<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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.
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(Exact name of registrant as specified in its charter)
Virginia 13-3260245
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
120 Park Avenue, New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 880-5000
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
At April 30, 1996, there were 826,031,953 shares outstanding of the
registrant's common stock, par value $1 per share.
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PHILIP MORRIS COMPANIES INC.
TABLE OF CONTENTS
<TABLE>
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets at
March 31, 1996 and December 31, 1995 3 - 4
Condensed Consolidated Statements of Earnings for the
Three Months Ended March 31, 1996 and 1995 5
Condensed Consolidated Statements of Stockholders'
Equity for the Year Ended December 31, 1995
and the Three Months Ended March 31, 1996 6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 7 - 8
Notes to Condensed Consolidated Financial Statements 9 - 21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 22 - 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 32
Item 4. Submission of Matters to a Vote of Security Holders. 32
Item 6. Exhibits and Reports on Form 8-K. 33
Signature 34
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
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<S> <C> <C>
ASSETS
CONSUMER PRODUCTS
Cash and cash equivalents $ 680 $ 1,138
Receivables, net 5,109 4,508
Inventories:
Leaf tobacco 3,586 3,332
Other raw materials 1,890 1,721
Finished product 3,071 2,809
------- -------
8,547 7,862
Other current assets 1,364 1,371
------- -------
Total current assets 15,700 14,879
Property, plant and equipment, at cost 19,054 18,601
Less accumulated depreciation 7,778 7,485
------- -------
11,276 11,116
Goodwill and other intangible assets
(less accumulated amortization of
$4,017 and $3,873) 19,200 19,319
Other assets 2,973 2,866
------- -------
Total consumer products assets 49,149 48,180
FINANCIAL SERVICES AND REAL ESTATE
Finance assets, net 4,975 4,991
Real estate held for development and sale 323 339
Other assets 305 301
------- -------
Total financial services and
real estate assets 5,603 5,631
------- -------
TOTAL ASSETS $54,752 $53,811
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
Continued
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<PAGE> 4
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
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<S> <C> <C>
LIABILITIES
CONSUMER PRODUCTS
Short-term borrowings $ 175 $ 122
Current portion of long-term debt 1,978 1,926
Accounts payable 2,352 3,364
Accrued marketing 2,031 2,114
Accrued taxes, except income taxes 1,640 1,075
Other accrued liabilities 3,360 3,701
Income taxes 1,754 1,137
Dividends payable 831 834
------- -------
Total current liabilities 14,121 14,273
Long-term debt 13,206 12,324
Deferred income taxes 369 356
Accrued postretirement health care costs 2,303 2,273
Other liabilities 5,679 5,643
------- -------
Total consumer products liabilities 35,678 34,869
FINANCIAL SERVICES AND REAL ESTATE
Short-term borrowings 406 671
Long-term debt 950 783
Deferred income taxes 3,371 3,382
Other liabilities 177 121
------- -------
Total financial services and
real estate liabilities 4,904 4,957
------- -------
Total liabilities 40,582 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 20,507 19,779
Currency translation adjustments 449 467
------- -------
21,891 21,181
Less cost of repurchased stock
(109,288,486 and 104,150,433 shares) 7,721 7,196
------- -------
Total stockholders' equity 14,170 13,985
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $54,752 $53,811
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1996 1995
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<S> <C> <C>
Operating revenues $17,491 $ 16,517
Cost of sales 6,745 6,833
Excise taxes on products 3,757 3,217
------- --------
Gross profit 6,989 6,467
Marketing, administration and research costs 3,913 3,673
Amortization of goodwill 147 146
------- --------
Operating income 2,929 2,648
Interest and other debt expense, net 277 318
------- --------
Earnings before income taxes
and cumulative effect of
accounting changes 2,652 2,330
Provision for income taxes 1,087 967
------- --------
Earnings before cumulative effect
of accounting changes 1,565 1,363
Cumulative effect of changes in method of
accounting -- (28)
------- --------
Net earnings $ 1,565 $ 1,335
======= ========
Weighted average number of shares 830 850
======= ========
Per share data:
Earnings before cumulative effect of
accounting changes $ 1.89 $ 1.60
Cumulative effect of changes in
method of accounting -- (.03)
------- --------
Net earnings $ 1.89 $ 1.57
======= ========
Dividends declared $ 1.00 $ .825
======= ========
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 6
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1995 and
the Three Months Ended March 31, 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 1,565 1,565
Exercise of stock options
and issuance of other stock
awards (23) 160 137
Cash dividends declared
($1.00 per share) (829) (829)
Currency translation adjustments (18) (18)
Stock repurchased (685) (685)
Net unrealized appreciation
on securities 15 15
------ ------- ------ ------- -------
Balances, March 31, 1996 $ 935 $20,507 $ 449 $(7,721) $14,170
====== ======= ====== ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1996 1995
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<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $ 1,538 $ 1,314
- Financial services and real estate 27 21
------- -------
Net earnings 1,565 1,335
Adjustments to reconcile net earnings to
operating cash flows:
CONSUMER PRODUCTS
Depreciation and amortization 421 432
Deferred income tax provision 29 82
Cumulative effect of accounting changes -- 46
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (604) (727)
Inventories (467) (132)
Accounts payable (1,021) (1,133)
Income taxes 635 440
Other working capital items (92) (42)
Other 103 17
FINANCIAL SERVICES AND REAL ESTATE
Deferred income tax (benefit) provision (22) 23
(Increase) decrease in real estate receivables (6) 19
Decrease (increase) in real estate held for
development and sale 16 (1)
Other 57 48
------- -------
Net cash provided by operating activities 614 407
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
CONSUMER PRODUCTS
Capital expenditures (316) (308)
Purchases of businesses, net of acquired cash (254) (5)
Proceeds from sales of businesses 21 691
Other 24 (45)
FINANCIAL SERVICES AND REAL ESTATE
Investments in finance assets (26) (26)
Proceeds from finance assets 63 38
------- -------
Net cash (used in) provided by
investing activities (488) 345
------- -------
Net cash provided by operating and
investing activities $ 126 $ 752
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</TABLE>
See notes to condensed consolidated financial statements.
Continued
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<PAGE> 8
Philip Morris Companies Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (continued)
(in millions of dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1996 1995
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<S> <C> <C>
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
CONSUMER PRODUCTS
Net issuance of short-term borrowings $ 827 $ 732
Long-term debt proceeds 417 19
Long-term debt repaid (286) (101)
FINANCIAL SERVICES AND REAL ESTATE
Net repayment of short-term borrowings (265) (194)
Long-term debt proceeds 170 --
Repurchase of outstanding stock (716) (478)
Dividends paid (832) (706)
Issuance of shares 101 53
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Net cash used in
financing activities (584) (675)
Effect of exchange rate changes on cash and
cash equivalents -- (4)
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Cash and cash equivalents:
(Decrease) increase (458) 73
Balance at beginning of period 1,138 184
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Balance at end of period $ 680 $ 257
======= =====
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 9
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.
Note 2. Contingencies:
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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 March 31, 1996, there were 156 such smoking
and health cases pending in the United States. Of these cases, 126 were filed
in the state of Florida and served between April 28, 1995 and March 31, 1996.
One hundred thirty-nine of the smoking and health cases pending as of March 31,
1996, four of which purport to be class actions, involve allegations of various
injuries allegedly related to cigarette smoking. Ten of the smoking and health
cases, including one that purports to be a class action, involve allegations of
various personal injuries allegedly related to exposure to ETS. Seven of the
cases pending as of March 31, 1996, involve states that have commenced actions
seeking reimbursement for Medicaid and other expenditures to treat diseases
allegedly caused by cigarette smoking. In addition, a purported class action
involving allegations of various personal injuries allegedly related to
cigarette smoking is pending in Canada against, among others, an entity in
which the Company has a 40% indirect ownership interest, and another such
action is pending in Brazil against a subsidiary of the Company, among others.
In addition, there is one purported class action pending involving allegations
of defective filtered tobacco products, which arose out of the recall of
certain of PM Inc.'s products. 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.
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, strict liability, fraud, misrepresentation, design defect, failure
to warn, breach of express and implied warranties, conspiracy, concert of
action, unjust enrichment, common law public nuisance, indemnity, market share
liability, and violations of deceptive trade practices and 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, lack of design defect, statutes of limitations or repose, equitable
defenses such as "unclean hands" and lack of benefit, failure to state a claim
and preemption by the Federal Cigarette Labeling and Advertising Act, as amended
(the "Act"). In June 1992, the United States Supreme Court held that the Act, as
enacted in 1965, does not preempt common law damage claims but that the Act, as
amended in 1969, preempts claims arising after 1969 against cigarette
manufacturers "based on failure to warn and the neutralization of federally
mandated warnings to the extent that those claims rely on omissions or
inclusions in advertising or promotions." The Court also held that the 1969 Act
does not preempt claims based on express warranty, fraudulent misrepresentation
or conspiracy. The Court also held that claims for fraudulent concealment were
preempted except "insofar as those claims relied on a duty to disclose...facts
through channels of communication other than advertising or promotion." (The
Court did not consider whether such common law damage claims were valid under
state law.) The Court's decision was announced by a plurality opinion. The
effect of the decision on pending and future cases will be the subject of
further proceedings in the lower federal and state courts. Additional similar
litigation could be encouraged if 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.
A description of certain pending class action and state Medicaid
litigation follows.
SMOKING AND HEALTH CLASS ACTION LITIGATION
------------------------------------------
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." In January
1996, the Florida Third District Court of Appeal affirmed the trial court's
class certification decision, and on May 10, 1996, it denied defendants'
motions for rehearing, rehearing en banc and certification of the case to the
Florida Supreme Court. PM Inc. has announced that it intends to seek review of
the class certification decision by the Florida Supreme Court.
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<PAGE> 11
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In May 1994, an action was filed in Florida state court against the
leading United States tobacco manufacturers and others, including the Company,
by plaintiffs alleging injury and purporting to represent a class of certain
smokers, certain former smokers and their heirs. Engle, et al. v. R.J. Reynolds
Tobacco Company, et al., Circuit Court of the Eleventh Judicial Circuit in and
for Dade County, Florida, Case No. 94-08273-CA-20. Subsequently, the Company
was voluntarily dismissed from this action, which otherwise continues against
the tobacco manufacturers, including PM Inc. In October 1994, the trial court
granted plaintiffs' motion for class certification. The class, as certified,
comprised "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
be restricted to Florida citizens and residents rather than United States
citizens and residents. The Florida Third District Court of Appeal, on May 10,
1996, denied defendants' motions for rehearing and rehearing en banc but issued
no order on defendants' motion for certification of the case to the Florida
Supreme Court. PM Inc. has announced that it intends to seek review of the
class certification decision by the Florida Supreme Court. In March 1996,
plaintiffs notified the trial court that they believed that the case is ready
to be set for trial and thereafter defendants filed a joint opposition to the
notice of trial.
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 allege that the cigarette
manufacturers concealed and/or misrepresented information regarding the
addictive nature of nicotine and manipulated the levels of nicotine in their
tobacco products to make such products addictive. In February 1995, the court
conditionally certified the class for certain issues including fraud, breach of
warranty, intentional tort, negligence, strict liability, consumer protection
and punitive damages. However, the court declined to certify a class on the
issues of injury in fact, causation, reliance, compensatory damages, certain
affirmative defenses and on plaintiffs' claim for medical monitoring.
Defendants, including the Company, asked the court to certify its class
certification decision for immediate appeal to the United States Court of
Appeals for the Fifth Circuit. The court granted that request and, on April 2,
1996, the Court of Appeals heard oral argument on the appeal.
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.
On May 3, 1996, an action was filed in Indiana state court against the
leading United States cigarette manufacturers and others, including the Company,
by plaintiffs seeking certification of a purported class action on behalf of all
Indiana residents who allege that they are dependent on nicotine, and who have
purchased and smoked cigarettes manufactured by defendant manufacturers from
January 1, 1940, or are the legal heirs, survivors or representatives of these
allegedly nicotine dependent cigarette smokers. Norton, et al. v. RJR Nabisco
Holdings Corporations, et al., Madison Superior Court, County of Madison, State
of Indiana, Case No. 48D01-9605-CP-0271.
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In February 1995, Rothman's, Benson & Hedges, Inc. (in which the
Company, through subsidiaries, owns a 40% interest) was served with a statement
of claim commencing a purported class action in the Ontario Court of Justice,
Toronto, Canada, against Imperial Tobacco Limited, RJR-MacDonald Inc., and
Rothman's, Benson & Hedges. LeTourneau v. Rothman's et al., Ontario Court of
Justice, Toronto, Canada. Court File No. 95-CU-82186. The lawsuit seeks damages
in the amount of $1,000,000 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 have requested a more particular statement of claim
prior to delivering their statement of defense. In July 1995, the court granted
Mr. LeTourneau's motion to withdraw as a class representative and two new class
representatives have been substituted. On April 12, 1996, the Master partially
granted and partially denied the defendants' request for a more particular
statement of claim. On April 19, 1996, defendants filed an appeal of the
Master's 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 codefendant. The Smoker Health
Defense Association, et al. v. Souza Cruz, S.A. and Philip Morris Marketing,
S.A., 19th Lower Civil Court of the Central Courts of the Judiciary District of
Sao Paulo, Brazil. Plaintiffs allege that defendants failed to warn that smoking
is "addictive" and engaged in misleading advertising. Plaintiffs have obtained
an ex-parte order reversing the burden of proof and placing the burden on
defendants. PM Marketing has appealed the order and has denied all material
allegations in the complaint. In December 1995, the court denied PM Marketing's
request for dismissal (which was based on plaintiffs' lack of standing and
failure to follow proper filing procedures) as well as its request to seek
recusal of the judge assigned to this matter.
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Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
STATE MEDICAID LITIGATION
-------------------------
In May 1994, the State of Florida enacted a statute which purports to
abolish affirmative defenses in actions brought by the state seeking
reimbursement of Medicaid costs. The statute purports in such actions to adopt a
market share liability theory, to permit the introduction of statistical
evidence to prove causation, and to allow the state not to identify the
individual Medicaid recipients who received the benefits at issue in such
action. Two lawsuits are presently pending relating to the statute: (1) In June
1994, PM Inc. and others filed suit in Florida state court challenging the
constitutionality of the statute. Associated Industries of Florida, Inc., et al.
v. State of Florida Agency for Health Care Administration, et al., Circuit Court
of the Second Judicial Circuit in and for Leon County, Florida, Case No.
94-3128. In June 1995, the court declared certain parts of the statute to be
unconstitutional, declared other parts to be constitutional and held that the
statute could be applied only to conduct occurring after the date of its
enactment in 1994. The court also declared that the agency charged with
enforcing the statute was unconstitutional. In July 1995, the State of Florida
appealed the ruling to the Florida Supreme Court and PM Inc. then
cross-appealed. The Florida Supreme Court heard oral arguments on the appeal in
November 1995 and took the matter under advisement; (2) In February 1995, the
State of Florida filed an action in Florida state court against the tobacco
industry under the statute, attempting to recover certain Medicaid costs and
seeking certain injunctive relief (including an injunction prohibiting the sale
of cigarettes to minors), the funding of certain programs and the disgorging of
profits from the sale of cigarettes in Florida. The State of Florida, et al. v.
The American Tobacco Company, et al., Circuit Court of the Fifteenth Judicial
Circuit in and for Palm Beach County, Florida, Case No. CL 95 1466 AO. The
action was subsequently stayed by the trial court pending further order of the
court. In October 1995, the trial court partially lifted the stay to allow the
entry of a case management order and to permit plaintiffs to file a motion
seeking permission to take discovery. In March 1996, the trial court partially
lifted the stay for the limited purpose of permitting motions to dismiss to be
filed. On March 29, 1996, the defendants filed motions to dismiss and oral
argument on these motions to dismiss is scheduled for May 28, 1996. In addition
to these two lawsuits, during the second quarter of 1995, legislation repealing
the statute was passed by the Florida legislature and vetoed by the Governor of
Florida after the legislature had adjourned. To date, the legislature has not
voted on whether to override the Governor's veto.
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<PAGE> 14
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In May 1994, an action was filed in Mississippi state court against the
leading United States cigarette manufacturers and others, including the Company,
by the Attorney General of Mississippi seeking reimbursement of Medicaid and
other expenditures by the State of Mississippi to treat diseases allegedly
caused by cigarette smoking. Moore v. The American Tobacco Company, et al.,
Chancery Court of Jackson County, Mississippi, Case No. 94-1429. Plaintiff also
seeks punitive damages and an injunction barring defendants from selling or
encouraging the sale of cigarettes to minors. In February 1995, the court
granted plaintiff's motion to strike certain of defendants' challenges to the
sufficiency of the complaint and denied defendants' motion for 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, including PM Inc., from asserting their
"set off" defenses which seek reduction or elimination of damages based on
benefits arising to the state through the sale of cigarettes. That motion is
still pending. In February 1996, the Governor of Mississippi filed a Petition
for Writ of Mandamus and Prohibition and for Declaratory Judgment with the
Mississippi Supreme Court requesting, among other things, that the court issue a
Writ of Mandamus and Prohibition requiring the Attorney General to cease and
desist from actions for recovery of Medicaid funds until employed and/or
directed to do so by the Governor. In February 1996, PM Inc. and other
defendants filed a Petition for Writ of Prohibition and/or Mandamus with the
Mississippi Supreme Court requesting that the court instruct the trial judge to
dismiss those portions of the Attorney General's lawsuit that seek recovery of
the Medicaid funds. On March 29, 1996, the trial court issued an order
scheduling the case for trial on March 24, 1997. On April 1, 1996, the
Mississippi Supreme Court issued an order directing the Attorney General to
respond to the Petition for Writ of Mandamus and Prohibition filed by Governor
of Mississippi.
In August 1994, an action was filed in Minnesota state court against the
leading United States cigarette manufacturers and others by the Attorney General
of Minnesota and Blue Cross and Blue Shield of Minnesota seeking reimbursement
of Medicaid and other expenditures by plaintiffs to treat diseases allegedly
caused by cigarette smoking. Minnesota, et al. v. Philip Morris Incorporated, et
al., Minnesota District Court, Second Judicial District, County of Ramsey, Case
No. C1-94-8565. Plaintiffs' asserted causes of action include negligent
performance of a voluntary undertaking, violation of Minnesota antitrust laws,
violation of consumer protection statutes, restitution, and conspiracy.
Plaintiffs also seek injunctive relief, the funding of certain programs, the
disgorging of profits from the sale of cigarettes in Minnesota, attorneys' fees
and treble damages for the alleged antitrust violations. In August 1995,
defendants requested that the Minnesota Supreme Court determine whether Blue
Cross and Blue Shield of Minnesota has standing to bring a direct cause of
action against defendants to recover alleged increased health care costs. In
September 1995, the Supreme Court accepted review of this matter, and oral
argument was heard in January 1996.
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<PAGE> 15
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In September 1994, an action was filed in West Virginia state court
against the leading United States cigarette manufacturers and others, including
the Company, by the Attorney General of West Virginia seeking reimbursement of
Medicaid and other expenditures by the State of West Virginia to treat diseases
allegedly caused by cigarette smoking. McGraw v. The American Tobacco Company,
et al., Circuit Court of Kanawha County, West Virginia, Case No. 94-1707.
Plaintiff asserts causes of action for restitution, public nuisance, negligent
performance of a voluntary undertaking, fraud, conspiracy and concert of action,
aiding and abetting, violation of consumer protection statutes, and violation of
the West Virginia Antitrust Act. Plaintiff also seeks certain injunctive relief,
including an injunction barring defendants from selling or encouraging the sale
of cigarettes to minors, treble damages for alleged antitrust violations,
punitive damages and attorneys' fees and prejudgment interest. In December 1994,
defendants filed a motion to dismiss, claiming that the Attorney General did not
have standing to assert certain counts in the complaint, and separate motions to
dismiss the antitrust and consumer fraud counts of the complaint. In addition,
the non-manufacturing defendants, including the Company, have moved to dismiss
based upon the absence of personal jurisdiction. In October 1995, the court
issued a final order dismissing eight of ten counts of the complaint for lack of
standing. The court did not rule on the antitrust and consumer fraud counts. In
October 1995, the court granted defendants' motion to prohibit prosecution of
this case pursuant to a contingent fee agreement with private counsel, ruling
that the Attorney General lacked the authority to enter into such an agreement.
In February 1996, the Attorney General petitioned the Supreme Court of West
Virginia to reverse the trial court's ruling, and oral argument to determine
whether the Supreme Court will accept plaintiff's petition is scheduled for May
30, 1996. On May 13, 1996, the trial court allowed the Attorney General to
amend the complaint to add the Public Employees' Insurance Agency Finance Board
as a plaintiff.
In November 1995, PM Inc., the other leading United States cigarette
manufacturers and the Tobacco Institute filed a lawsuit in federal court in
Texas against the Attorney General of the State of Texas, the Health and Human
Services Commission of the State of Texas, the Department of Health of the State
of Texas, and the Department of Human Services of the State of Texas. 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 suit
seeks to enjoin a lawsuit, which the Attorney General subsequently filed against
plaintiffs (see discussion below), to recover Medicaid costs related to medical
conditions allegedly caused by cigarette smoking. 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. In February 1996,
plaintiffs, including PM Inc., amended their complaint to include a request for
a declaration that the Attorney General has no authority to enter into
contingent fee agreements with private attorneys and filed a motion for partial
summary judgment on counts I and II of their amended complaint (which request,
respectively, a declaration that the Attorney General has no authority under
Texas law to seek reimbursement of Medicaid expenditures from plaintiffs outside
of the assignment/subrogation remedy provided by statute, and a declaration that
the assignment/subrogation remedy is the exclusive remedy for recovery of
Medicaid expenditures from third parties).
-15-
<PAGE> 16
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
On March 28, 1996, an action was filed in federal court in Texas against
the leading United States cigarette manufacturers and others, including the
Company, by the State of Texas seeking reimbursement of Medicaid and other
expenditures by the State of Texas to treat diseases allegedly caused by
cigarette smoking. The State of Texas v. The American Tobacco Company, et al.,
United States District Court, Eastern District of Texas, Civil No. 5-96CV91.
Plaintiff asserts causes of action for violations of state and federal antitrust
laws, the Racketeer Influenced and Corrupt Organizations Act, as well as claims
based upon several equitable and common law doctrines. Plaintiff also seeks to
enjoin defendants from marketing tobacco products to minors, punitive damages,
attorneys' fees, legal fees and prejudgment interest.
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, inter alia, 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 lawsuit (which
was subsequently brought, as discussed below) seeking to recover Medicaid costs
against plaintiffs purportedly pursuant to these statutory provisions. The
complaint asserts claims based upon the United States Constitution and federal
law, as well as certain Massachusetts state constitutional, statutory and common
law claims. In December 1995, the Attorney General moved to dismiss the
complaint.
In December 1995, the Commonwealth of Massachusetts filed a complaint in
Massachusetts state court against PM Inc. and nine other parties. Defendants
subsequently removed the case to federal court. Commonwealth of Massachusetts v.
Philip Morris Inc., et al., United States District Court, the District of
Massachusetts, Case No. 96-10014-GAD. Plaintiff is seeking reimbursement of
Medicaid and other expenditures by the Commonwealth to treat diseases allegedly
caused by cigarette smoking and the funding of certain programs. The
Commonwealth's complaint asserts five counts: undertaking of special duty,
breach of warranty, conspiracy and concert of action, restitution, and unjust
enrichment. By letters dated the date of the complaint, the Massachusetts
Attorney General advised PM Inc. and certain other parties that the Attorney
General intended to add claims under a Massachusetts "Consumer Protection" Act,
demanded that $1,372,440,000 be paid, and asserted that if that sum were not
paid (or if a reasonable written settlement offer were not made), "double or
treble damages, together with interest, costs, and attorneys' fees" could be
sought. In February 1996, oral argument was heard on plaintiffs' motion to
remand the action to the state court in which it was originally filed.
-16-
<PAGE> 17
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 against the Governor and Attorney General of the State
of Maryland and the Department of Health and Mental Hygiene of Maryland seeking
certain declaratory relief. 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 the
Governor and Attorney General's threatened lawsuit, which was subsequently filed
on May 1, 1996 (see below), against cigarette manufacturers for recovery of
Medicaid and other costs related to medical conditions allegedly caused by
cigarette smoking. The complaint seeks a declaration that, under Maryland law,
any contingent fee contract between the Attorney General and private attorneys
to be appointed assistant counsel for the State and compensated in such a manner
is invalid. In February 1996, plaintiffs, including PM Inc., filed a motion for
summary judgment. In February 1996, defendants filed a motion to dismiss or, in
the alternative, for summary judgment arguing that plaintiffs have no standing
to assert the challenges they make in the complaint and that the Attorney
General has the power under Maryland law to retain contingency fee counsel.
Argument on each of the parties' motions was heard on May 14, 1996.
On May 1, 1996, the State of Maryland filed an action in Maryland state
court against the leading United States cigarette manufacturers and others,
including the Company, seeking reimbursement of Medicaid and other expenditures
to treat diseases allegedly caused by cigarette smoking. State of Maryland v.
Philip Morris Incorporated, et al., Circuit Court for Baltimore City, Maryland,
Case No. 96 122017/CL211017. Plaintiff asserts various claims under Maryland law
and is seeking an injunction prohibiting defendants from marketing and
advertising cigarettes to minors, the funding of certain programs, punitive
damages and attorneys' fees. The Company has not yet received service of the
complaint.
In March 1996, an action was filed in Louisiana state court against the
leading United States cigarette manufacturers and others, including the Company,
by the Attorney General of Louisiana seeking reimbursement of Medicaid and other
expenditures to treat diseases allegedly caused by cigarette smoking. Defendants
subsequently removed the case to federal court in Louisiana and, on May 10,
1996, plaintiffs made a motion to remand the case back to state court. Ieyoub,
et al. v. The American Tobacco Company, et al., United States District Court,
Western District of Louisiana, Civil Action No. 96-CV-0908. Plaintiff asserts
various claims under Louisiana law and is seeking an injunction prohibiting the
sale of cigarettes to minors, punitive damages, attorneys' fees, and prejudgment
and legal interest. The Company has not yet received service of the complaint.
In addition to the foregoing cases, other states have announced they are
considering filing Medicaid reimbursement actions.
-17-
<PAGE> 18
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
OTHER TOBACCO RELATED CLASS ACTION LITIGATION
---------------------------------------------
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
allege in their complaint that PM Inc. intentionally withheld and suppressed
material information relating to technology to produce a cigarette less likely
to cause fires and failed to design and sell its cigarettes using the alleged
technology. Causes of action are asserted based on federal and state consumer
protection statutes, strict liability, negligence and breach of implied
warranties. Compensatory and punitive damages are sought. In September 1995, PM
Inc. filed a motion to dismiss the complaint based on plaintiffs' failure to
state a claim.
In May 1995, PM Inc. announced a recall of certain of its products and in
June and July four purported class actions relating to the recall were filed.
Three of these cases have been dismissed, including the Netherland case on April
15, 1996. Netherland, et al. v. Philip Morris USA, et al., United States
District Court, Western District of Louisiana, Monroe Division, Case No. CV95-
1249-M; Sansone, et al. v. Hoechst Celanese Corporation, et al., Superior Court
of New Jersey, Hudson County, Case No. HUD-L-4342-95; and Walton, et al. v.
Philip Morris, Inc., United States District Court, Middle District of Louisiana,
Case No. 95-693. The actions alleged, among other things, that PM Inc. sold
defective products that caused injury to plaintiffs.
In September 1995, plaintiffs in the remaining action filed a second
amended complaint to change the scope of the complaint to allege that PM Inc.
has, for many years, knowingly manufactured filtered products that are defective
because they contain "defective filters." 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. The second amended complaint purported to be
brought on behalf of a class of all persons who have used filtered products
manufactured by PM Inc. and who have suffered adverse health effects. In March
1996, plaintiffs further amended their complaint to limit the proposed class to
all people who have purchased and smoked within the State of Texas certain
filtered products manufactured by PM Inc. 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 are pending. On April 15, 1996, the court entered an order
requiring the case to be ready for trial by August 31, 1996.
-18-
<PAGE> 19
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
OTHER CLASS ACTION LITIGATION
-----------------------------
In April 1993, the Company and certain officers and directors were named
as defendants in the first of a number of purported shareholder class actions
which were consolidated in the United States District Court for the Southern
District of New York. San Leandro Emergency Medical Group Profit Sharing Plan,
et al. v. Philip Morris Companies Inc., et al., United States District Court for
the Southern District of New York, Case No. 93 Civ. 2131. These lawsuits alleged
that the Company violated federal securities laws by making false and misleading
statements concerning the effects of discount cigarettes on PM Inc.'s premium
tobacco business prior to April 2, 1993, the date upon which PM Inc. announced
revisions in its marketing and pricing strategies for its premium and discount
brands. In December 1994, defendants' motion to dismiss was granted and the case
was dismissed. In January 1996, the United States Court of Appeals for the
Second Circuit affirmed the District Court's dismissal of the complaint against
the Company, but reinstated a claim of alleged insider trading against one of
the individual defendants. On May 3, 1996, the parties submitted to the court a
stipulation of dismissal for the remaining claim.
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
December 1994, a motion to dismiss by defendants was denied. In August 1995, the
court granted plaintiffs' motion for class certification, certifying this action
as a class action on behalf of all persons (other than persons associated with
defendants) who purchased common stock of the Company during the period July 10,
1991 through April 1, 1993, inclusive, and who held such stock at the close of
business on April 1, 1993. In 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. On April 2, 1996, the Court of Appeals ordered
plaintiffs to respond to the Company's Petition for Writ of Mandamus. On April
29, 1996, an alleged class member noticed his appearance in the trial court and
stated that he intended to move to be certified as an additional class
representative.
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. On April 26, 1996, the
court entered an order stipulating the dismissal of the State Board's claim.
-19-
<PAGE> 20
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 for
consumption during the four years preceding the date upon which the complaint
was filed. McIver, et al. v. General Mills, Inc., et al., Superior Court of the
State of California, County of Santa Barbara, Case No. 206666. Plaintiffs seek
treble damages and the return of profits resulting from defendants' alleged
conspiracy to fix and raise prices of cereal products sold to California
consumers. In April 1995, a second purported class action similar to the
earlier action was filed in the same court. In August 1995, the two cases were
consolidated. In September 1995, the court granted defendants' motions for
summary judgment. In December 1995, plaintiffs filed an appeal of that decision
with the California Court of Appeals.
On April 5, 1996, an antitrust action was filed in federal court in
Wisconsin against Kraft, the Company's North American food subsidiary, as a
purported class action. Stuart et al. v. Kraft Foods, Inc., United States
District Court, Eastern District of Wisconsin, Case No. 96-C-391. 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 defendant engaged in a conspiracy
to fix and depress the prices of bulk cheese and milk through its trading
activity on the National Cheese Exchange. Plaintiff seeks injunctive and
equitable relief and treble damages. Kraft has not yet received service of the
complaint.
The Company and each of its subsidiaries named as a defendant believes,
and each has been so advised by counsel handling the respective cases, that it
has a number of valid defenses to all litigation pending against it. All such
cases are, and will continue to be, vigorously defended. It is not possible to
predict the outcome of this litigation. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. There have also
been a number of adverse legislative, regulatory, political and other
developments concerning cigarette smoking and the tobacco industry. These
developments generally receive widespread media attention. The Company is not
able to evaluate the effect of these developing matters on pending litigation
and the possible commencement of additional litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of all pending litigation.
It is possible that the Company's results of operations or cash flows in a
particular quarterly or annual period or its financial position could be
materially affected by an ultimate unfavorable outcome of certain pending
litigation. Management believes, however, that the ultimate outcome of all
pending litigation should not have a material adverse effect on the Company's
financial position.
-20-
<PAGE> 21
Philip Morris Companies Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 3. Recently Adopted 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 and
application of SFAS No. 121 as of January 1, 1996 and for the three months ended
March 31, 1996 had no impact on the Company's financial position or results of
operations.
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.
-21-
<PAGE> 22
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
- ------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
- ------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
--------------------------------------------------------------------------------
Operating Revenues Operating Income
-------------------------------- --------------------------------
(in millions)
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tobacco $ 9,146 $ 7,941 $ 2,084 $ 1,824
Food 7,144 7,459 948 933
Beer 1,100 1,046 116 114
Financial services
and real estate 101 71 41 32
Amortization of goodwill (147) (146)
Unallocated
corporate expenses (113) (109)
------- ------- ------- -------
Total $17,491 $16,517 $ 2,929 $ 2,648
======= ======= ======= =======
</TABLE>
1996 COMPARED WITH 1995
Operating revenues for the first three months of 1996 increased $974
million (5.9%) over the comparable 1995 period, primarily due to increases in
tobacco, international food and beer revenues, partially offset by the impact of
divestitures of North American food businesses. Operating income for the first
quarter increased $281 million (10.6%) over the comparable 1995 period,
reflecting increases in the tobacco, food and beer segments. Excluding the
results of divested food businesses (discussed below in Food--Business
Environment), operating revenues and operating income for the first quarter
increased $2.0 billion (12.6%) and $309 million (11.8%), respectively, over the
comparable 1995 period.
Currency movements, primarily the Japanese yen and Mexican peso,
decreased operating income by $17 million in the first three months of 1996
versus the comparable 1995 period. Although the Company cannot predict future
movements in currency rates, it currently estimates that currency movements may
continue to have an unfavorable impact on operating income in 1996.
Interest and other debt expense, net, decreased $41 million (12.9%) in
the 1996 first quarter compared to the 1995 first quarter, due primarily to
interest income on cash equivalents and lower average outstanding debt during
the period.
Excluding the cumulative effect of accounting changes discussed below,
net earnings increased by $202 million (14.8%) in the first quarter of 1996,
primarily due to increased operating income ($281 million), which was partially
offset by a higher income tax provision ($120 million).
-22-
<PAGE> 23
Excluding the cumulative effect of accounting changes discussed below,
earnings per share of $1.89 increased by 18.1% in the first quarter of 1996 over
the comparable 1995 period, due to a 14.8% increase in earnings to $1.6 billion
and fewer shares outstanding. As a result of the Company's share repurchase
program, the weighted average number of shares outstanding decreased to 830
million in the first quarter of 1996 from 850 million in the first 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
and for the three months ended March 31, 1996 had no impact on the Company's
financial position or results of operations.
OPERATING RESULTS BY BUSINESS SEGMENT
- -------------------------------------
TOBACCO
- -------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
-----------------------------------------------------------------------------
Operating Revenues Operating Income
--------------------------- -------------------------------
(in millions)
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Domestic tobacco $ 2,834 $2,578 $ 971 $ 874
International tobacco 6,312 5,363 1,113 950
------- ------ ------ ------
Total $ 9,146 $7,941 $2,084 $1,824
======= ====== ====== ======
</TABLE>
-23-
<PAGE> 24
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 publication of proposed 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 additional 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
a portion of the cost of tobacco advertising; increased assertions of adverse
health effects associated with both smoking and exposure to environmental
tobacco smoke (and legislation or other governmental action seeking to ascribe
to the industry responsibility and liability therefor); 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 seeking Medicaid reimbursement.
See Note 2 to the Condensed Consolidated Financial Statements ("Note 2")
regarding certain litigation in which the Company and/or its subsidiaries
(including PM Inc.) are defendants.
In August 1995, President Clinton announced, and the FDA initiated, a
rule-making proceeding purportedly designed to prevent minors from smoking. In
the proposed regulations, the FDA asserted that it has jurisdiction over
nicotine as a "drug" and over cigarettes as a "medical device" (a nicotine
delivery system) under the provisions of the Food, Drug and Cosmetic Act. The
proposed regulations include severe restrictions on the distribution, marketing
and advertising of cigarettes and require cigarette manufacturers to fund, in
the aggregate, a $150 million-a-year campaign to discourage minors from using
tobacco products. In March 1996, the FDA placed in its rulemaking docket
statements from three former employees of PM Inc. concerning, according to the
FDA Commissioner, "the role of nicotine in the design and manufacture of
cigarettes." The period for public comment on the FDA's proposal ended on April
19, 1996. 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 current proposed 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 issue an injunction requiring the FDA to withdraw its
proposed regulations. Similar suits have been filed against the FDA by
manufacturers of smokeless tobacco products, by a trade association of cigarette
retailers, and by advertising agency associations. It is not possible to
determine the outcome of the FDA regulatory initiative announced by President
Clinton or the related litigation.
A number of 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 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
advertising, sale or use of cigarettes or to the tobacco industry generally.
-24-
<PAGE> 25
In June 1995, PM Inc. announced that it has 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.
On May 15, 1996, PM Inc. announced a plan for comprehensive
federal legislation to respond to concerns by the President and others
regarding the use of tobacco products by minors. The plan 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 plan
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 plan calls for
penalties of up to $50,000 for violations by a tobacco manufacturer. The plan
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.
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. 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 Attorney for the Southern District
of New York which was 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;
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 Department of Justice relating to
testimony provided by tobacco industry executives before Congress; and
An investigation by the United States Attorney for the Eastern District
of Virginia relating to Healthy Buildings International, Inc.
While the outcomes of these investigations cannot be predicted, PM Inc.
believes it has acted lawfully.
-25-
<PAGE> 26
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. 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 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.
Since the announcement of the Liggett settlement, Texas and Maryland have
filed Medicaid reimbursement actions. Other states have announced they are
considering filing similar actions as well.
In addition to the foregoing, there is litigation pending against the
Company and its subsidiaries which is discussed in Note 2. The Company's
position with regard to this litigation is set forth therein.
1996 COMPARED WITH 1995
DOMESTIC TOBACCO. During the first three months of 1996, PM Inc.'s
operating revenues increased 9.9% over the comparable 1995 period, due to higher
volume ($169 million), pricing ($75 million) and improved product mix ($12
million). Operating income for the 1996 period increased 11.1% from 1995, due to
higher volume ($104 million), pricing ($61 million), improved product mix ($12
million) and lower fixed manufacturing expense ($12 million), partially offset
by higher marketing, administration and research costs ($92 million).
The premium and discount segments (based on shipments) accounted for
approximately 71.2% and 28.8%, respectively, of domestic cigarette industry
volume in the first quarter of 1996, versus approximately 69.4% for the premium
segment and 30.6% for the discount segment in the first quarter of 1995.
PM Inc.'s volume (based on shipments) for the first quarter of 1996 was
53.9 billion units, an increase of 6.7% over 1995, compared with an industry
increase of 2.7%, from the comparable period in 1995. PM Inc.'s volume gains
were enhanced by a change in trade buying patterns in 1995's first quarter, when
distributors reduced their inventories. Second quarter comparisons, however, are
expected to be negatively affected by last year's trade buying, when
distributors made additional purchases to replenish their inventories and to
stock warehouses in advance of the July 4th holiday weekend. Although industry
volume grew in the quarter due primarily to the change in trade buying patterns
described above, PM Inc. estimates that industry shipments are still declining
at their historical long-term average rate of 1% to 2% a year.
PM Inc.'s market share (based on shipments) for the first quarter of 1996
was 47.8%, an increase of 1.8 share points from the first quarter of 1995. In
the premium segment, volume in PM Inc.'s brands increased 8.5%, compared with a
5.4% increase for the industry, resulting in a premium segment share of 56.1%,
an increase of 1.6 share points from the first quarter of 1995. Marlboro volume
was up 3.6 billion units (11.1%) 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 1.7%, to 8.8 billion units, in the first quarter of 1996
compared with an industry decline of 3.5%, resulting in a discount segment share
of 27.2%, an increase of 0.5 share points from the first quarter of 1995.
-26-
<PAGE> 27
Retail sales data (compiled by the A.C. Nielsen Company) indicate PM Inc.
and Marlboro market shares of 48.7% and 32.4%, respectively, in the first
quarter of 1996, compared with 47.5% and 30.6%, respectively, in the first
quarter of 1995. The market share for PM Inc.'s other premium brands as a group
was 9.1% in 1996, up slightly from the comparable period in 1995. In the
discount segment, Basic increased its segment share 1.4 points, to 16.7%, in the
first quarter of 1996.
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.
On April 8, 1996, PM Inc. announced a $2.00 per thousand increase in the
price of its premium and discount brands, effective in May 1996. In May 1995, PM
Inc. increased the price of its domestic brands by $1.50 per thousand.
INTERNATIONAL TOBACCO. During the first quarter of 1996, tobacco
operating revenues of PMI increased 17.7%, due to higher foreign excise taxes
($497 million, including those for previously unconsolidated subsidiaries),
favorable volume/mix ($261 million), price increases ($72 million), currency
movements ($62 million) and the consolidation of previously unconsolidated
subsidiaries ($57 million). Operating income increased 17.2% due to favorable
volume/mix ($147 million), price increases, net of cost increases ($57 million)
and the consolidation of previously unconsolidated subsidiaries ($10 million),
partially offset by currency movements ($27 million) and higher marketing,
administration and research costs ($24 million).
Total international volume grew 20.1 billion units (12.9%) in the first
quarter of 1996 over the comparable 1995 period to 175.9 billion units. Volume
advanced in most major markets, including Germany, Italy, France, Spain, the
Netherlands, Belgium, Central and Eastern Europe, Turkey, Japan and Korea.
Volume continued to decline in Mexico, due to poor economic conditions. Volume
in Central Europe includes local brands manufactured by ZPT-Krakow, Poland's
largest cigarette manufacturer in which PMI acquired a controlling interest
during the quarter. Excluding sales of ZPT-Krakow's local brands, PMI's overall
volume during the first quarter of 1996 was 10.8% higher than the comparable
1995 period.
PMI's market shares also rose in most major markets, with gains recorded
in Germany, Italy, Spain, the Netherlands, Belgium, Turkey, Japan, Korea,
Singapore, Hong Kong and Australia.
FOOD
- ----
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
---------------------------------------------------------------------------
Operating Revenues Operating Income
------------------------- ------------------------------
(in millions)
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
North American food $4,189 $4,901 $ 685 $ 671
International food 2,955 2,558 263 262
------ ------ ------ ------
Total $7,144 $7,459 $ 948 $ 933
====== ====== ====== ======
</TABLE>
-27-
<PAGE> 28
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 fully
integrate 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 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;
Asia/Pacific; and Latin America. During 1996, the international food business
plans to continue initiatives to realign its portfolio of businesses, focus on
higher-margin premium products, reduce costs and grow in new markets.
During the first quarter of 1996, Kraft Foods sold its Rondele specialty
cheese business. In 1995, Kraft Foods 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, several
smaller international food businesses were sold in 1995. These divestitures
are not expected to have a material effect on Kraft Foods' 1996 earnings or
future results of operations.
During the second half of 1994 and into the first quarter of 1995, both
the North American and international food businesses were affected by higher
coffee prices due to higher green coffee bean costs, resulting from frosts in
Brazil in the second quarter of 1994. Throughout 1995, green coffee bean prices
remained volatile, and continued to fluctuate in the first quarter of 1996.
Volatile green coffee bean costs significantly affected consumer buying
patterns. In some markets, such as Germany, intense price competition among
coffee companies continued, reflecting these volatile costs.
1996 COMPARED WITH 1995
NORTH AMERICAN FOOD. During the first three months of 1996, operating
revenues decreased 14.5% from the comparable 1995 period, due primarily to the
impact of divestitures ($981 million), partially offset by volume increases in
continuing operations ($259 million). Operating income increased 2.1% over the
comparable 1995 period, due primarily to volume increases in continuing
operations ($139 million), partially offset by higher marketing, administration
and research costs ($95 million), and the impact of divestitures ($28 million).
Excluding operating results of divested businesses, discussed above,
North American food operating revenues and operating income increased 6.9% and
6.5%, respectively, in the first quarter of 1996 compared with the comparable
1995 period.
Volume grew in beverages, on the strength of powdered and ready-to-drink
products; ready-to-eat and packaged desserts, due to enhanced marketing efforts
and the addition of a shelf-stable pudding product line; frozen pizza, helped by
new product introductions; coffee, which reported volume growth in premium
products; and processed meats, driven by lunch combinations and cold cuts, both
of which were aided by new product introductions. Volume decreased in cereals,
reflecting increased promotional spending by market leaders and continued
pressure from price brands. In response, Kraft announced on April 15, 1996, a
price reduction averaging approximately 20% for all of its ready-to-eat cereals.
In Canada, volume increased strongly, and market shares were higher in most of
Kraft Canada's retail categories.
-28-
<PAGE> 29
INTERNATIONAL FOOD. Operating revenues for the first quarter of 1996
increased 15.5% over the first quarter of 1995, due primarily to higher volume
($158 million, reflecting an additional selling week in 1996), the consolidation
of previously unconsolidated operations in emerging markets ($207 million) and
currency movements ($84 million), partially offset by pricing ($42 million,
primarily coffee). Operating income during the first quarter of 1996, which
included the results from an extra selling week, was essentially even with the
comparable 1995 period reflecting higher volume ($69 million), the consolidation
of previously unconsolidated operations in emerging markets ($29 million) and
currency movements ($9 million), partially offset by pricing ($42 million,
related primarily to lower coffee margins in 1996) and higher marketing,
administration and research costs ($64 million).
Coffee volume grew in Western and Northern Europe, reflecting a gradual
recovery in consumption in several key markets, particularly in Germany and
Sweden. Although volume gains in coffee were realized in the first quarter,
volume related earnings gains were not realized due to lower margins,
reflecting continued competition. Confectionery, cheese and grocery volumes were
higher due primarily to the additional selling week. Price competition in these
categories remains intense in Europe. Volume in the emerging markets of Central
and Eastern Europe increased during the quarter, driven by chocolate and coffee
in Poland and chocolate in Bulgaria and Romania. In the Asia/Pacific region,
volume grew on higher sales of yogurt in China and all major cheese brands in
the Philippines. In Latin America, volume was higher on strong sales of powdered
soft drinks in the region, as well as higher sales of bubble gum and ice cream
in Brazil.
In April 1996, PMI announced that its Brazilian affiliate signed a
preliminary agreement to acquire a controlling interest in Industrias de
Chocolate Lacta S.A., Brazil's leading chocolate company in which PMI currently
holds a 40% interest. The transaction, which is subject to certain conditions,
including the approval by the Company's Board of Directors, is expected to be
completed near the end of June 1996.
BEER
- ----
Operating revenues of Miller Brewing Company ("Miller") for the first
quarter of 1996 increased $54 million (5.2%) from the comparable 1995 period,
due primarily to price/mix improvements ($31 million) and volume increases ($21
million). Operating income increased $2 million (1.8%) over 1995, due primarily
to price/mix improvements ($11 million) and higher volume ($9 million),
partially offset by higher marketing, administration and research costs ($7
million) and Miller's share of a one-time restructuring charge at 20%-owned
Molson Canada.
Miller's 1996 first quarter total worldwide volume of 11.3 million
barrels increased 2.1% from the comparable 1995 period. Miller's domestic
shipments were also 2.1% higher in the first three months, reflecting increased
shipments of premium-priced brands. Shipments of premium-priced beers accounted
for 81.6% of shipments in the first quarter of 1996 compared with 80.3% in the
first quarter of 1995. Premium brand growth was led by the introduction of
Miller Beer, a new lager, and increased shipments of Miller Lite, reflecting
enhanced advertising, marketing and packaging. Miller High Life, Genuine Draft
and Icehouse also had increased shipment volume, while shipments of Red Dog
declined from last year's first quarter.
Miller expects that its costs for aluminum and other packaging and
brewing materials will increase as supply agreements expire during 1996.
-29-
<PAGE> 30
FINANCIAL SERVICES AND REAL ESTATE
- ----------------------------------
For the first three months of 1996, operating revenues from financial
services, Philip Morris Capital Corporation ("PMCC"), and real estate
operations, Mission Viejo Company, increased 42.3%, and operating income
increased 28.1% from the first three months of 1995. Higher financial services
operating income reflects the continued growth and profitability of PMCC's
leasing and structured finance portfolio. Operating income from real estate
operations increased from 1995 levels, due primarily to higher sales of business
property in California and improved residential land sales volume in Colorado.
FINANCIAL REVIEW
- ----------------
Net Cash Provided by Operating Activities
- -----------------------------------------
During the first three months of 1996, cash provided by operating
activities was $614 million, $207 million higher than during the first three
months of 1995. The increase was primarily due to higher net earnings.
Net Cash Used in Investing Activities
- -------------------------------------
Cash used in investing activities for the first three months of 1996 was
$488 million, compared with $345 million provided by investing activities in the
comparable 1995 period. The change is due primarily to cash received from the
sale of the Kraft Foodservice distribution business during the first quarter of
1995 and the acquisition of a controlling interest in ZPT-Krakow, Poland's
largest tobacco company, in the first quarter of 1996.
Net Cash Used in Financing Activities
- -------------------------------------
During the first three months of 1996, the Company's net cash used in
financing activities was $584 million, compared with $675 million during the
comparable 1995 period. The change reflects higher net borrowings in 1996 ($407
million), partially offset by a 49.8% increase in stock repurchases and a 17.8%
increase in dividends paid in 1996.
Debt
- ----
The Company's total debt was $16.7 billion and $15.8 billion at March 31,
1996 and December 31, 1995, respectively. Total consumer products debt increased
$987 million in the first quarter of 1996, due primarily to the net issuance of
short-term borrowings of $827 million, most of which was reclassified as
long-term debt. 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 March 31, 1996 and December
31, 1995, of which $1.4 billion and $1.5 billion related to consumer products
debt at March 31, 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 March 31, 1996 and December 31, 1995, the Company
had forward exchange contracts, with maturities of less than one year, of $1.8
billion and $1.2 billion, respectively.
-30-
<PAGE> 31
Equity and Dividends
- --------------------
During the first three months of 1996, the Company repurchased 7.2
million shares of its common stock at an aggregate cost of $685 million. 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.
Through March 31, 1996, cumulative purchases under the program totaled 42.7
million shares at a cost of $3.2 billion.
At March 31, 1996, the ratio of consumer products debt to total equity
was 1.08, compared with 1.03 at December 31, 1995. The Company's ratio of total
debt to total equity at March 31, 1996 was 1.18 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, primarily due to net earnings offset by share repurchases
and dividends declared.
Dividends paid in the first quarter of 1996 were 17.8% higher than in the
first quarter of 1995, reflecting an increase in dividends declared, partially
offset by fewer shares outstanding. On August 30, 1995, the Board of Directors
increased the Company's quarterly dividend rate to $1.00 per share, a 21.2%
increase, resulting in an annualized dividend rate of $4.00 per share.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents of $680 million at March 31, 1996, primarily
representing cash earned and retained outside of North America, decreased $458
million during the first quarter of 1996. The decrease represents cash which was
used for new investments, normal working capital requirements, the payment of
foreign excise taxes and dividend repatriation.
Contingencies
- -------------
See Note 2 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.
-31-
<PAGE> 32
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 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders was held in Richmond, Virginia on
April 25, 1996. 713,422,513 shares of Common Stock, 86% of outstanding shares,
were represented in person or by proxy.
The following fourteen directors were elected to a one-year term
expiring in 1997:
<TABLE>
<CAPTION>
Number of Shares
--------------------------------------------------
For Withheld
----------- ----------
<S> <C> <C>
Elizabeth E. Bailey 709,576,119 3,846,394
Geoffrey C. Bible 709,549,265 3,873,248
Murray H. Bring 709,711,336 3,711,177
Harold Brown 709,480,878 3,941,635
William H. Donaldson 709,688,464 3,734,049
Jane Evans 709,494,784 3,927,729
Robert E. R. Huntley 709,548,005 3,874,508
Rupert Murdoch 687,457,151 25,965,362
John D. Nichols 709,625,764 3,796,749
Richard D. Parsons 709,537,260 3,885,253
Roger S. Penske 709,637,083 3,785,430
John S. Reed 709,629,099 3,793,414
Hans G. Storr 709,745,632 3,676,881
Stephen M. Wolf 709,447,795 3,974,718
</TABLE>
The selection of Coopers & Lybrand L.L.P. as auditors was approved:
709,893,420 shares voted in favor; 1,874,939 shares voted against and 1,654,154
shares abstained (including broker non-votes).
The four stockholder proposals were defeated:
Proposal One: That a Committee of outside directors institute an executive
compensation review and prepare a report to be made available to stockholders:
23,263,777 shares voted in favor; 588,107,978 shares voted against and
102,050,758 shares abstained (including broker non-votes);
Proposal Two: That the Company refrain from making expenditures to challenge
health studies relating to ETS: 37,336,383 shares voted in favor; 546,786,978
shares voted against and 129,299,152 shares abstained (including broker
non-votes);
Proposal Three: That management take steps to accomplish a separation of the
Company's non-tobacco businesses from its tobacco businesses: 24,111,471 shares
voted in favor; 560,818,475 shares voted against and 128,492,567 shares
abstained (including broker non-votes); and
Proposal Four: That the Board take certain measures to name and curb nicotine in
tobacco products and to develop and market drugs or medical devices to help
adult smokers quit tobacco use: 21,370,805 shares voted in favor; 552,794,493
shares voted against and 139,257,215 shares abstained (including broker
non-votes).
-32-
<PAGE> 33
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
12 Statement regarding computation of ratios of earnings to
fixed charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K. During the quarter for which this report is
filed, the Registrant filed a Current Report on Form 8-K, dated
February 1, 1996, containing the Registrant's consolidated
financial statements for the year ended December 31, 1995.
- -----------
-33-
<PAGE> 34
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
BY /s/ HANS G. STORR
Hans G. Storr, Executive Vice President and
Chief Financial Officer
DATE May 15, 1996
-34-
<PAGE> 35
EXHIBIT INDEX
12 Statement regarding computation of ratios of earnings to
fixed charges.
27 Financial Data Schedule.
<PAGE> 1
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)
-------------------
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 1996
------------------
<S> <C>
Earnings before income taxes and cumulative
effect of accounting changes $ 2,652
Add (Deduct):
Equity in net earnings of less than 50% owned
affiliates (34)
Dividends from less than 50% owned
affiliates 42
Fixed charges 362
Interest capitalized, net of amortization 5
-------
Earnings available for fixed charges $ 3,027
=======
Fixed charges:
Interest incurred:
Consumer products $ 305
Financial services and real estate 24
-------
329
Portion of rent expense deemed to represent
interest factor 33
-------
Fixed charges $ 362
=======
Ratio of earnings to fixed charges 8.4
=======
</TABLE>
<PAGE> 2
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>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM PAGES 3-5 OF THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 680
<SECURITIES> 0
<RECEIVABLES> 5,283
<ALLOWANCES> 174
<INVENTORY> 8,547
<CURRENT-ASSETS> 15,700
<PP&E> 19,054
<DEPRECIATION> 7,778
<TOTAL-ASSETS> 54,752
<CURRENT-LIABILITIES> 14,121
<BONDS> 14,156
0
0
<COMMON> 935
<OTHER-SE> 13,235
<TOTAL-LIABILITY-AND-EQUITY> 56,752
<SALES> 17,491
<TOTAL-REVENUES> 17,491
<CGS> 6,745
<TOTAL-COSTS> 10,502
<OTHER-EXPENSES> 4,060
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 277
<INCOME-PRETAX> 2,652
<INCOME-TAX> 1,087
<INCOME-CONTINUING> 1,565
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,565
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.89
</TABLE>
