarily to volume increases
in on-going operations ($337 million), partially offset by net price reductions
and net cost increases ($135 million), the impact of divestitures ($107 million)
and product mix ($71 million). The effect of pricing on 1996 operating revenues
was due primarily to price reductions in coffee and cereals, partially offset by
price increases in cheese. The effect of net price reductions on 1996 operating
income was due primarily to price reductions in cereals. The effect of net cost
increases on 1996 operating income was due primarily to higher cheese commodity
costs.
Excluding operating results of the divested businesses discussed above, North
American food operating revenues and operating income increased 4.5% and 7.7%,
respectively, in the first nine months of 1996 compared with the comparable 1995
period.
Significant volume gains were achieved in beverages, on the strength of
ready-to-drink and powdered products; desserts, due to strength in packaged and
refrigerated products, as well as the acquisition of a shelf-stable pudding
product line in the fourth quarter of 1995; and frozen pizza, helped by new
product introductions and geographic market expansion. Volume also increased in
coffee, aided by sales of premium-priced line extensions, and processed meats,
with growth in lunch combinations, driven by product introductions. Volume
increased in cereals in the first nine months of 1996, due primarily to product
introductions and Kraft's implementation of price reductions and simplified
couponing in the second quarter.
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<PAGE>
INTERNATIONAL FOOD. Operating revenues for the first nine months of 1996
increased 4.3% over the first nine months of 1995, due to higher volume ($121
million, reflecting an additional selling week in 1996) and the consolidation of
previously unconsolidated operations in emerging markets ($448 million), the
impact of acquisitions ($31 million), partially offset by pricing ($175 million,
primarily coffee) and the impact of divestitures ($77 million). Operating
income during the first nine months of 1996, which included the results from an
extra selling week, increased 4.3% over the comparable 1995 period reflecting
higher volume ($60 million), cost decreases, net of price reductions ($35
million), and the consolidation of previously unconsolidated operations in
emerging markets ($30 million), partially offset by higher marketing,
administration and research costs ($97 million, primarily higher marketing
costs partially offset by lower administration costs).
During the first nine months of 1996, several small international businesses
were sold, and margarine businesses in the U.K. and Italy were sold at gains.
In addition, a charge was recorded for cost reduction initiatives. The net
impact of these items was not material to operating income.
Higher international food volume was due primarily to the consolidation of
previously unconsolidated businesses, an extra selling week in the first quarter
and growth in a number of developing markets. KFI's coffee volume increased in
all regions during the first nine months of 1996 over the first nine months of
1995, particularly in several key markets such as Germany and France, KFI's
largest coffee markets. Although volume gains in coffee were realized during
the first nine months of 1996, volume related earnings gains were not realized
due to continued intense competition and higher coffee margins in 1995. KFI's
confectionery volume increased, especially in the emerging markets of Central
and Eastern Europe but volume declined in several Western and Northern European
markets. KFI's cheese and grocery volumes were down, due to divestitures of
businesses, lower sliced beef sales in Italy and the effects of a peanut butter
recall in Australia. Price competition remains intense in all international
food categories and may continue to have an unfavorable impact on volume and
operating income during 1996. Latin America volume was higher on strong sales
of powdered soft drinks throughout the region.
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------
Operating Revenues Operating Income
------------------ ----------------
(in millions)
1996 1995 1996 1995
------ ------ ---- ----
<S> <C> <C> <C> <C>
North American food $4,062 $4,366 $642 $635
International food 2,648 2,635 299 286
------ ------ ---- ----
Total $6,710 $7,001 $941 $921
====== ====== ==== ====
</TABLE>
NORTH AMERICAN FOOD. During the third quarter of 1996, operating revenues
decreased 7.0% from the comparable 1995 period, due primarily to the impact of
divestitures ($465 million), product mix ($41 million) and pricing ($6 million),
partially offset by volume increases in on-going operations ($172 million), the
impact of acquisitions ($24 million) and currency movements ($12 million).
Operating income increased 1.1% over the comparable 1995 period, due primarily
to volume increases in on-going operations ($95 million) and lower marketing,
administrative and research expenses ($65 million), partially offset by net
price reductions and net cost increases ($90 million), the impact of
divestitures ($48 million) and product mix ($22 million). The effect of pricing
on 1996 operating revenues was due primarily to
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<PAGE>
price reductions in coffee and cereals, partially offset by price increases on
cheese. The effect of net price reductions on 1996 operating income was due
primarily to price reductions in cereals. The effect of net cost increases on
1996 operating income was due primarily to higher cheese commodity costs.
Excluding operating results of divested businesses, discussed above, North
American food operating revenues and operating income increased 4.1% and 9.4%,
respectively, in the third quarter of 1996 compared with the comparable 1995
period.
Significant volume gains were achieved in beverages, on the strength of
ready-to-drink products; desserts, due to refrigerated desserts, frozen toppings
and the acquisition of a shelf-stable pudding product line in the fourth quarter
of 1995; and frozen pizza, helped by new product introductions and geographic
market expansion. Volume gains were also realized in processed meats, driven by
hot dogs and lunch combinations, which were aided by new product introductions,
coffee, aided by sales of premium-priced line extensions and meals, benefiting
from dinners and sales from Taco Bell grocery products, acquired in the third
quarter of 1996. Volume also increased in the cereals business, as consumers
responded to price reductions and new product introductions. Cheese volume was
down slightly for the quarter, reflecting weakness in the process cheese
category as a result of commodity-driven price increases.
INTERNATIONAL FOOD. Operating revenues for the third quarter of 1996
increased 0.5% compared to the third quarter of 1995, due to the consolidation
of previously unconsolidated operations in emerging markets ($86 million),
higher volume ($59 million) and the impact of acquisitions ($25 million),
partially offset by pricing ($69 million, reflecting lower coffee prices and
continued intense price competition in Western Europe), currency movements ($51
million) and the impact of divestitures ($37 million). Operating income
increased 4.5% over the comparable 1995 period reflecting higher volume ($20
million) and cost decreases, net of price reductions ($8 million), partially
offset by higher marketing, administration and research costs ($8 million,
primarily higher marketing costs partially offset by lower administration
costs), currency movements ($4 million) and the impact of divestitures ($3
million).
During the third quarter of 1996, margarine businesses in the U.K. and Italy
were sold at gains. In addition, a charge was recorded for cost reduction
initiatives. The net impact of these items was not material to operating
income.
KFI's coffee volumes increased in the third quarter of 1996 due primarily to
higher shipments of premium priced coffee in France and new product
introductions in Germany, KFI's largest coffee markets. KFI's confectionery
volumes also increased in the third quarter of 1996 reflecting increases in
Western Europe. KFI's cheese and grocery volume decreased in the third quarter
reflecting the sale of several small international food businesses in 1995,
price competition, lower sliced beef volume in Italy and the effect of a peanut
butter recall in Australia, partially offset by higher volume in the United
Kingdom, China and the Philippines.
Volume in Latin America increased in the third quarter of 1996 due to the
second quarter acquisition of nearly all of the remaining voting shares, and
subsequent consolidation, of Lacta, as discussed above, and on the strength of
powdered soft drinks in Argentina, Brazil and Puerto Rico. These increases were
partially offset by lower confectionery volume in Argentina and Brazil
(excluding Lacta) and lower ice cream volume in Brazil.
BEER
____
Nine Months ended September 30
Operating revenues of Miller Brewing Company ("Miller") for the first nine
months of 1996 increased $22 million (0.6%) from the comparable 1995 period, due
to price/mix improvements ($109 million) and the impact of acquisitions ($6
million), partially offset by lower volume ($93 million). Operating income
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<PAGE>
decreased $6 million (1.5%) from the comparable 1995 period, due to lower volume
($39 million) and unfavorable fixed manufacturing expenses ($16 million),
partially offset by price/mix improvements ($28 million) and lower marketing,
administration and research costs ($21 million). During the first quarter of
1996, Miller recorded its share of a restructuring charge at 20%-owned Molson
Canada. In the second quarter of 1996, Miller realized the benefit of lower than
anticipated costs for integrating Molson USA's operations. The net impact of
these items was not material to Miller's operating income for the nine months
ended September 30, 1996.
Miller's 1996 first nine months total shipment volume of 34.5 million barrels
decreased 2.6% from the comparable 1995 period, reflecting decreased shipments
of premium-priced and budget-priced brands. Shipments of premium-priced beers
accounted for 82.6% of shipments in the first nine months of 1996 compared with
81.8% in the first nine months of 1995. Lower volume was due to continued
intense competition, softness in most of Miller's major brands and unseasonably
cool weather during the second quarter in Miller's key northern United States
markets. Miller currently estimates that shipments for the full year will be
lower than 1995 shipments.
Quarter Ended September 30
Operating revenues of Miller for the third quarter of 1996 decreased $45
million (3.9%) from the comparable 1995 period, due primarily to volume
decreases ($77 million), partially offset by price/mix improvements ($30
million). Operating income decreased by $2 million (1.7%) from the comparable
1995 period, due to lower volume ($32 million) and unfavorable fixed
manufacturing expenses ($5 million), partially offset by price/mix improvements
($3 million) and lower marketing, administration and research costs ($32
million). During the third quarter, Miller took a number of actions intended to
restore growth and streamline its organization. These included the announced
elimination of approximately 500 salaried positions, to take effect in November.
The Company's accrued liability for postemployment benefits is adequate to
provide for this workforce reduction.
Miller's 1996 third quarter total shipment volume of 11.4 million barrels
decreased 6.5% from the comparable 1995 period, reflecting softness in most of
Miller's major brands and reductions in distributor inventory levels during the
quarter.
FINANCIAL SERVICES AND REAL ESTATE
__________________________________
Nine Months ended September 30
For the first nine months of 1996, operating revenues from financial services
and real estate operations decreased 4.9%, and operating income increased 15.8%
from the first nine months of 1995, reflecting growth from the financial
services operations of Philip Morris Capital Corporation ("PMCC") partially
offset by lower results from the real estate operations of Mission Viejo Company
("MVC"). Higher financial services operating revenues and operating income
reflect the continued growth and profitability of PMCC's leasing and structured
finance portfolio. Operating revenues and income from real estate operations
decreased from 1995 levels, due primarily to reduced residential land sales,
partially offset by improved business properties sales volume.
Quarter Ended September 30
For the third quarter of 1996, operating revenues from financial services and
real estate operations decreased 3.3% from the third quarter of 1995, and
operating income increased 25.6% from the third quarter of 1995, reflecting
growth from PMCC's financial services and MVC's real estate operations. Higher
financial services operating revenues and operating income reflect growth and
profitability from continuing and new investments in PMCC's leasing and
structured finance
-36-
<PAGE>
portfolio. Operating income from real estate operations increased from 1995
levels, due primarily to higher land sales volume.
FINANCIAL REVIEW
________________
Net Cash Provided by Operating Activities
_________________________________________
During the first nine months of 1996, cash provided by operating activities
was $4.5 billion, $85 million higher than during the first nine months of 1995.
The increase was due primarily to higher net earnings, partially offset by
increased investments in working capital.
Net Cash Used in Investing Activities
_____________________________________
During the first nine months of 1996, cash used in investing activities was
$1.6 billion, compared with $358 million used during the comparable 1995 period.
The change is due primarily to cash used for the acquisitions in 1996 (primarily
for controlling interests in ZPT-Krakow, a Polish cigarette manufacturer, and
Lacta, a Brazilian chocolate confectionery company) compared with cash received
in 1995 from the sales of North American food businesses.
Net Cash Used in Financing Activities
_____________________________________
During the first nine months of 1996, the Company's net cash used in
financing activities was $3.5 billion, compared with $3.4 billion used during
the comparable 1995 period. In the first nine months of 1996 and 1995, cash was
used to repurchase and pay dividends on common stock. In 1996, increases in
stock repurchases and dividends paid were partially offset by net proceeds from
debt.
Debt
____
The Company's total debt was $16.5 billion and $15.8 billion at September 30,
1996 and December 31, 1995, respectively. Total consumer products debt
increased $796 million in the first nine months of 1996, due primarily to the
net issuance of long-term debt. At September 30, 1996, short-term borrowings of
$2.8 billion were reclassified as long-term debt based upon the Company's intent
and ability to refinance such debt under an $8 billion revolving bank credit
agreement that expires in 2000. The Company may continue to refinance long-term
and short-term debt and the proportionate amount of each can be expected to vary
as a result of future business requirements, market conditions and other
factors.
The Company operates internationally, with manufacturing and sales facilities
in various locations around the world. The Company continually evaluates its
foreign currency net asset exposure (primarily the Swiss franc, German mark,
Swedish krona, Canadian dollar and Norwegian krone) based on current market
conditions and business strategies. It acts to manage such exposure, when
deemed prudent, through various hedging transactions. The Company has entered
into currency and related interest rate swap agreements to manage exposure to
currency movements. The aggregate notional principal amounts of these
agreements outstanding was $2.0 billion at September 30, 1996 and December 31,
1995, of which $1.1 billion and $1.5 billion related to consumer products debt
at September 30, 1996 and December 31, 1995, respectively.
The Company enters into forward exchange contracts, for purposes other than
trading, to reduce the effects of fluctuating foreign currency on foreign
currency denominated assets, liabilities, commitments and short-term
intercompany transactions. At September 30, 1996 and December 31, 1995, the
Company had forward exchange contracts, with maturities of less than one year,
of $2.1 billion and $1.2 billion, respectively.
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<PAGE>
Equity and Dividends
____________________
During the first nine months of 1996, the Company repurchased 21.7 million
shares of its common stock at an aggregate cost of $2.1 billion. These
purchases were made pursuant to the Company's repurchase program, announced in
1994, to purchase up to $6 billion of its common stock in the open market.
These repurchases, net of 6.0 million shares issued under the Company's stock
option and stock awards plan in the first nine months of 1996, resulted in lower
average shares outstanding. Through September 30, 1996, cumulative purchases
under the program totaled 57.2 million shares at a cost of $4.6 billion.
At September 30, 1996, the ratio of consumer products debt to total equity
was 1.06, compared with 1.03 at December 31, 1995. The Company's ratio of total
debt to total equity at September 30, 1996 was 1.15 compared with 1.13 at
December 31, 1995. The increase in these ratios primarily reflects net issuance
of short-term borrowings and long-term debt, partially offset by an increase in
stockholders' equity, due primarily to net earnings partially offset by share
repurchases, dividends declared and currency translation adjustments.
Dividends paid in the first nine months of 1996 were 18.2% higher than in the
first nine months of 1995, reflecting an increase in dividends declared,
partially offset by fewer shares outstanding. On August 28, 1996, the Board of
Directors increased the Company's quarterly dividend rate to $1.20 per share, a
20.0% increase, resulting in an annualized dividend rate of $4.80 per share.
Cash and Cash Equivalents
_________________________
Cash and cash equivalents, primarily representing cash earned and retained
outside of North America, was $459 million at September 30, 1996, compared with
$1.1 billion at December 31, 1995. Cash earned and retained outside of North
America is used for new investments, normal working capital requirements, the
payment of foreign excise taxes and dividend repatriation. The decrease in cash
and cash equivalents primarily reflects these uses of cash during the quarter.
At September 30, 1996, PMI had not received payment of certain cigarette-
related invoices from the Italian state cigarette monopoly, which distributes
cigarettes in Italy. Payment of the overdue invoices was received in October,
bringing the monopoly current in its financial obligation to PMI and its
affiliates for their shipments.
Contingencies
_____________
See Note 2 to the Condensed Consolidated Financial Statements for discussion
of contingencies. Reference is made to Item 1 (c) "Other Matters - Forward-
Looking and Cautionary Statements" of the Company's 1995 Annual Report on Form
10-K regarding important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company, including forward-looking statements contained in Item 2
of this Form 10-Q.
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<PAGE>
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Note 2, "Contingencies," of the Notes to the
Condensed Consolidated Financial Statements included in Part I, Item 1 of this
report, and to "Tobacco--Business Environment," of the Management's Discussion
and Analysis of Financial Condition and Results of Operations included in Part
I, Item 2 of this report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.2 By-Laws, as amended, of the Company.
12 Statement regarding computation of ratios of earnings to fixed
charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K. During the quarter for which this report is filed,
the Registrant filed a Current Report on Form 8-K, dated September 20,
1996. The Form 8-K incorporated by reference a Prospectus and
Prospectus Supplement each dated September 19, 1996 (Registration
Statement No. 33-49195). The Prospectus and Prospectus Supplement were
filed in connection with the Registrant's offering of $650 million
aggregate principal amount of its 7 1/4% Notes Due 2001.
___________
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<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
BY
/s/ Louis C. Camilleri
Louis C. Camilleri, Senior Vice President and
Chief Financial Officer
DATE November 13, 1996
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<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
PHILIP MORRIS COMPANIES INC.
ARTICLE I
MEETING OF STOCKHOLDERS
SECTION 1. ANNUAL MEETINGS. - The annual meeting of the stockholders for
the election of directors and for the transaction of such other business as may
properly come before the meeting, and any postponement or adjournment thereof,
shall be held on such date and at such time as the Board of Directors may in its
discretion determine.
SECTION 2. SPECIAL MEETINGS. - Unless otherwise provided by law, special
meetings of the stockholders may be called by the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any), the president
(if one shall have been elected by the Board of Directors) or, in the absence of
all of the foregoing, an executive vice president or by order of the Board of
Directors, whenever deemed necessary.
SECTION 3. PLACE OF MEETINGS. - All meetings of the stockholders shall be
held at such place in the Commonwealth of Virginia as from time to time may be
fixed by the Board of Directors.
SECTION 4. NOTICE OF MEETINGS. - Written notice, stating the place, day
and hour and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be given by mail not less than ten nor more
than sixty days before the date of the meeting (except as a different time is
specified herein or by law), to each stockholder of record having voting power
in respect of the business to be transacted thereat, at his or her address as it
appears on the stock transfer books of the Corporation.
Notice of a stockholders' meeting to act on an amendment of the Articles of
Incorporation, a plan of merger or share exchange, a proposed sale of all, or
substantially all of the Corporation's assets, otherwise than in the usual and
regular course of business, or the dissolution of the Corporation shall be
given, in the manner provided above, not less than twenty-five nor more than
sixty days before the date of the meeting and shall be accompanied, as
appropriate, by a copy of the proposed amendment, plan of merger or share
exchange or sale agreement.
November 1, 1996
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<PAGE>
Notwithstanding the foregoing, a written waiver of notice signed by the
person or persons entitled to such notice, either before or after the time
stated therein, shall be equivalent to the giving of such notice. A stockholder
who attends a meeting shall be deemed to have (i) waived objection to lack of
notice or defective notice of the meeting, unless at the beginning of the
meeting he or she objects to holding the meeting or transacting business at the
meeting, and (ii) waived objection to consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the meeting
notice, unless he or she objects to considering the matter when it is presented.
SECTION 5. QUORUM. - At all meetings of the stockholders, unless a greater
number or voting by classes is required by law, a majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum.
If a quorum is present, action on a matter is approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless the vote
of a greater number or voting by classes is required by law or the Articles of
Incorporation, and except that in elections of directors those receiving the
greatest number of votes shall be deemed elected even though not receiving a
majority. Less than a quorum may adjourn.
SECTION 6. ORGANIZATION AND ORDER OF BUSINESS. - At all meetings of the
stockholders, the chairman of the Board of Directors or, in the chairman's
absence, the deputy chairman of the Board of Directors (if any), the president
(if one shall have been elected by the Board of Directors) or, in the absence of
all of the foregoing, the most senior executive vice president, shall act as
chairman. In the absence of all of the foregoing officers or, if present, with
their consent, a majority of the shares entitled to vote at such meeting, may
appoint any person to act as chairman. The secretary of the Corporation or, in
the secretary's absence, an assistant secretary, shall act as secretary at all
meetings of the stockholders. In the event that neither the secretary nor any
assistant secretary is present, the chairman may appoint any person to act as
secretary of the meeting.
The chairman shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts and things as are necessary
or desirable for the proper conduct of the meeting, including, without
limitation, the establishment of procedures for the dismissal of business not
properly presented, the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof and the opening and closing of the voting polls.
At each annual meeting of stockholders, only such business shall be
conducted as shall have been properly brought before the meeting (a) by or at
the direction of the Board of Directors or (b) by any stockholder of the
Corporation who shall be entitled to vote at such meeting and who complies with
the notice
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<PAGE>
procedures set forth in this Section 6. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the secretary of the Corporation. To be timely, a stockholder's
notice must be given, either by personal delivery or by United States certified
mail, postage prepaid, and received at the principal executive offices of the
Corporation (i) not less than 120 days nor more than 150 days before the first
anniversary of the date of the Corporation's proxy statement in connection with
the last annual meeting of stockholders or (ii) if no annual meeting was held in
the previous year or the date of the applicable annual meeting has been changed
by more than 30 days from the date contemplated at the time of the previous
year's proxy statement, not less than 60 days before the date of the applicable
annual meeting. A stockholder's notice to the secretary shall set forth as to
each matter the stockholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before the annual
meeting, including the complete text of any resolutions to be presented at the
annual meeting, and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the Corporation's stock
transfer books, of such stockholder proposing such business, (c) a
representation that such stockholder is a stockholder of record and intends to
appear in person or by proxy at such meeting to bring the business before the
meeting specified in the notice, (d) the class and number of shares of stock of
the Corporation beneficially owned by the stockholder and (e) any material
interest of the stockholder in such business. Notwithstanding anything in the
By-Laws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 6.
The chairman of an annual meeting shall, if the facts warrant, determine that
the business was not brought before the meeting in accordance with the
procedures prescribed by this Section 6. If the chairman should so determine,he
or she shall so declare to the meeting and the business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing
provisions of this Section 6, a stockholder seeking to have a proposal included
in the Corporation's proxy statement shall comply with the requirements of
Regulation 14A under the Securities Exchange Act of 1934, as amended (including,
but not limited to, Rule 14a-8 or its successor provision). The secretary of
the Corporation shall deliver each such stockholder's notice that has been
timely received to the Board of Directors or a committee designated by the Board
of Directors for review.
SECTION 7. VOTING. - A stockholder may vote either in person or by proxy
executed in writing by the stockholder or by his or her duly authorized
attorney-in-fact. No stockholder may authorize more than four persons to act
for him or her, and any proxy shall be delivered to the secretary of the meeting
at or prior to the time designated by the chairman or in the order of business
for so delivering such proxies. No proxy shall be valid after eleven months
from its date, unless otherwise provided in the proxy. Each holder of record of
stock of any class shall, as to all
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<PAGE>
matters in respect of which stock of such class has voting power, be entitled to
such vote as is provided in the Articles of Incorporation for each share of
stock of such class standing in the holders's name on the books of the
Corporation. Unless required by statute or determined by the chairman to be
advisable, the vote on any questions need not be by ballot. On a vote by ballot,
each ballot shall be signed by the stockholder voting or by such stockholder's
proxy, if there be such proxy.
SECTION 8. INSPECTORS. - At every meeting of the stockholders for election
of directors, the proxies shall be received and taken in charge, all ballots
shall be received and counted and all questions touching the qualifications of
voters, the validity of proxies, and the acceptance or rejection of votes shall
be decided, by two inspectors. Such inspectors shall be appointed by the
chairman of the meeting. They shall be sworn faithfully to perform their duties
and shall in writing certify to the returns. No candidate for election as
director shall be appointed or act as inspector.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. - The business and affairs of the Corporation
shall be managed under the direction of the Board of Directors.
SECTION 2. NUMBER. - The number of directors shall be thirteen (13).
SECTION 3. TERM OF OFFICE AND QUALIFICATION. - Each director shall serve
for the term for which he or she shall have been elected and until a successor
shall have been duly elected.
SECTION 4. NOMINATION AND ELECTION OF DIRECTORS. - At each annual meeting
of stockholders, the stockholders entitled to vote shall elect the directors.
No person shall be eligible for election as a director unless nominated in
accordance with the procedures set forth in this Section 4. Nominations of
persons for election to the Board of Directors may be made by the Board of
Directors or any committee designated by the Board of Directors or by any
stockholder entitled to vote for the election of directors at the applicable
meeting of stockholders who complies with the notice procedures set forth in
this Section 4. Such nominations, other than those made by the Board of
Directors or any committee designated by the Board of Directors, may be made
only if written notice of a stockholder's intent to nominate one or more persons
for election as directors at the applicable meeting of stockholders has been
given,either by personal delivery or by United States certified mail, postage
prepaid, to the secretary of the Corporation and received (i) not less than 120
days nor more than 150 days before the first anniversary of the date of the
Corporation's proxy statement in connection with the last annual meeting of
-4-
<PAGE>
stockholders, or (ii) if no annual meeting was held in the previous year or the
date of the applicable annual meeting has been changed by more
than 30 days from the date contemplated at the time of the previous year's proxy
statement, not less than 60 days before the date of the applicable annual
meeting, or (iii) with respect to any special meeting of stockholders called for
the election of directors, not later than the close of business on the seventh
day following the date on which notice of such meeting is first given to
stockholders. Each such stockholder's notice shall set forth (a) as to the
stockholder giving the notice, (i) the name and address, as they appear on the
Corporation's stock transfer books, of such stockholder, (ii) a representation
that such stockholder is a stockholder of record and intends to appear in person
or by proxy at such meeting to nominate the person or persons specified in the
notice, (iii) the class and number of shares of stock of the Corporation
beneficially owned by such stockholder, and (iv) a description of all
arrangements or understandings between such stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by such stockholder; and (b) as to each
person whom the stockholder proposes to nominate for election as a director, (i)
the name, age, business address and, if known, residence address of such person,
(ii) the principal occupation or employment of such person, (iii) the class and
number of shares of stock of the Corporation which are beneficially owned by
such person, (iv) any other information relating to such person that is required
to be disclosed in solicitations of proxies for election of directors or is
otherwise required by the rules and regulations of the Securities and Exchange
Commission promulgated under the Securities Exchange Act of 1934, as amended,
and (v) the written consent of such person to be named in the proxy statement as
a nominee and to serve as a director if elected. The secretary of the
Corporation shall deliver each such stockholder's notice that has been timely
received to the Board of Directors or a committee designated by the Board of
Directors for review. Any person nominated for election as director by the
Board of Directors or any committee designated by the Board of Directors shall,
upon the request of the Board of Directors or such committee, furnish to the
secretary of the Corporation all such information pertaining to such person that
is required to be set forth in a stockholder's notice of nomination. The
chairman of the meeting of stockholders shall, if the facts warrant, determine
that a nomination was not made in accordance with the procedures prescribed by
this Section 4. If the chairman should so determine, he or she shall so declare
to the meeting and the defective nomination shall be disregarded.
SECTION 5. ORGANIZATION. - At all meetings of the Board of Directors, the
chairman of the Board of Directors or, in the chairman's absence, the deputy
chairman of the Board of Directors (if any),the president (if one shall have
been elected by the Board of Directors) or, in the absence of all of the
foregoing, the senior most executive vice president, shall act as chairman of
the meeting. The secretary of the Corporation or, in the secretary's absence,
an assistant secretary, shall act as secretary of meetings of the Board of
Directors. In the event that neither the
-5-
<PAGE>
secretary nor any assistant secretary shall be present at such meeting, the
chairman of the meeting shall appoint any person to act as secretary of the
meeting.
SECTION 6. VACANCIES. - Any vacancy occurring in the Board of Directors,
including a vacancy resulting from amending these By-Laws to increase the number
of directors by thirty percent or less, may be filled by the affirmative vote of
a majority of the remaining directors though less than a quorum of the Board of
Directors.
SECTION 7. PLACE OF MEETING. - Meetings of the Board of Directors, regular
or special, may be held either within or without the Commonwealth of Virginia.
SECTION 8. ORGANIZATIONAL MEETING. - The annual organizational meeting of
the Board of Directors shall be held immediately following adjournment of the
annual meeting of stockholders and at the same place, without the requirement of
any notice other than this provision of the By-Laws.
SECTION 9. REGULAR MEETINGS: NOTICE. - Regular meetings of the Board of
Directors shall be held at such times and places as it may from time to time
determine. Notice of such meetings need not be given if the time and place have
been fixed at a previous meeting.
SECTION 10. SPECIAL MEETINGS. - Special meetings of the Board of Directors
shall be held whenever called by order of the chairman of the Board of
Directors, the deputy chairman of the Board of Directors (if any) or of the
president (if any) or of two of the directors. Notice of each such meeting,
which need not specify the business to be transacted thereat, shall be mailed to
each director, addressed to his or her residence or usual place of business, at
least two days before the day on which the meeting is to be held, or shall be
sent to such place by telegraph, telex or telecopy or be delivered personally or
by telephone, not later than the day before the day on which the meeting is to
be held
SECTION 11. WAIVER OF NOTICE. - Whenever any notice is required to be
given to a director of any meeting for any purpose under the provisions of law,
the Articles of Incorporation or these By-Laws, a waiver thereof in writing
signed by the person or persons entitled to such notice, either before or after
the time stated therein, shall be equivalent to the giving of such notice. A
director's attendance at or participation in a meeting waives any required
notice to him or her of the meeting unless at the beginning of the meeting or
promptly upon the director's arrival, he or she objects to holding the meeting
or transacting business at the meeting and does not thereafter vote for or
assent to action taken at the meeting.
SECTION 12. QUORUM AND MANNER OF ACTING. - Except where otherwise
-6-
<PAGE>
provided by law, a majority of the directors fixed by these By-Laws at the time
of any regular or special meeting shall constitute a quorum for the transaction
of business at such meeting, and the act of a majority of the directors present
at any such meeting at which a quorum is present shall be the act of the Board
of Directors. In the absence of a quorum, a majority of those present may
adjourn the meeting from time to time until a quorum be had. Notice of any such
adjourned meeting need not be given.
SECTION 13. ORDER OF BUSINESS. - At all meetings of the Board of Directors
business may be transacted in such order as from time to time the Board of
Directors may determine.
SECTION 14. COMMITTEES. - In addition to the executive committee
authorized by Article III of these By-Laws, other committees, consisting of two
or more directors, may be designated by the Board of Directors by a resolution
adopted by the greater number of (i) a majority of all directors in office at
the time the action is being taken or (ii) the number of directors required to
take action under Article II, Section 12 hereof. Any such committee, to the
extent provided in the resolution of the Board of Directors designating the
committee, shall have and may exercise the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation,
except as limited by law.
ARTICLE III
EXECUTIVE COMMITTEE
SECTION 1. HOW CONSTITUTED AND POWERS. - The Board of Directors, by
resolution adopted pursuant to Article II, Section 14 hereof, may designate, in
addition to the chairman of the Board of Directors, one or more directors to
constitute an executive committee, who shall serve during the pleasure of the
Board of Directors. The executive committee, to the extent provided in such
resolution and permitted by law, shall have and may exercise all of the
authority of the Board of Directors.
SECTION 2. ORGANIZATION, ETC. - The executive committee may choose a
chairman and secretary. The executive committee shall keep a record of its acts
and proceedings and report the same from time to time to the Board of Directors.
SECTION 3. MEETINGS. - Meetings of the executive committee may be called
by any member of the committee. Notice of each such meeting, which need not
specify the business to be transacted thereat, shall be mailed to each member of
the committee, addressed to his or her residence or usual place of business, at
least two days before the day on which the meeting is to be held or shall be
sent to such place
-7-
<PAGE>
by telegraph, telex or telecopy or be delivered personally or by telephone, not
later than the day before the day on which the meeting is to be held.
SECTION 4. QUORUM AND MANNER OF ACTING. - A majority of the executive
committee shall constitute a quorum for transaction of business, and the act of
a majority of those present at a meeting at which a quorum is present shall be
the act of the executive committee. The members of the executive committee shall
act only as a committee, and the individual members shall have no powers as
such.
SECTION 5. REMOVAL. - Any member of the executive committee may be
removed, with or without cause, at any time, by the Board of Directors.
SECTION 6. VACANCIES. - Any vacancy in the executive committee shall be
filled by the Board of Directors.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER. - The officers of the Corporation shall be a chairman
of the Board of Directors, a deputy chairman of the Board of Directors (if
elected by the Board of Directors), the president (if elected by the Board of
Directors), one or more vice chairmen of the Board of Directors (if elected by
the Board of Directors), one or more vice presidents (one or more of whom may be
designated executive vice president or senior vice president), a treasurer, a
controller, a secretary, one or more assistant treasurers, assistant controllers
and assistant secretaries and such other officers as may from time to time be
chosen by the Board of Directors. Any two or more offices may be held by the
same person.
SECTION 2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. - All officers of
the Corporation shall be chosen annually by the Board of Directors, and each
officer shall hold office until a successor shall have been duly chosen and
qualified or until the officer resigns or is removed in the manner hereinafter
provided. The chairman of the Board of Directors, the deputy chairman of the
Board of Directors (if any), the president (if any) and the vice chairmen of the
Board of Directors (if any) shall be chosen from among the directors.
SECTION 3. VACANCIES. - If any vacancy shall occur among the officers of
the Corporation, such vacancy shall be filled by the Board of Directors.
-8-
<PAGE>
SECTION 4. OTHER OFFICERS, AGENTS AND EMPLOYEES - THEIR POWERS AND DUTIES.
- - The Board of Directors may from time to time appoint such other officers as
the Board of Directors may deem necessary, to hold office for such time as may
be designated by it or during its pleasure, and the Board of Directors or the
chairman of the Board of Directors may appoint, from time to time, such agents
and employees of the Corporation as may be deemed proper, and may authorize any
officers to appoint and remove agents and employees. The Board of Directors or
the chairman of the Board of Directors may from time to time prescribe the
powers and duties of such other officers, agents and employees of the
Corporation.
SECTION 5. REMOVAL. - Any officer, agent or employee of the Corporation
may be removed, either with or without cause, by a vote of a majority of the
Board of Directors or, in the case of any agent or employee not appointed by the
Board of Directors, by a superior officer upon whom such power of removal may be
conferred by the Board of Directors or the chairman of the Board of Directors.
SECTION 6. CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE
OFFICER. - The chairman of the Board of Directors shall preside at meetings of
the stockholders and of the Board of Directors and shall be a member of the
executive committee. The chairman shall be the Chief Executive Officer of the
Corporation and shall be responsible to the Board of Directors. He or she shall
be responsible for the general management and control of the business and
affairs of the Corporation and shall see to it that all orders and resolutions
of the Board of Directors are implemented. The chairman shall from, time to
time, report to the Board of Directors on matters within his or her knowledge
which the interests of the Corporation may require be brought to its notice. The
chairman shall do and perform such other duties as from time to time the Board
of Directors may prescribe.
SECTION 7. DEPUTY CHAIRMAN OF THE BOARD OF DIRECTORS. - In the absence of
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if elected by the Board of Directors) shall preside at meetings of
the stockholders and of the Board of Directors. The deputy chairman shall be
responsible to the chairman of the Board of Directors and shall perform such
duties as shall be assigned to him or her by the chairman of the Board of
Directors. The deputy chairman shall from time to time report to the chairman
of the Board of Directors on matters within the deputy chairman's knowledge
which the interests of the Corporation may require be brought to the chairman's
notice.
SECTION 8. PRESIDENT. - In the absence of the chairman of the Board of
Directors and the deputy chairman of the Board of Directors (if any), the
president (if one shall have been elected by the Board of Directors) shall
preside at meetings of the stockholders and of the Board of Directors. The
president shall be responsible to the chairman of the Board of Directors.
Subject to the authority of the chairman of the Board of Directors, the
president shall be devoted to the Corporation's business
-9-
<PAGE>
and affairs under the basic policies set by the Board of Directors and the
chairman of the Board of Directors. He or she shall from, time to time, report
to the chairman of the Board of Directors on matters within the president's
knowledge which the interests of the Corporation may require be brought to the
chairman's notice. In the absence of the chairman of the Board of Directors and
the deputy chairman of the Board of Directors (if any), the president (if any)
shall, except as otherwise directed by the Board of Directors, have all of the
powers and the duties of the chairman of the Board of Directors. The president
(if any) shall do and perform such other duties as from time to time the Board
of Directors or the chairman of the Board of Directors may prescribe.
SECTION 9. VICE CHAIRMEN OF THE BOARD OF DIRECTORS. - In the absence of
the chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any) and the president (if any), the vice chairman of the Board of
Directors designated for such purpose by the chairman of the Board of Directors
(if any) shall preside at meetings of the stockholders and of the Board of
Directors. Each vice chairman of the Board of Directors shall be responsible to
the chairman of the Board of Directors. Each vice chairman of the Board of
Directors shall from time to time report to the chairman of the Board of
Directors on matters within the vice chairman's knowledge which the interests of
the Corporation may require be brought to the chairman's notice. In the absence
or inability to act of the chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any) and the president (if any), such
vice chairman of the Board of Directors as the chairman of the Board of
Directors may designate for the purpose shall have the powers and discharge the
duties of the chairman of the Board of Directors. In the event of the failure or
inability of the chairman of the Board of Directors to so designate a vice
chairman of the Board of Directors, the Board of Directors may designate a vice
chairman of the Board of Directors who shall have the powers and discharge the
duties of the chairman of the Board of Directors.
SECTION 10. VICE PRESIDENTS. - The vice presidents of the Corporation
shall assist the chairman of the Board of Directors, the deputy chairman of the
Board of Directors, the president (if any) and the vice chairmen (if any) of the
Board of Directors in carrying out their respective duties and shall perform
those duties which may from time to time be assigned to them. The chief
financial officer shall be a vice president of the Corporation (or more senior)
and shall be responsible for the management and supervision of the financial
affairs of the Corporation.
SECTION 11. TREASURER. - The treasurer shall have charge of the funds,
securities, receipts and disbursements of the Corporation. He or she shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such banks or trust companies or with such bankers or other
depositaries as the Board of Directors may from time to time designate. The
treasurer shall render to the Board of Directors, the chairman of the Board of
Directors, the deputy chairman
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<PAGE>
of the Board of Directors (if any), the president (if any), the vice chairmen of
the Board of Directors (if any), and the chief financial officer, whenever
required by any of them, an account of all of his transactions as treasurer. If
required, the treasurer shall give a bond in such sum as the Board of Directors
may designate, conditioned upon the faithful performance of the duties of the
treasurer's office and the restoration to the Corporation at the expiration of
his or her term of office or in the case of death, resignation or removal from
office, all books, papers, vouchers, money or other property of whatever kind in
his or her possession or under his or her control belonging to the Corporation.
The treasurer shall perform such other duties as from time to time may be
assigned to him or her.
SECTION 12. ASSISTANT TREASURERS. - In the absence or disability of the
treasurer, one or more assistant treasurers shall perform all the duties of the
treasurer and, when so acting, shall have all the powers of, and be subject to
all restrictions upon, the treasurer. Assistant treasurers shall also perform
such other duties as from time to time may be assigned to them.
SECTION 13. SECRETARY. - The secretary shall keep the minutes of all
meetings of the stockholders and of the Board of Directors in a book or books
kept for that purpose. He or she shall keep in safe custody the seal of the
Corporation, and shall affix such seal to any instrument requiring it. The
secretary shall have charge of such books and papers as the Board of Directors
may direct. He or she shall attend to the giving and serving of all notices of
the Corporation and shall also have such other powers and perform such other
duties as pertain to the secretary's office, or as the Board of Directors, the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), the president (if any) or any vice chairman of the Board of
Directors may from time to time prescribe.
SECTION 14. ASSISTANT SECRETARIES. - In the absence or disability of the
secretary, one or more assistant secretaries shall perform all of the duties of
the secretary and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the secretary. Assistant secretaries
shall also perform such other duties as from time to time may be assigned to
them.
SECTION 15. CONTROLLER. - The controller shall be administrative head of
the controller's department. He or she shall be in charge of all functions
relating to accounting and the preparation and analysis of budgets and
statistical reports and shall establish, through appropriate channels, recording
and reporting procedures and standards pertaining to such matters. The
controller shall report to the chief financial officer and shall aid in
developing internal corporate policies whereby the business of the Corporation
shall be conducted with the maximum safety, efficiency and economy. The
controller shall be available to all departments of the Corporation for advice
and guidance in the interpretation and application of policies which are within
the scope of his or her authority. The controller shall perform such other
duties as from time to time may be assigned to him or her.
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<PAGE>
SECTION 16. ASSISTANT CONTROLLERS. - In the absence or disability of the
controller, one or more assistant controllers shall perform all of the duties of
the controller and, when so acting, shall have all of the powers of, and be
subject to all the restrictions upon, the controller. Assistant controllers
shall also perform such other duties as from time to time may be assigned to
them.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
SECTION 1. CONTRACTS. - The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president, the treasurer
and such other persons as the chairman of the Board of Directors may authorize
shall have the power to execute any contract or other instrument on behalf of
the Corporation; no other officer, agent or employee shall, unless otherwise in
these By-Laws provided, have any power or authority to bind the Corporation by
any contract or acknowledgement, or pledge its credit or render it liable
pecuniarily for any purpose or to any amount.
SECTION 2. LOANS. - The chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president, the treasurer
and such other persons as the Board of Directors may authorize shall have the
power to effect loans and advances at any time for the Corporation from any
bank, trust company or other institution, or from any corporation, firm or
individual, and for such loans and advances may make, execute and deliver
promissory notes or other evidences of indebtedness of the Corporation, and, as
security for the payment of any and all loans, advances, indebtedness and
liability of the Corporation, may pledge, hypothecate or transfer any and all
stocks, securities and other personal property at any time held by the
Corporation, and to that end endorse, assign and deliver the same.
SECTION 3. VOTING OF STOCK HELD. - The chairman of the Board of Directors,
the deputy chairman of the Board of Directors (if any), the president (if any),
any vice chairman of the Board of Directors (if any), any vice president or the
secretary may from time to time appoint an attorney or attorneys or agent or
agents of the Corporation to cast the votes that the Corporation may be entitled
to cast as a stockholder or otherwise in any other corporation, any of whose
stock or securities may be held by the Corporation, at meetings of the holders
of the stock or other securities of such other corporation, or to consent in
writing to any action by any other such corporation, and may instruct the person
or persons so appointed as to
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<PAGE>
the manner of casting such votes or giving such consent, and may execute or
cause to be executed on behalf of the Corporation such written proxies,
consents, waivers or other instruments as such officer may deem necessary or
proper in the premises; or the chairman of the Board of Directors, the deputy
chairman of the Board of Directors (if any), the president (if any), any vice
chairman of the Board of Directors (if any), any vice president or the secretary
may attend in person any meeting of the holders of stock or other securities of
such other corporation and thereat vote or exercise any and all powers of the
Corporation as the holder of such stock or other securities of such other
corporation.
ARTICLE VI
CERTIFICATES REPRESENTING SHARES
Certificates representing shares of the Corporation shall be signed by the
chairman of the Board of Directors, the deputy chairman of the Board of
Directors (if any), or the president of the Corporation (if any) and the
secretary or an assistant secretary. Any and all signatures on such
certificates, including signatures of officers, transfer agents and registrars,
may be facsimile.
ARTICLE VII
DIVIDENDS
The Board of Directors may declare dividends from funds of the Corporation
legally available therefor.
ARTICLE VIII
SEAL
The Board of Directors shall provide a suitable seal or seals, which shall
be in the form of a circle, and shall bear around the circumference the words
"Philip Morris Companies Inc." and in the center the word and figures "Virginia,
1985."
ARTICLE IX
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<PAGE>
FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year.
ARTICLE X
AMENDMENT
The power to alter, amend or repeal the By-Laws of theCorporation or to
adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made by
the Board of Directors may be repealed or changed by the stockholders, or new
By-Laws may be adopted by the stockholders, and the stockholders may prescribe
that any By-Laws made by them shall not be altered, amended or repealed by the
directors.
ARTICLE XI
EMERGENCY BY-LAWS
If a quorum of the Board of Directors cannot be readily assembled because
of some catastrophic event, and only in such event, these By-Laws shall, without
further action by the Board of Directors, be deemed to have been amended for the
duration of such emergency, as follows:
SECTION 1. SECTION 6 OF ARTICLE II SHALL READ AS FOLLOWS:
Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the directors present at a meeting of the
Board of Directors called in accordance with these By-Laws.
SECTION 2. THE FIRST SENTENCE OF SECTION 10 OF ARTICLE II SHALL READ AS
FOLLOWS:
Special meetings of the Board of Directors shall be held whenever called by
order of the chairman of the Board of Directors or a deputy chairman (if
any),or of the president (if any) or any vice chairman of the Board of
Directors (if any) or any director or of any person having the powers and
duties of the chairman of the Board of Directors, the
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<PAGE>
deputy chairman, the president or any vice chairman of the Board of
Directors.
SECTION 3. SECTION 12 OF ARTICLE II SHALL READ AS FOLLOWS:
The directors present at any regular or special meeting called in
accordance with these By-Laws shall constitute a quorum for the transaction
of business at such meeting, and the action of a majority of such directors
shall be the act of the Board of Directors, provided, however, that in the
event that only one director is present at any such meeting no action
except the election of directors shall be taken until at least two
additional directors have been elected and are in attendance.
-15-
<PAGE>
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
___________________
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, 1996 September 30, 1996
------------------- -------------------
<S> <C> <C>
Earnings before income taxes and
cumulative effect of accounting changes $8,190 $2,790
Add (Deduct):
Equity in net earnings of less than 50%
owned affiliates (154) (52)
Dividends from less than 50% owned
affiliates 117 22
Fixed charges 1,058 359
Interest capitalized, net of amortization 9 4
------ ------
Earnings available for fixed charges $9,220 $3,123
====== ======
Fixed charges:
Interest incurred:
Consumer products $ 898 $ 307
Financial services and real estate 62 19
------ ------
960 326
Portion of rent expense deemed to represent
interest factor 98 32
------ ------
Fixed charges $1,058 $ 358
====== ======
Ratio of earnings to fixed charges 8.7 8.7
====== ======
</TABLE>
<PAGE>
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
___________________
<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 changes $ 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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from Pages 3-5 of the
Company's Quarterly Report on Form 10-Q for the quarterly period ended September
30, 1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 459
<SECURITIES> 0
<RECEIVABLES> 5,277
<ALLOWANCES> 172
<INVENTORY> 8,601
<CURRENT-ASSETS> 15,380
<PP&E> 19,493
<DEPRECIATION> 8,081
<TOTAL-ASSETS> 54,721
<CURRENT-LIABILITIES> 13,823
<BONDS> 14,233
0
0
<COMMON> 935
<OTHER-SE> 13,440
<TOTAL-LIABILITY-AND-EQUITY> 54,721
<SALES> 52,414
<TOTAL-REVENUES> 52,414
<CGS> 20,001
<TOTAL-COSTS> 31,233
<OTHER-EXPENSES> 12,167
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 824
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</TABLE>
