SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 30, 1997
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PHILIP MORRIS COMPANIES INC.
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(Exact name of registrant as specified in its charter)
Virginia 1-8940 13-3260245
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(State or other (Commission (IRS Employer
jurisdiction File Number) Identification No.)
of incorporation)
120 Park Avenue, New York, New York 10017-5592
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (212) 880-5000
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(Former name or former address, if changed since last report)
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Item 5. Other Events.
Filed as part of this Current Report on Form 8-K are the consolidated
balance sheets of Philip Morris Companies Inc. and subsidiaries (the "Company")
as of December 31, 1996 and 1995, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1996 (the "Financial Statements"), the independent
accountants' report thereon and the statement regarding computation of ratios of
earnings to fixed charges. The Financial Statements, the independent
accountants' report and the statement regarding computation of ratios of
earnings to fixed charges will be incorporated by reference in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
Additionally, see Exhibit 1 below.
Item 7. Financial Statements and Exhibits.
The Financial Statements, together with the independent accountants'
report thereon, are included herein.
(c) Exhibits
1. Form of Underwriting Agreement, including form of Terms
Agreement.
12. Statement regarding computation of ratios of earnings to
fixed charges.
23. Consent of independent accountants.
27. Financial Data Schedule.
99. Financial Statements.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
BY /s/ LOUIS C. CAMILLERI
Senior Vice President and
Chief Financial Officer
DATE January 30, 1997
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EXHIBIT INDEX
Exhibit No.
1. Form of Underwriting Agreement, including form of Terms Agreement.
12. Statement regarding computation of ratios of earnings to fixed charges.
23. Consent of independent accountants.
27. Financial Data Schedule.
99. Financial Statements.
PHILIP MORRIS COMPANIES INC.
Debt Securities and Warrants to Purchase Debt Securities
UNDERWRITING AGREEMENT
Dated as of January 2, 1997
1. Introductory. Philip Morris Companies Inc., a Virginia corporation
("Company"), proposes to issue and sell from time to time certain of its debt
securities and warrants to purchase certain of its debt securities in an
aggregate principal amount expressed in U.S. dollars or in such foreign
currencies or currency units as the Company shall designate at the time of
offering. Such debt securities, warrants and debt securities subject to such
warrants, registered under the registration statement referred to in Section
2(a), are hereinafter collectively referred to as "Registered Securities".
Registered Securities involved in any offering referred to below are hereinafter
collectively referred to as "Securities", such debt securities that are
Securities are hereinafter referred to as "Purchased Debt Securities", warrants
to purchase debt securities that are Securities are hereinafter referred to as
"Debt Warrants", debt securities subject to warrants that are Securities are
hereinafter referred to as "Warrant Debt Securities", Purchased Debt Securities
and Warrant Debt Securities are hereinafter collectively referred to as "Debt
Securities" and Purchased Debt Securities and Debt Warrants are hereinafter
collectively referred to as "Purchased Securities". The Debt Securities will be
issued under an Indenture, dated as of December 2, 1996 (the "Indenture"),
between the Company and The Chase Manhattan Bank, as Trustee and the Debt
Warrants will be issued under a debt warrant agreement (the "Debt Warrant
Agreement"), between the Company and a bank or trust company, as Debt Warrant
Agent, specified in the Terms Agreement referred to in Section 3, in one or more
series or issues, which may vary as to interest rates, maturities, redemption
provisions, exercise prices, expiration dates, selling prices, currency or
currency units and other terms, with in each case all such terms for any
particular Registered Securities being determined at the time of sale.
Particular Purchased Securities will be sold pursuant to a Terms Agreement and
for resale in accordance with terms of offering determined at the time of sale.
The firm or firms which agree to purchase the Purchased Securities are
hereinafter referred to as the "Underwriters" of such Purchased Securities, and
the representative or representatives of the Underwriters, if any, specified in
a Terms Agreement referred to in Section 3 are hereinafter referred to as the
"Representatives"; provided, however, that if the Terms Agreement does not
specify any representative of the Underwriters, the term "Representatives", as
used in this Agreement (other than in Sections 2(b), 5 and 6 and the second
sentence of Section 3), shall mean the Underwriters.
2. Representations and Warranties of the Company. The Company represents and
warrants to, and agrees with, each Underwriter that:
(a) A registration statement (No. 333-16955), including a prospectus, relating
to the Registered Securities has been filed with the Securities and Exchange
Commission (the "Commission") and such amendments thereto as may have been
required to the date hereof have been filed and such registration statement has
become effective. Such registration statement, as amended at the time of any
Terms Agreement referred to in Section 3, is hereinafter referred to as the
"Registration Statement", and the prospectus included in such Registration
Statement, as supplemented as contemplated by Section 3 to reflect the terms of
the Securities and the terms of offering thereof, including all material
incorporated by reference therein, is hereinafter referred to as the
"Prospectus".
(b) On the effective date of the registration statement relating to the
Registered Securities, such registration statement or, if one or more
post-effective amendments shall have been filed with respect to such
registration statement, on the most recent effective date of such post-effective
amendments, such registration statement, as so amended, conformed in all
material respects to the requirements of the Securities Act of 1933 (the "Act"),
the Trust Indenture Act of 1939 (the "Trust Indenture Act") and the rules and
regulations of the Commission (the "Rules and Regulations") and did not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to
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make the statements therein not misleading, and, on the date of each Terms
Agreement referred to in Section 3 and on each Closing Date as defined in
Section 3, the Registration Statement and the Prospectus will conform in all
respects to the requirements of the Act, the Trust Indenture Act and the Rules
and Regulations, and none of such documents will include any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, except that the
foregoing does not apply to statements in or omissions from any of such
documents based upon written information furnished to the Company by any
Underwriter through the Representatives, if any, specifically for use therein.
3. Purchase and Offering of Securities. The obligation of the Underwriters to
purchase the Purchased Securities will be evidenced by an exchange of
telegraphic or other written communications (the "Terms Agreement") at the time
the Company determines to sell the Purchased Securities. The Terms Agreement
will incorporate by reference the provisions of this Agreement, except as
otherwise provided therein, and will specify the firm or firms which will be
Underwriters, the names of any Representatives, the principal amount of
Purchased Debt Securities and the number of Debt Warrants to be purchased by
each Underwriter, the purchase price to be paid by the Underwriters and the
terms of the Purchased Securities not already specified in the Indenture or the
Debt Warrant Agreement, as the case may be, including, but not limited to,
interest rate, maturity, any redemption provisions and any sinking fund
requirements, the exercise price of the Debt Warrants to be purchased, the
principal amount of Warrant Debt Securities issuable upon exercise of one such
Debt Warrant, the date after which such Debt Warrants are exercisable, the
expiration date thereof and the date, if any, such Debt Warrants are detachable
and whether any of the Purchased Debt Securities or Debt Warrants may be sold to
institutional investors pursuant to Delayed Delivery Contracts (as defined
below). The Terms Agreement will also specify the time and date of delivery and
payment (such time and date, or such other time not later than seven full
business days thereafter as the Representatives and the Company agree as the
time for payment and delivery, being herein and in the Terms Agreement referred
to as the "Closing Date"), the place of delivery and payment and any details of
the terms of offering that should be reflected in the prospectus supplement
relating to the offering of the Securities. The obligations of the Underwriters
to purchase the Purchased Securities will be several and not joint. It is
understood that the Underwriters propose to offer the Purchased Securities for
sale as set forth in the Prospectus. The Purchased Securities delivered to the
Underwriters on the Closing Date will be in fully registered or bearer form with
respect to any Debt Securities, and in fully registered form with respect to
Debt Warrants, in each case in such denominations and numbers and registered in
such names as the Underwriters may request.
If the Terms Agreement provides for sales of Purchased Debt Securities or Debt
Warrants pursuant to delayed delivery contracts, the Company authorizes the
Underwriters to solicit offers to purchase Purchased Debt Securities or Debt
Warrants pursuant to delayed delivery contracts substantially in the form of
Annex I attached hereto ("Delayed Delivery Contracts") with such changes therein
as the Company may authorize or approve. Delayed Delivery Contracts are to be
with institutional investors, including commercial and savings banks, insurance
companies, pension funds, investment companies and educational and charitable
institutions. On the Closing Date the Company will pay, as compensation, to the
Representatives for the accounts of the Underwriters, the fee set forth in such
Terms Agreement in respect of the principal amount of Purchased Debt Securities
and number of Debt Warrants to be sold pursuant to Delayed Delivery Contracts
("Contract Securities"). The Underwriters will not have any responsibility in
respect of the validity or the performance of Delayed Delivery Contracts. If the
Company executes and delivers Delayed Delivery Contracts, the Contract
Securities will be deducted from the Securities to be purchased by the several
Underwriters and the aggregate principal amount of Purchased Debt Securities and
number of Debt Warrants, as the case may be, to be purchased by each Underwriter
will be reduced pro rata in proportion to the principal amount of Purchased Debt
Securities or number of Debt Warrants set forth opposite each Underwriter's name
in such Terms Agreement, except to the extent that the Representatives determine
that such reduction shall be otherwise than pro rata and so advise the Company.
The Company will advise the Representatives not later than the business day
prior to the Closing Date of the Purchased Debt Securities and Debt Warrants
that are the Contract Securities.
4. Certain Agreements of the Company. The Company agrees with the several
Underwriters that it will furnish to Simpson Thacher & Bartlett, counsel for
the Underwriters, one signed copy of the registration
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statement relating to the Registered Securities, including all exhibits, in the
form it became effective and of all amendments thereto and that, in connection
with each offering of Securities:
(a) The Company will advise the Representatives promptly of any proposal to
amend or supplement the Registration Statement or the Prospectus and will afford
the Representatives a reasonable opportunity to comment on any such proposed
amendment or supplement; and the Company will also advise the Representatives
promptly of the filing of any such amendment or supplement and of the
institution by the Commission of any stop order proceedings in respect of the
Registration Statement or of any part thereof and will use its best efforts to
prevent the issuance of any such stop order and to obtain as soon as possible
its lifting, if issued.
(b) If, at any time when a prospectus relating to the Securities is required
to be delivered under the Act, any event occurs as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it is necessary at any time to amend the Prospectus
to comply with the Act, the Company promptly will prepare and file with the
Commission an amendment or supplement which will correct such statement or
omission or an amendment which will effect such compliance.
(c) As soon as practicable, but not later than 18 months, after the date of
each Terms Agreement, the Company will make generally available to its
securityholders an earnings statement covering a period of at least 12 months
beginning after the later of (i) the most recent effective date of the
registration statement relating to the Registered Securities, (ii) the effective
date of the most recent post-effective amendment to the Registration Statement
to become effective prior to the date of such Terms Agreement and (iii) the date
of the Company's most recent Annual Report on Form 10-K filed with the
Commission prior to the date of such Terms Agreement, which will satisfy the
provisions of Section 11(a) of the Act (including, at the option of the Company,
Rule 158 of the Rules and Regulations under the Act).
(d) The Company will furnish to the Representatives copies of the Registration
Statement, including all exhibits, any related preliminary prospectus, any
related preliminary prospectus supplement and all amendments and supplements to
such documents, in each case as soon as available, and copies of the Prospectus
and all amendments and supplements to the Prospectus not later than 10:00 A.M.,
New York City time, on the day following the date thereof. The Company will
furnish each of such documents in such quantities as are reasonably requested.
(e) The Company will arrange for the qualification of the Securities for sale
and the determination of their eligibility for investment under the laws of such
jurisdictions within the United States as the Representatives designate and will
continue such qualifications in effect so long as required for the distribution;
provided that the Company will not be required to qualify to do business in any
jurisdiction where it is not now qualified or to take any action which would
subject it to general or unlimited service of process in any jurisdiction where
it is not now subject.
(f) During the period of five years after the date of any Terms Agreement, the
Company will furnish to the Representatives and, upon request, to each of the
other Underwriters, if any, as soon as practicable after the end of each fiscal
year, a copy of its annual report to stockholders for such year; and the Company
will furnish to the Representatives (i) as soon as available, a copy of each
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on
Form 8-K and definitive proxy statement of the Company filed with the Commission
under the Securities Exchange Act of 1934 (the "Exchange Act") or mailed to
stockholders, and (ii) from time to time, such other information concerning the
Company as the Representatives may reasonably request.
(g) The Company will pay all expenses incident to the performance of its
obligations under this Agreement and will reimburse the Underwriters for any
expenses (including fees and disbursements of counsel) incurred by them in
connection with qualification of the Registered Securities for sale and
determination of their eligibility for investment under the laws of such
jurisdictions as the Representatives
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may designate and the printing of memoranda relating thereto, for any fees
charged by investment rating agencies for the rating of the Securities, for the
filing fee of the National Association of Securities Dealers, Inc. relating to
the Registered Securities and for expenses incurred in distributing the
Prospectus, any preliminary prospectuses and any preliminary prospectus
supplements to Underwriters.
(h) For a period beginning at the time of execution of the Terms Agreement and
ending on the Closing Date, if any Debt Securities are being issued, without the
prior consent of the Representatives, the Company will not offer or contract to
sell or, except pursuant to a commitment entered into prior to the date of the
Terms Agreement, sell or otherwise dispose of any debt securities denominated in
the currency or currency unit in which the Securities are denominated and issued
or guaranteed by the Company and having a maturity of more than one year from
the date of issue.
5. Conditions of the Obligations of the Underwriters. The obligations of the
several Underwriters to purchase and pay for the Purchased Securities will be
subject to the accuracy of the representations and warranties on the part of the
Company herein, to the accuracy of the statements of Company officers made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder and to the following additional conditions precedent:
(a) On or prior to the date of the Terms Agreement, the Representatives, or
counsel for the Underwriters, shall have received a letter of Coopers & Lybrand
L.L.P., confirming that they are independent certified public accountants within
the meaning of the Act and the applicable published Rules and Regulations
thereunder and stating in effect that:
(i) in their opinion, the financial statements and schedules of the Company
audited by them and included in the prospectus contained in the registration
statement relating to the Registered Securities, as amended at the date of such
letter, comply as to form in all material respects with the applicable
accounting requirements of the Act and the related published Rules and
Regulations;
(ii) on the basis of performing the procedures specified by the American
Institute of Certified Public Accountants for a review of interim financial
information as described in Statement on Auditing Standards No. 71, Interim
Financial Information ("SAS No. 71") on any unaudited interim condensed
consolidated financial statements of the Company included in such prospectus,
inquiries of officials of the Company who have responsibility for financial and
accounting matters and other specified procedures, nothing came to their
attention that caused them to believe that (A) the unaudited interim condensed
consolidated financial statements, if any, of the Company included in such
prospectus do not comply as to form in all material respects with the applicable
accounting requirements of the Exchange Act as it applies to Quarterly Reports
on Form 10-Q and the related published Rules and Regulations or (B) that any
material modifications should be made for them to be in conformity with
generally accepted accounting principles;
(iii) on the basis of a reading of any unaudited pro forma condensed combined
financial statements of the Company included in such prospectus, inquiries of
officials of the Company who have responsibility for financial and accounting
matters and other specified procedures, nothing came to their attention that
caused them to believe that the unaudited pro forma condensed combined financial
statements included in such prospectus do not comply in form in all material
respects with the applicable accounting requirements of Rule 11-02 of Regulation
S-X and that the pro forma adjustments, if any, have not been properly applied
to the historical amounts in the compilation of those statements; and
(iv) they have compared specified dollar amounts (or percentages derived from
such dollar amounts) and other financial information contained in such
prospectus (in each case to the extent that such dollar amounts, percentages and
other financial information are obtained from accounting records that are
subject to the internal control structure, policies and procedures of the
Company's accounting system or are derived directly from such accounting records
by analysis or computation) with the results obtained from procedures specified
in such letter and have found such dollar amounts,
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percentages and other financial information to be in agreement with such
results, except as otherwise specified in such letter.
All financial statements and schedules included in material incorporated by
reference into such prospectus shall be deemed included in such prospectus for
purposes of this subsection.
(b) No stop order suspending the effectiveness of the Registration Statement
or of any part thereof shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Company or any
Underwriter, shall be contemplated by the Commission.
(c) Subsequent to the execution of the Terms Agreement, there shall not have
occurred (i) any change in the capital stock or long-term debt of the Company
and its subsidiaries or any change, or any development involving a prospective
change, in or affecting the general affairs, financial position, stockholders'
equity or results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus, the effect of which is, in
the reasonable judgment of the Representatives, so material and adverse as to
make it impracticable or inadvisable to proceed with the public offering or the
delivery of the Securities on the terms and in the manner contemplated in the
Prospectus; (ii) any downgrading in the rating of the Company's debt securities
by any "nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the Act), and no such organization shall have
publicly announced that it has under surveillance or review, with possible
negative implications, its rating of such debt securities; (iii) any suspension
or limitation of trading in securities generally on the New York Stock Exchange
or any setting of minimum prices for trading on the New York Stock Exchange or
any suspension of trading of any securities of the Company on any United States
exchange or in the over-the-counter market; (iv) any banking moratorium declared
by Federal or New York authorities, or the authorities of any country in whose
currency any Purchased Debt Securities or Debt Warrants are denominated under
the applicable Terms Agreement; (v) any outbreak or escalation of major
hostilities in which the United States or any country in whose currency any
Purchased Debt Securities or Debt Warrants are denominated under the applicable
Terms Agreement is involved, any declaration of war by Congress or any other
substantial national or international calamity or emergency if, in the
reasonable judgment of the Representatives, the effect of any such outbreak,
escalation, declaration, calamity or emergency makes it impractical or
inadvisable to proceed with completion of the sale of and payment for the
Securities; or (vi) any action by any governmental authority or any change, or
any development involving a prospective change, involving currency exchange
rates or exchange controls, which makes it impracticable or inadvisable in the
reasonable judgment of the Representatives to proceed with the public offering
or delivery of the Securities on the terms and in the manner contemplated in the
Prospectus.
(d) The Representatives shall have received an opinion, dated the Closing
Date, of Hunton & Williams, counsel for the Company, to the effect that:
(i) the Company has been duly incorporated and is an existing corporation in
good standing under the laws of the Commonwealth of Virginia, with corporate
power and authority to own its properties and conduct its business as described
in the Prospectus; and the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which it owns or
leases substantial properties or in which the conduct of its business requires
such qualification and in which the failure to so qualify would have a material
adverse effect on the Company;
(ii) Philip Morris Incorporated, Philip Morris International Inc. and Kraft
Foods, Inc. have been duly incorporated and are existing corporations in good
standing under the laws of their respective jurisdictions of incorporation,
with corporate power and authority to own their respective properties and
conduct their respective businesses as described in the Prospectus; all
outstanding shares of capital stock of Philip Morris Incorporated, Philip
Morris International Inc. and Kraft Foods, Inc. are owned by the Company, free
and clear of any lien, pledge and encumbrance or claim of any third party;
(iii) the Indenture and any Debt Warrant Agreement have been duly authorized,
executed and delivered by the Company; the Indenture has been duly qualified
under the Trust Indenture Act; the Securities have been duly authorized; the
Purchased Securities other than any Contract Securities have been duly executed,
authenticated, issued and delivered; the Indenture, any Debt Warrant Agreement
and the Securities other than any Warrant Debt Securities and any Contract
Securities constitute, and
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any Warrant Debt Securities, when executed, authenticated, issued and delivered
in the manner provided in the Indenture and sold pursuant to any Debt Warrant
Agreement, and any Contract Securities, when executed, authenticated, issued and
delivered in the manner provided in the Indenture and sold pursuant to Delayed
Delivery Contracts, will constitute, valid and legally binding obligations of
the Company, enforceable in accordance with their terms, subject to the effects
of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, to
general equity principles and any implied covenant of good faith and fair
dealing; and the Securities other than any Warrant Debt Securities and any
Contract Securities conform, and any Warrant Debt Securities and any Contract
Securities, when so issued and delivered and sold, will conform, to the
description thereof contained in the Prospectus;
(iv) no consent, approval, authorization or order of, or filing with, any
governmental agency or body or any court is required for the consummation of the
transactions contemplated by the Terms Agreement (including the provisions of
this Agreement) in connection with the issuance or sale of the Purchased
Securities by the Company, except such as have been obtained and made under the
Act and the Trust Indenture Act and such as may be required under state
securities laws;
(v) the execution, delivery and performance of the Indenture, the Terms
Agreement (including the provisions of this Agreement), any Debt Warrant
Agreement, and any Delayed Delivery Contracts and the issuance and sale of the
Securities and compliance with the terms and provisions thereof will not result
in a breach or violation of any of the terms and provisions of, or constitute a
default under, the charter or by-laws of the Company, Philip Morris
Incorporated, Philip Morris International Inc. or Kraft Foods, Inc., or, to the
knowledge of such counsel, the charter or by-laws of any other subsidiary of the
Company, any statute, any rule, regulation or order of any governmental agency
or body or any court having jurisdiction over the Company or any subsidiary of
the Company or any of their properties or any agreement or instrument to which
the Company or any such subsidiary is a party or by which the Company or any
such subsidiary is bound or to which any of the properties of the Company or any
such subsidiary is subject, and the Company has full power and authority to
authorize, issue and sell the Securities as contemplated by the Terms Agreement
(including the provisions of this Agreement);
(vi) the Registration Statement has become effective under the Act, and, to
the knowledge of such counsel, no stop order suspending the effectiveness of the
Registration Statement or of any part thereof has been issued and no proceedings
for that purpose have been instituted or are pending or contemplated under the
Act, and the registration statement relating to the Registered Securities, as of
its effective date, the Registration Statement and the Prospectus, as of the
date of the Terms Agreement, and any amendment or supplement thereto, as of its
date, complied as to form in all material respects with the requirements of the
Act, the Trust Indenture Act and the Rules and Regulations; such counsel have no
reason to believe that such registration statement, as of its effective date, or
any amendment or supplement thereto, as of its date, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading or that the Prospectus or any amendment or supplement thereto
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; the descriptions in
the Registration Statement and Prospectus of statutes, legal and governmental
proceedings and contracts and other documents are accurate and fairly present
the information required to be shown; and such counsel do not know of any legal
or governmental proceedings required to be described in the Prospectus which are
not described as required or of any contracts or documents of a character
required to be described in the Registration Statement or Prospectus or to be
filed as exhibits to the Registration Statement which are not described and
filed as required; it being understood that such counsel need express no opinion
as to the financial statements or other financial data contained in the
Registration Statement or the Prospectus or any such amendment or supplement;
and
(vii) the Terms Agreement (including the provisions of this Agreement) and any
Delayed Delivery Contracts have been duly authorized, executed and delivered by
the Company.
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In rendering such opinion, Hunton & Williams may state that (1) in clause (iii)
with respect to the validity and enforceability of the Indenture, any Debt
Warrant Agreement and the Securities, and in clause (iv) and in clause (v) with
respect to any statute, rule, regulation or order of any governmental agency,
body or court and the power and authority of the Company to authorize, issue and
sell the Securities, such counsel has assumed that under the laws of any country
in whose currency (or whose currency is a component currency of a currency unit
in which) any Securities are denominated or payable, if other than in U.S.
dollars, or of any other governmental authority having jurisdiction over any
such currency unit, that no consent, approval, authorization, or order of, or
filing with any governmental agency, body or court is required for the
consummation of the transactions contemplated hereunder in connection with the
issuance and sale of the Securities and compliance with the terms and provisions
thereof will not result in any breach or violation of any of the terms and
provisions in any statute, rule, regulation or order of any governmental agency
or body or any court, and (2) in clause (iii) with respect to the enforceability
of the Indenture, no opinion is expressed with respect to Section 516 thereof.
Such counsel may note that (a) a New York statute provides that with respect to
a foreign currency obligation a court of the State of New York shall render a
judgment or decree in such foreign currency and such judgment or decree shall be
converted into currency of the United States at the rate of exchange prevailing
on the date of entry of such judgment or decree and (b) with respect to a
foreign currency obligation a United States Federal court in New York may award
judgment in United States dollars, provided that such counsel expresses no
opinion as to the rate of exchange such court would apply.
(e) The Representatives shall have received from Simpson Thacher & Bartlett,
counsel for the Underwriters, such opinion or opinions, dated the Closing Date,
with respect to the incorporation of the Company, the validity of the
Securities, the Registration Statement, the Prospectus and other related matters
as they may require, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon such
matters. In rendering such opinion, Simpson Thacher & Bartlett may rely as to
the incorporation of the Company and all other matters governed by Virginia law
upon the opinion of Hunton & Williams referred to above.
(f) The Representatives shall have received a certificate, dated the Closing
Date, of the President or any Vice President and a principal financial or
accounting officer of the Company in which such officers, to the best of their
knowledge after reasonable investigation, shall state that the representations
and warranties of the Company in this Agreement are true and correct, that the
Company has complied with all agreements and satisfied all conditions on its
part to be performed or satisfied hereunder at or prior to the Closing Date,
that no stop order suspending the effectiveness of the Registration Statement or
of any part thereof has been issued and no proceedings for that purpose have
been instituted or are contemplated by the Commission and that, subsequent to
the date of the most recent financial statements in the Prospectus, there has
been no material adverse change in the financial position or results of
operation of the Company and its subsidiaries except as set forth in or
contemplated by the Prospectus or as described in such certificate.
(g) The Representatives shall have received a letter, dated the Closing Date,
of Coopers & Lybrand L.L.P., which reconfirms the matters set forth in their
letter delivered pursuant to subsection (a) of this Section and states in effect
that:
(i) in their opinion, any financial statements or schedules examined by them
and included in the Prospectus and not covered by their letter delivered
pursuant to subsection (a) of this Section comply in form in all material
respects with the applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) on the basis of performing the procedures specified by the American
Institute of Certified Public Accountants for a review of interim financial
information as described in SAS No. 71, on any unaudited interim condensed
consolidated financial statements of the Company included in the Prospectus and
not covered by their letter delivered pursuant to subsection (a) of this
Section, reading the latest available interim financial statements of the
Company, inquiries of officials of the Company who have responsibility for
financial and accounting matters and other specified procedures, nothing came to
their attention that caused them to believe that:
(A) the unaudited interim condensed consolidated financial statements of the
Company, if any, included in the Prospectus do not comply as to form in all
material respects with the
7
<PAGE>
applicable accounting requirements of the Act and the related published Rules
and Regulations or require any material modifications to be made for them to be
in conformity with generally accepted accounting principles;
(B) at the date of the latest available consolidated balance sheet of the
Company read by such accountants, and at a subsequent specified date not more
than three business days prior to the Closing Date, there was any decrease in
the outstanding common stock, or consolidated earnings reinvested in the
business of the Company other than any decrease resulting from the declaration
of regular quarterly cash dividends, or any issuance or assumption of long-term
debt by the Company, Philip Morris Incorporated, Philip Morris International
Inc., Kraft Foods, Inc. or Philip Morris Capital Corporation (exclusive of any
short-term borrowings reclassified as long-term based upon the Company's ability
and intention to refinance these short-term borrowings on a long-term basis),
and, at the date of the latest available consolidated balance sheet of the
Company read by such accountants, there was any decrease in consolidated net
current assets or net assets, all as compared with amounts shown on or included
in the latest balance sheet of the Company included in the Prospectus; or
(C) for the period from the date of the latest consolidated statement of
earnings of the Company included in the Prospectus to the date of the latest
available consolidated statement of earnings of the Company read by such
accountants there were any decreases, as compared with the corresponding period
of the previous year, in consolidated operating revenues, operating income, net
earnings or the historical ratio of earnings to fixed charges of the Company and
consolidated subsidiaries;
except in all cases set forth in clauses (B) and (C) above for issuances or
assumptions or decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter;
(iii) with respect to the unaudited capsule information of the Company, if
any, included in the Prospectus:
(A) on the basis of performing the procedures specified by the American
Institute of Certified Public Accountants for a review of interim financial
information as described in SAS No. 71 on the unaudited interim condensed
consolidated financial statements of the Company from which such unaudited
capsule information was derived, reading such unaudited capsule information,
inquiries of officials of the Company who have responsibility for financial and
accounting matters and other specified procedures, nothing came to their
attention that caused them to believe that:
(1) the amounts contained in the unaudited capsule information included in the
Prospectus do not agree with the amounts set forth in the unaudited interim
condensed consolidated financial statements of the Company from which such
amounts were derived; and
(2) the amounts contained in the unaudited capsule information included in the
Prospectus were not determined on a basis substantially consistent with that of
the corresponding financial information in the latest audited financial
statements of the Company included in the Prospectus; or
(B) if the procedures specified by the American Institute of Certified Public
Accountants for a review of interim financial information as described in SAS
No. 71 have not been performed on the unaudited interim condensed consolidated
financial statements of the Company from which such unaudited capsule
information was derived, they have:
(1) read the unaudited capsule information and agreed the amounts contained
therein with the Company's accounting records from which it was derived; and
(2) inquired of certain officials of the Company who have responsibility for
financial and accounting matters whether the unaudited capsule information was
determined on a basis substantially consistent with that of the corresponding
financial information in the latest audited financial statements of the Company
included in the Prospectus; and
8
<PAGE>
(iv) they have compared specified dollar amounts (or percentages derived from
such dollar amounts) and other financial information included in the Prospectus
and not covered by their letter delivered pursuant to subsection (a) of this
Section (in each case to the extent that such dollar amounts, percentages and
other financial information are obtained from accounting records that are
subject to the internal control structure, policies and procedures of the
Company's accounting system or are derived directly from such accounting records
by analysis or computation) with the results obtained from procedures specified
in such letter and have found such dollar amounts, percentages and other
financial information to be in agreement with such results, except as otherwise
specified in such letter.
All financial statements and schedules included in material incorporated by
reference into the Prospectus shall be deemed included in the Prospectus for the
purposes of this subsection.
(h) The Representatives shall have received, so long as financial statements
audited by any independent accountants for or with respect to any entity
acquired by the Company are included in the Prospectus, a letter, dated the
Closing Date, of such accountants confirming that as of a specified date
immediately prior to such acquisition and during the period covered by the
financial statements on which they reported, they were independent accountants
with respect to such entity within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating in effect that:
(i) in their opinion, the consolidated financial statements audited by them
and included in the Prospectus comply in form in all material respects with the
applicable accounting requirements of the Act and the Exchange Act and the
related published Rules and Regulations, with respect to Registration Statements
on Form S-3; and
(ii) on the basis of performing the procedures specified by the American
Institute of Certified Public Accountants for a review of interim financial
information as described in SAS No. 71, inquiries of officials of the Company
who have responsibility for financial and accounting matters and other specified
procedures, nothing came to their attention that caused them to believe that the
unaudited financial statements of such entity at any date and for any period
ending on or prior to the date of the latest unaudited balance sheet of such
entity included in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the related
published Rules and Regulations or any material modifications should be made for
them to be in conformity with generally accepted accounting principles.
All financial statements and schedules included in material incorporated by
reference into the Prospectus shall be deemed included in the Prospectus for
purposes of this subsection.
(i) The Representatives shall have received from counsel, satisfactory to the
Representatives, such opinion or opinions, dated the Closing Date, with respect
to compliance with the laws of any country, other than the United States, in
whose currency Purchased Debt Securities or Debt Warrants are denominated, the
validity of the Securities, the Prospectus and other related matters as they may
require, and the Company shall have furnished to such counsel such documents as
they request for the purpose of enabling them to pass upon such matters.
(j) If applicable to the offering of any Securities, the Representatives shall
have received an opinion from Sutherland, Asbill & Brennan, L.L.P., special tax
counsel for the Company, dated the Closing Date, confirming their opinion as to
United States tax matters set forth in the Prospectus.
The Company will furnish the Representatives with such conformed copies of such
opinions, certificates, letters and documents as they reasonably request.
6. Indemnification and Contribution. (a) The Company will indemnify and hold
harmless each Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement,
the Prospectus, or any amendment or supplement thereto, or any related
preliminary prospectus or preliminary prospectus supplement, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make
9
<PAGE>
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement in or omission or alleged omission from any of such
documents in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through the Representatives, if any,
specifically for use therein; and provided further that as to any preliminary
prospectus this indemnity agreement shall not inure to the benefit of any
Underwriter or any person controlling that Underwriter on account of any loss,
claim, damage or liability arising from the sale of Purchased Securities to any
person by that Underwriter if that Underwriter failed to send or give a copy of
the Prospectus, as the same may be amended or supplemented, to that person
within the time required by the Act, and the untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact in such preliminary prospectus was corrected in the Prospectus, unless such
failure resulted from non-compliance by the Company with Section 4(d). For
purposes of the second proviso to the immediately preceding sentence, the term
Prospectus shall not be deemed to include the documents incorporated therein by
reference, and no Underwriter shall be obligated to send or give any supplement
or amendment to any document incorporated by reference in a preliminary
prospectus or the Prospectus to any person other than a person to whom such
Underwriter has delivered such incorporated documents in response to a written
request therefor.
(b) Each Underwriter will indemnify and hold harmless the Company against any
losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus or preliminary prospectus
supplement, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives, if any, specifically for use therein, and will
reimburse any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall (i) without the
prior written consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with its written
consent or if there be a final judgment for the plaintiff in any such action,
the indemnifying party agrees to indemnify and hold harmless any indemnified
party from and against any loss or liability by reason of such settlement or
judgment.
10
<PAGE>
(d) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a) or (b)
above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in addition to
any liability which the Company may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each director of the Company, to each officer of the Company who
has signed the Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
7. Default of Underwriters. If any Underwriter or Underwriters default in
their obligations to purchase Purchased Securities under the Terms Agreement and
the aggregate amount of the Purchased Securities that such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of
the aggregate amount of the Purchased Securities, the Representatives may make
arrangements satisfactory to the Company for the purchase of such Purchased
Securities by other persons, including any of the Underwriters, but if no such
arrangements are made by the Closing Date, the non-defaulting Underwriters shall
be obligated severally, in proportion to their respective commitments under this
Agreement and the Terms Agreement, to purchase the Purchased Securities that
such defaulting Underwriters agreed but failed to purchase. If any Underwriter
or Underwriters so default and the aggregate amount of the Purchased Securities
with respect to which such default or defaults occur exceeds 10% of the
aggregate amount of the Purchased Securities and arrangements satisfactory to
the Representatives and the Company for the purchase of such Purchased
Securities by other persons are not made within 36 hours after such default,
such Terms Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company, except as provided in Section 8. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. As used in this Section only, the
"aggregate amount" of Purchased Securities shall mean the aggregate principal
amount of any Purchased Debt Securities plus the public offering price of any
Debt Warrants included in the relevant offering of Purchased Securities. Nothing
herein will relieve a defaulting Underwriter from liability for its default. The
respective commitments of the several Underwriters for the purposes of this
Section shall be determined without regard to reduction in the respective
Underwriters' obligations to purchase the amount of Purchased Debt
11
<PAGE>
Securities set forth opposite their names in the Terms Agreement as a result of
Delayed Delivery Contracts entered into by the Company.
The foregoing obligations and agreements set forth in this Section will not
apply if the Terms Agreement specifies that such obligations and agreements will
not apply.
8. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person and will survive delivery of and
payment for the Purchased Securities. If the obligations of the Underwriters
with respect to any offering of Securities are terminated pursuant to Section 7
or if for any reason the purchase of the Purchased Securities by the
Underwriters under a Terms Agreement is not consummated, the Company shall
remain responsible for the expenses to be paid or reimbursed by it pursuant to
Section 4 and the respective obligations of the Company and the Underwriters
pursuant to Section 6 shall remain in effect. If for any reason the purchase of
the Purchased Securities by the Underwriters is not consummated other than
because of the termination of this Agreement pursuant to Section 7 or a failure
to satisfy the conditions set forth in Section 5(c), the Company shall reimburse
the Underwriters, severally, for all out-of-pocket expenses (including fees and
disbursements of counsel) reasonably incurred by them in connection with the
offering of the Securities.
9. Notices. All communications hereunder will be in writing and, if sent to
the Underwriters, will be mailed, delivered or telegraphed and confirmed to
them at their addresses furnished to the Company in writing for the purpose of
communications hereunder or, if sent to the Company, will be mailed, delivered
or telegraphed and confirmed to it at 120 Park Avenue, New York, New York
10017, Attention: G. Penn Holsenbeck, Vice President, Associate General Counsel
and Corporate Secretary.
10. Successors. This Agreement will inure to the benefit of and be binding
upon the Company and such Underwriters as are identified in Terms Agreements and
their respective successors and the officers and directors and controlling
persons referred to in Section 5, and no other person will have any right or
obligation hereunder.
11. Applicable Law. This Agreement and the Terms Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York.
12
<PAGE>
ANNEX I
(Three copies of this Delayed Delivery Contract should be signed and returned
to the address shown below so as to arrive not later than 9:00 A.M., New York
time, on .......... ........, 19....*.)
DELAYED DELIVERY CONTRACT
[Insert date of initial public offering]
Philip Morris Companies Inc.
c/o [Insert name and address of lead Underwriter]
Attention:
Gentlemen:
The undersigned hereby agrees to purchase from Philip Morris Companies Inc., a
Virginia corporation ("Company"), and the Company agrees to sell to the
undersigned, [If one delayed closing, insert-as of the date hereof, for delivery
on , 19 ("Delivery Date"),]
$........................................
principal amount of the Company's [Insert title of debt securities] ("Debt
Securities") and
........................................
of the Company's [Insert title of warrants] ("Debt Warrants") (collectively, the
"Securities"), offered by the Company's Prospectus dated , 19 and a Prospectus
Supplement dated , 19 relating thereto, receipt of copies of
which is hereby acknowledged, at % of the principal amount of the Debt
Securities plus accrued interest, if any, and on the further terms and
conditions set forth in this Delayed Delivery Contract ("Contract").
[If two or more delayed closings, insert the following:
The undersigned will purchase from the Company as of the date hereof, for
delivery on the dates set forth below, Debt Securities and Debt Warrants in the
principal amounts and number, respectively, set forth below:
Principal Amount Number
of Debt of Debt
Delivery Date Securities Warrants
- ------------- ---------------- --------
............. ................ ........
............. ................ ........
Each of such delivery dates is hereinafter referred to as a Delivery Date.]
Payment for the Securities that the undersigned has agreed to purchase for
delivery on [the] [each] Delivery Date shall be made to the Company or its
order by certified or official bank check in New York Clearing House (next day)
funds at the office of at .M. on [the] [such] Delivery
Date upon delivery to the undersigned of the Securities to be purchased by the
undersigned [for delivery on such Delivery Date] in definitive fully registered
form and in such denominations or numbers and registered in such names as the
undersigned may designate by written or telegraphic communication addressed to
the Company not less than five full business days prior to [the] [such] Delivery
Date.
- ------
* Insert date which is third full business day prior to Closing Date under the
Terms Agreement.
13
<PAGE>
It is expressly agreed that the provisions for delayed delivery and payment
are for the sole convenience of the undersigned; that the purchase hereunder of
Securities is to be regarded in all respects as a purchase as of the date of
this Contract; that the obligation of the Company to make delivery of and accept
payment for, and the obligation of the undersigned to take delivery of and make
payment for, Securities on [the] [each] Delivery Date shall be subject only to
the conditions that (1) investment in the Securities shall not at [the] [such]
Delivery Date be prohibited under the laws of any jurisdiction in the United
States to which the undersigned is subject and (2) the Company shall have sold
to the Underwriters the total principal amount of the Debt Securities less the
principal amount thereof covered by this and other similar Contracts. The
undersigned represents that its investment in the Securities is not, as of the
date hereof, prohibited under the laws of any jurisdiction to which the
undersigned is subject and which governs such investment.
Promptly after completion of the sale to the Underwriters the Company will
mail or deliver to the undersigned at its address set forth below notice to such
effect, accompanied by a copy of the opinion of counsel for the Company
delivered to the Underwriters in connection therewith.
This Contract will inure to the benefit of and be binding upon the parties
hereto and their respective successors, but will not be assignable by either
party hereto without the written consent of the other.
It is understood that the acceptance of any such Contract is in the Company's
sole discretion and, without limiting the foregoing, need not be on a
first-come, first-served basis. If this Contract is acceptable to the Company,
it is requested that the Company sign the form of acceptance below and mail or
deliver one of the counterparts hereof to the undersigned at its address set
forth below. This will become a binding contract between the Company and the
undersigned when such counterpart is so mailed or delivered.
Yours very truly,
..
(Name of Purchaser)
By ..
..
(Title of Signatory)
..
..
(Address of Purchaser)
Accepted, as of the above date.
Philip Morris Companies Inc.
By ..
(Insert Title)
14
<PAGE>
PHILIP MORRIS COMPANIES INC.
("Company")
Debt Securities and Warrants to Purchase
Debt Securities
TERMS AGREEMENT
, 199
Philip Morris Companies Inc.
120 Park Avenue
New York, New York 10017
Attention: Louis C. Camilleri,
Senior Vice President and Chief Financial Officer
Dear Sirs:
On behalf of the several Underwriters named in Schedule A hereto and for their
respective accounts, we offer to purchase, on and subject to the terms and
conditions of the Underwriting Agreement relating to Debt Securities and
Warrants to Purchase Debt Securities dated as of January 2, 1997 ("Underwriting
Agreement"), the following securities ("Securities") on the following terms:
Debt Securities
Title:
Principal Amount: $
Interest Rate: % from , 199 , payable:
Maturity:
Currency of Denomination:
Currency of Payment:
Form and Denomination:
Overseas Paying Agents:
Optional Redemption:
Sinking Fund:
Delayed Delivery Contracts: [authorized] [not authorized]
Delivery Date:
Minimum Contract:
Maximum aggregate principal amount:
Fee: %
Purchase Price: %, plus accrued interest, or amortized original issue
discount, if any, from 19 .
Expected Reoffering Price:
<PAGE>
Debt Warrants
Number of Debt Warrants to be issued:
Debt Warrant Agreement:
Form of Debt Warrants: Registered
Issuable jointly with Debt Securities: [Yes] [No]
[Number of Debt Warrants issued with each $ principal amount of Debt
Securities:]
[Detachable Date:]
Date from which Debt Warrants are exercisable:
Date on which Debt Warrants expire:
Exercise price of Debt Warrants:
Expected Reoffering price: $
Purchase price: $
Title of Warrant Debt Securities:
Principal amount of Warrant Debt Securities purchaseable upon exercise of one
Debt Warrant:
Interest Rate: % from , 199 , payable:
Maturity:
Currency of Denomination:
Currency of Payment:
Form and Denomination:
Overseas Paying Agents:
Optional Redemption:
Sinking Fund:
------------
<PAGE>
Names and Addresses of Representatives:
The respective principal amounts of the Debt Securities and number of Debt
Warrants to be purchased by each of the Underwriters are set forth opposite
their names in Schedule A hereto.
The provisions of the Underwriting Agreement are incorporated herein by
reference.
The Closing will take place at A.M., New York City time, on ,
199 , at the offices of Philip Morris Companies Inc., 120 Park Avenue, New York,
New York.
The Securities will be made available for checking and packaging at the office
of The Chase Manhattan Bank at least 24 hours prior to the Closing Date.
Please signify your acceptance by signing the enclosed response to us in the
space provided and returning it to us.
Very truly yours,
<PAGE>
SCHEDULE A
DEBT SECURITIES
Underwriter Principal Amount
- ----------- ----------------
DEBT WARRANTS
Number of Debt
Underwriter Warrants
- ----------- --------------
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(dollars in millions)
Years Ended December 31,
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- --------
Earnings before
income taxes and
cumulative effect
of accounting changes $ 10,683 $ 9,347 $ 8,216 $ 6,196 $ 8,608
Add (Deduct):
Equity in net earnings of
less than 50% owned
affiliates (227) (246) (184) (164) (107)
Dividends from less than
50% owned affiliates 160 202 165 151 125
Fixed charges 1,421 1,495 1,537 1,716 1,736
Interest capitalized, net
of amortization 13 2 (1) (13) (3)
-------- -------- ------- ------- --------
Earnings available for
fixed charges $ 12,050 $ 10,800 $ 9,733 $ 7,886 $ 10,359
======== ======== ======= ======= ========
Fixed charges:
Interest incurred:
Consumer products $ 1,197 $ 1,281 $ 1,317 $ 1,502 $ 1,525
Financial services and
real estate 81 84 78 87 95
-------- -------- ------- ------- --------
$ 1,278 $ 1,365 $ 1,395 $ 1,589 $ 1,620
Portion of rent expense
deemed to represent
interest factor 143 130 142 127 116
-------- -------- ------- ------- --------
Fixed charges $ 1,421 $ 1,495 $ 1,537 $ 1,716 $ 1,736
======== ======== ======= ======= ========
Ratio of earnings to
fixed charges 8.5 7.2 6.3 4.6 6.0
======== ======== ======= ======= ========
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No.
13 to the registration statement of Philip Morris Companies Inc. (the
"Company") on Form S-14 (File No. 2-96149) and in the Company's registration
statements on Form S-3 (File No. 333-16955) and Form S-8 (File Nos. 333-16127,
33-1479, 33-1480, 33-10218, 33-13210, 33-14561, 33-17870, 33-37115, 33-38781,
33-39162, 33-40110, 33-48781, 33-59109, 33-63975 and 33-63977), of our report
dated January 27, 1997 (included herein), on our audits of the consolidated
financial statements of the Company, which is included in this Current Report
on Form 8-K dated January 30, 1997, as indicated in item 7 herein.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
January 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Pages 2-3 of
the Company's consolidated financial statements for the year ended December 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 240
<SECURITIES> 0
<RECEIVABLES> 4,636
<ALLOWANCES> 170
<INVENTORY> 9,002
<CURRENT-ASSETS> 15,190
<PP&E> 19,972
<DEPRECIATION> 8,221
<TOTAL-ASSETS> 54,871
<CURRENT-LIABILITIES> 14,867
<BONDS> 12,961
0
0
<COMMON> 935
<OTHER-SE> 13,283
<TOTAL-LIABILITY-AND-EQUITY> 54,871
<SALES> 69,204
<TOTAL-REVENUES> 69,204
<CGS> 26,560
<TOTAL-COSTS> 41,211
<OTHER-EXPENSES> 16,224
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,086
<INCOME-PRETAX> 10,683
<INCOME-TAX> 4,380
<INCOME-CONTINUING> 6,303
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,303
<EPS-PRIMARY> 7.68
<EPS-DILUTED> 7.68
</TABLE>
EXHIBIT 99
PHILIP MORRIS COMPANIES INC.
and SUBSIDIARIES
Consolidated Financial Statements
for the period ended December 31, 1996
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Philip Morris Companies Inc.:
We have audited the accompanying consolidated balance sheets of Philip
Morris Companies Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Philip Morris
Companies Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
New York, New York
January 27, 1997
<PAGE>
PHILIP MORRIS COMPANIES INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS, at December 31,
(in millions of dollars, except per share data)
----------
1996 1995
------- -------
ASSETS
Consumer products
Cash and cash equivalents $ 240 $ 1,138
Receivables, net 4,466 4,508
Inventories:
Leaf tobacco 4,143 3,332
Other raw materials 1,854 1,721
Finished product 3,005 2,809
------- -------
9,002 7,862
Other current assets 1,482 1,371
------- -------
Total current assets 15,190 14,879
Property, plant and equipment, at cost:
Land and land improvements 664 726
Buildings and building equipment 5,168 4,976
Machinery and equipment 12,481 11,542
Construction in progress 1,659 1,357
------- -------
19,972 18,601
Less accumulated depreciation 8,221 7,485
------- -------
11,751 11,116
Goodwill and other intangible assets
(less accumulated amortization of
$4,391 and $3,873) 18,998 19,319
Other assets 3,015 2,866
------- -------
Total consumer products assets 48,954 48,180
Financial services and real estate
Finance assets, net 5,345 4,991
Real estate held for development and sale 314 339
Other assets 258 301
------- -------
Total financial services and
real estate assets 5,917 5,631
------- -------
TOTAL ASSETS $54,871 $53,811
======= =======
1996 1995
------- -------
LIABILITIES
Consumer products
Short-term borrowings $ 260 $ 122
Current portion of long-term debt 1,846 1,926
Accounts payable 3,409 3,364
Accrued liabilities:
Marketing 2,106 2,114
Taxes, except income taxes 1,331 1,075
Employment costs 942 995
Other 2,726 2,706
Income taxes 1,269 1,137
Dividends payable 978 834
------- -------
Total current liabilities 14,867 14,273
Long-term debt 11,827 12,324
Deferred income taxes 731 356
Accrued postretirement health care costs 2,372 2,273
Other liabilities 5,773 5,643
------- -------
Total consumer products liabilities 35,570 34,869
Financial services and real estate
Short-term borrowings 173 671
Long-term debt 1,134 783
Deferred income taxes 3,636 3,382
Other liabilities 140 121
------- -------
Total financial services and
real estate liabilities 5,083 4,957
------- -------
Total liabilities 40,653 39,826
Contingencies (Note 13)
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share
(935,320,439 shares issued) 935 935
Earnings reinvested in the business 22,478 19,779
Currency translation adjustments 192 467
------- -------
23,605 21,181
Less cost of repurchased stock
(124,871,681 and 104,150,433 shares) 9,387 7,196
------- -------
Total stockholders' equity 14,218 13,985
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $54,871 $53,811
======= =======
See notes to consolidated financial statements.
2
<PAGE>
CONSOLIDATED STATEMENTS of EARNINGS
for the years ended December 31,
(in millions of dollars, except per share data)
----------
1996 1995 1994
------- ------- ------
Operating revenues $69,204 $66,071 $65,125
Cost of sales 26,560 26,685 28,351
Excise taxes on products 14,651 12,932 11,349
------- ------- -------
Gross profit 27,993 26,454 25,425
Marketing, administration and research costs 15,630 15,337 15,372
Amortization of goodwill 594 591 604
------- ------- -------
Operating income 11,769 10,526 9,449
Interest and other debt expense, net 1,086 1,179 1,233
------- ------- -------
Earnings before income taxes and
cumulative effect of accounting changes 10,683 9,347 8,216
Provision for income taxes 4,380 3,869 3,491
------- ------- -------
Earnings before cumulative effect
of accounting changes 6,303 5,478 4,725
Cumulative effect of changes in method
of accounting (28)
------- ------- -------
Net earnings $ 6,303 $ 5,450 $ 4,725
======= ======= =======
Per share data:
Earnings before cumulative effect of
accounting changes $ 7.68 $ 6.51 $ 5.45
Cumulative effect of changes in
method of accounting (.03)
------- ------- -------
Net earnings $ 7.68 $ 6.48 $ 5.45
======= ======= =======
See notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY
(in millions of dollars, except per share data)
----------
<TABLE>
<CAPTION>
Earnings Currency Cost of Total
Common Reinvested in Translation Repurchased Stockholders'
Stock the Business Adjustments Stock Equity
----- ------------ ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 $935 $15,718 $(711) $(4,315) $11,627
Net earnings 4,725 4,725
Exercise of stock options and issuance
of other stock awards (217) 324 107
Cash dividends declared
($3.03 per share) (2,623) (2,623)
Currency translation adjustments 664 664
Stock repurchased (1,600) (1,600)
Net unrealized depreciation on securities (114) (114)
---- ------- ----- ------- -------
Balances, December 31, 1994 935 17,489 (47) (5,591) 12,786
Net earnings 5,450 5,450
Exercise of stock options and issuance
of other stock awards (77) 470 393
Cash dividends declared
($3.65 per share) (3,065) (3,065)
Redemption of stock rights (9) (9)
Currency translation adjustments 514 514
Stock repurchased (2,075) (2,075)
Net unrealized depreciation on securities (9) (9)
---- ------- ----- ------- -------
Balances, December 31, 1995 935 19,779 467 (7,196) 13,985
Net earnings 6,303 6,303
Exercise of stock options and issuance
of other stock awards (28) 609 581
Cash dividends declared
($4.40 per share) (3,606) (3,606)
Currency translation adjustments (275) (275)
Stock repurchased (2,800) (2,800)
Net unrealized appreciation on securities 30 30
---- ------- ----- ------- -------
Balances, December 31, 1996 $935 $22,478 $ 192 $(9,387) $14,218
==== ======= ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS of CASH FLOWS
for the years ended December 31,
(in millions of dollars)
----------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $ 6,180 $ 5,345 $ 4,591
- Financial services and real estate 123 105 134
------- ------- -------
Net earnings 6,303 5,450 4,725
Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Depreciation and amortization 1,691 1,671 1,722
Deferred income tax provision 163 15 237
(Gains) losses on sales of businesses (320) (275) 19
Cumulative effect of accounting changes 46
Cash effects of changes, net of the effects from acquired and
divested companies:
Receivables, net 35 (466) (239)
Inventories (952) (5) (387)
Accounts payable 60 (260) 582
Income taxes 446 504 202
Other working capital items (448) (482) (288)
Other 467 354 180
Financial services and real estate
Deferred income tax provision 224 299 376
Decrease (increase) in real estate receivables 11 35 (30)
Decrease in real estate held for development and sale 25 61 86
Other 2 (22) (82)
------- ------- -------
Operating cash flow before income taxes on sales of
businesses and interest payment on zero coupon bonds 7,707 6,925 7,103
Income taxes on sales of businesses (73) (238) (8)
Interest payment on zero coupon bonds - financial
services and real estate (156)
------- ------- -------
Net cash provided by operating activities 7,634 6,687 6,939
------- ------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures (1,782) (1,621) (1,726)
Purchase of businesses, net of acquired cash (616) (217) (146)
Proceeds from sales of businesses 612 2,202 300
Other (47) 17 28
Financial services and real estate
Investments in finance assets (439) (613) (582)
Proceeds from finance assets 217 123 889
------- ------- -------
Net cash used in investing activities (2,055) (109) (1,237)
------- ------- -------
</TABLE>
See notes to consolidated financial statements.
Continued
5
<PAGE>
CONSOLIDATED STATEMENTS of CASH FLOWS (Continued)
for the years ended December 31,
(in millions of dollars)
----------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net (repayment) issuance of short-term borrowings $(1,119) $ (21) $ 172
Long-term debt proceeds 2,699 564 97
Long-term debt repaid (1,979) (1,302) (1,817)
Financial services and real estate
Net (repayment) issuance of short-term borrowings (498) 67 (325)
Long-term debt proceeds 363 185
Long-term debt repaid (139) (44)
Repurchase of outstanding stock (2,770) (2,111) (1,532)
Dividends paid (3,462) (2,939) (2,487)
Stock rights redemption (9)
Issuance of shares 448 291 54
Other (88) (28) (20)
------- ------- -------
Net cash used in financing activities (6,406) (5,627) (5,717)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (71) 3 17
------- ------- -------
Cash and cash equivalents:
(Decrease) increase (898) 954 2
Balance at beginning of year 1,138 184 182
------- ------- -------
Balance at end of year $ 240 $ 1,138 $ 184
======= ======= =======
Cash paid: Interest - Consumer products $ 1,244 $ 1,293 $ 1,340
======= ======= =======
- Financial services and real estate $ 95 $ 89 $ 229
======= ======= =======
Income taxes $ 3,424 $ 3,067 $ 2,449
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
-----------
Note 1. Summary of Significant Accounting Policies:
Basis of presentation:
The consolidated financial statements include all significant
subsidiaries. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
amounts of operating revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Balance sheet accounts are segregated by two broad types of business.
Consumer products assets and liabilities are classified as either
current or non-current, whereas financial services and real estate
assets and liabilities are unclassified, in accordance with respective
industry practices.
Cash and cash equivalents:
Cash equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.
Inventories:
Inventories are stated at the lower of cost or market. The last-in,
first-out ("LIFO") method is used to cost substantially all domestic
inventories. The cost of other inventories is determined by the average
cost or first-in, first-out methods. It is a generally recognized
industry practice to classify the total amount of leaf tobacco
inventory as a current asset although part of such inventory, because
of the duration of the aging process, ordinarily would not be utilized
within one year.
Advertising costs:
Advertising costs are expensed generally as incurred.
Depreciation, amortization and goodwill valuation:
Depreciation is recorded by the straight-line method. Substantially all
goodwill and other intangible assets are amortized by the straight-line
method, principally over 40 years. The Company periodically evaluates
the recoverability of goodwill and measures any impairment by
comparison to estimated undiscounted cash flows from future operations.
Financial instruments:
Derivative financial instruments are used by the Company to manage its
foreign currency and interest rate exposures. Realized and unrealized
gains and losses on foreign currency swaps that are effective as hedges
of net assets in foreign subsidiaries are offset against currency
translation adjustments as a component of stockholders' equity. The
interest differential to be paid or received under the currency and
related interest rate swap agreements is recognized over the life of
the related debt and is included in interest and other debt expense,
net. Unrealized gains and losses on forward contracts that are
effective as hedges of assets, liabilities and commitments are deferred
and recognized in income as the related transaction is realized.
Continued
7
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Accounting changes:
Effective January 1, 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 impaired, remeasured at fair value, whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS No. 121 at January 1, 1996 and its
application during 1996, had no material impact on the Company's
financial position or results of operations.
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 the 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. The Company's stock compensation plans are discussed
in Note 7.
Effective January 1, 1995, the Company adopted SFAS No. 116, "Accounting
for Contributions Received and Contributions Made." This Statement
requires the Company to recognize an unconditional promise to make a
contribution as an expense in the period the promise is made. The
Company had previously expensed contributions when payment was made.
The cumulative effect at January 1, 1995 of adopting SFAS No. 116
reduced 1995 net earnings by $7 million ($.01 per share). The
application of SFAS No. 116 did not materially reduce 1995 earnings
before cumulative effect of accounting changes.
Effective January 1, 1995, the Company adopted SFAS No. 106 for non-U.S.
postretirement benefits other than pensions. The cumulative effect at
January 1, 1995 of adopting SFAS No. 106, for the non-U.S. plans,
reduced 1995 net earnings by $21 million ($.02 per share). However,
application of SFAS No. 106 for non-U.S. employees during the year
ended December 31, 1995 did not materially reduce earnings before
cumulative effect of accounting changes.
In October 1996, the AICPA's Accounting Standards Executive Committee
issued Statement of Position No. 96-1, "Environmental Remediation
Liabilities," which requires adoption by the Company on January 1,
1997. The Company estimates that the effect of adoption will not be
material.
Note 2. Divestitures and Acquisitions:
During 1996, the Company acquired a controlling interest in a Polish tobacco
company, at a cost of $285 million and nearly all of the remaining voting
shares of a Brazilian confectionery company, at a cost of $314 million.
During 1996, the Company sold several domestic and international food
businesses for total proceeds of $612 million and net pretax gains of $320
million. In addition, the Company initiated cost saving programs that
included downsizing facilities and workforce reductions. The cost of these
actions substantially offset the gains from businesses sold. The effect of
these and other smaller acquisitions and dispositions, were not material
to the Company's 1996 results of operations.
Continued
8
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
During 1995, the Company sold its bakery businesses and its North American
margarine, specialty oils, marshmallows, caramels and Kraft Foodservice
distribution businesses. In addition, several smaller international food
businesses were sold. Operating revenues and operating income of these
businesses for the period owned in 1995 were $2.0 billion and $107
million, respectively, and for the year ended December 31, 1994 were $5.9
billion and $267 million, respectively. Net assets of the businesses sold
were $1.8 billion. Total proceeds and net pretax gains from the sales of
these businesses were $2.1 billion and $275 million, respectively. As part
of this divestiture program, the Company offered an early retirement
program and downsized or closed other food facilities. The cost of these
actions offset the gains from businesses sold.
During 1994, the Company sold The All American Gourmet Company (frozen
dinners business) for $170 million. The effect of this disposition, and
other smaller acquisitions and dispositions, was not material to the
Company's 1994 results of operations.
Note 3. Inventories:
The cost of approximately 49% of inventories in 1996 and 50% of inventories
in 1995 was determined using the LIFO method. The stated LIFO values of
inventories were approximately $965 million and $750 million lower than
the current cost of inventories at December 31, 1996 and 1995,
respectively.
Note 4. Short-Term Borrowings and Borrowing Arrangements:
At December 31, the Company's short-term borrowings and related average
interest rates consisted of the following:
1996 1995
--------------------- ----------------------
(in millions)
Average Average
Amount Year-end Amount Year-end
Outstanding Rate Outstanding Rate
----------- ---- ----------- ----
Consumer products:
Bank loans $ 295 8.1% $ 209 13.1%
Commercial paper 1,373 5.7% 2,495 5.8%
Amount reclassified
as long-term debt (1,408) (2,582)
------- -------
$ 260 $ 122
======= =======
Financial services and
real estate:
Commercial paper $ 173 6.0% $ 671 5.9%
======= =======
The fair values of the Company's short-term borrowings at December 31, 1996
and 1995, based upon market rates, approximate the amounts disclosed
above.
The Company and its subsidiaries maintain credit facilities with a number of
lending institutions, amounting to approximately $15.6 billion at December
31, 1996. Approximately $15.3 billion of these facilities were unused at
December 31, 1996. Certain of these facilities are used to
Continued
9
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
support commercial paper borrowings, are available for acquisitions and
other corporate purposes and require the maintenance of a fixed charges
coverage ratio.
The Company's credit facilities include revolving bank credit agreements
totaling $12.0 billion. An agreement for $4.0 billion expires in October
1997. An agreement for $8.0 billion expires in 2000 enabling the Company
to refinance short-term debt on a long-term basis. Accordingly, short-term
borrowings intended to be refinanced were reclassified as long-term debt.
Note 5. Long-Term Debt:
At December 31, the Company's long-term debt consisted of the following:
1996 1995
---- ----
(in millions)
Consumer products:
Short-term borrowings, reclassified $ 1,408 $ 2,582
Notes, 6.15% to 9.75% (average effective
rate 7.82%), due through 2008 9,550 8,598
Debentures, 6.0% to 8.5%
(average effective rate 10.77%),
$1.2 billion face amount,
due through 2017 1,046 1,018
Foreign currency obligations:
Swiss franc, 2.13% to 6.88%
(average effective rate 5.80%),
due through 2000 957 1,303
Deutsche mark, 2.75% to 6.38%
(average effective rate 5.96%),
due through 2002 411 392
Other foreign 49 102
Other 252 255
------- -------
13,673 14,250
Less current portion of long-term debt (1,846) (1,926)
------- -------
$11,827 $12,324
======= =======
Financial services and real estate:
Eurodollar notes, 6.75% and 6.63%,
(average effective rate 6.68%)
due 1997 and 1999 $ 400 $ 400
Foreign currency obligations:
ECU notes, 9.25% and 8.50%, due
1997 and 1998 372 383
Deutsche mark, 6.5%, due 2003 166
French franc, 6.88%, due 2006 196
------- -------
$ 1,134 $ 783
======= =======
Continued
10
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Aggregate maturities of long-term debt, excluding short-term borrowings
reclassified as long-term debt, are as follows:
Financial services and
Consumer products real estate
----------------- ----------------------
(in millions)
1997 $1,846 $386
1998 1,516 186
1999 1,773 200
2000 845
2001 1,730
2002-2006 3,871 362
2007-2011 767
Thereafter 131
The revolving credit facility under which the consumer products short-term
debt was reclassified as long-term debt expires in 2000 and any amounts
then outstanding mature.
Based on market quotes, where available, or interest rates currently
available to the Company for issuance of debt with similar terms and
remaining maturities, the aggregate fair value of consumer products and
financial services and real estate long-term debt, including current
portion of long-term debt, at December 31, 1996 and 1995 was $15.3 billion
and $15.9 billion, respectively.
Note 6. Capital Stock:
Shares of authorized common stock are 4 billion; issued, repurchased and
outstanding were as follows:
Net
Shares Shares Shares
Issued Repurchased Outstanding
------ ----------- -----------
Balances, January 1, 1994 935,320,439 (58,229,749) 877,090,690
Exercise of stock options
and issuance of other
stock awards 4,569,731 4,569,731
Repurchased (28,801,356) (28,801,356)
----------- ------------ -----------
Balances, December 31, 1994 935,320,439 (82,461,374) 852,859,065
Exercise of stock options
and issuance of other
stock awards 6,470,262 6,470,262
Repurchased (28,159,321) (28,159,321)
----------- ------------ -----------
Balances, December 31, 1995 935,320,439 (104,150,433) 831,170,006
Exercise of stock options
and issuance of other
stock awards 7,890,835 7,890,835
Repurchased (28,612,083) (28,612,083)
----------- ------------ -----------
Balances, December 31, 1996 935,320,439 (124,871,681) 810,448,758
=========== ============ ===========
Continued
11
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
At December 31, 1996, 33,794,922 shares of common stock were reserved for
stock options and other stock awards under the Company's stock plans and
10,000,000 shares of Serial Preferred Stock, $1.00 par value, were
authorized, none of which have been issued.
Note 7. Stock Plans:
Under the Philip Morris 1992 Incentive Compensation and Stock Option Plan
(the "Plan"), the Company may grant to eligible employees stock options,
stock appreciation rights, restricted stock and annual incentive and
long-term performance cash awards. Up to 37 million shares of common stock
are authorized for grant, of which no more than 9 million shares may be
awarded as restricted stock. Shares available to be granted at December
31, 1996 and 1995 were 5,882,835 and 12,639,175, respectively.
Stock options are granted at an exercise price of not less than fair value on
the date of the grant. Stock options granted under the Plan generally
become exercisable on the first anniversary of the grant date and have a
maximum term of ten years.
The Company applies the intrinsic value based method permitted by SFAS No.
123 in accounting for the Plan. Accordingly, no compensation expense has
been recognized other than for restricted stock awards. Had compensation
cost for stock option awards under the Plan been determined based on the
fair value at the grant dates, the effect on the Company's 1996 and 1995
net earnings would not have been material.
Option activity was as follows for the years ended December 31, 1994, 1995
and 1996:
Weighted
Shares Subject Options Average
to Option Exercisable Exercise Price
--------- ----------- --------------
Balance at January 1, 1994 30,035,681 $51.09
Options granted 511,610 69.73
Options exercised (2,394,089) 34.63
Options cancelled (388,045) 59.87
----------
Balance at December 31, 1994 27,765,157 27,253,547 52.73
Options granted 7,983,200 74.78
Options exercised (6,750,112) 45.69
Options cancelled (590,121) 68.46
----------
Balance at December 31, 1995 28,408,124 20,700,934 60.27
Options granted 7,542,405 108.25
Options exercised (8,436,980) 56.81
Options cancelled (442,422) 78.64
----------
Balance at December 31, 1996 27,071,127 19,649,932 $74.42
==========
The weighted average exercise prices of options exercisable at December 31,
1996, 1995 and 1994 were $61.67, $54.83 and $52.41, respectively.
Continued
12
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
The following table summarizes the status of stock options outstanding and
exercisable as of December 31, 1996, by range of exercise price:
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
$20.92-$35.42 1,805,676 2 years $30.56 1,805,676 $30.56
$46.31-$69.25 8,263,823 5 years 53.63 8,263,823 53.63
$73.56-$120.00 17,001,628 8 years 89.18 9,580,433 74.45
---------- ----------
27,071,127 19,649,932
========== ==========
The Company may grant shares of restricted stock and rights to receive shares
of stock to eligible employees, giving them in most instances all of the
rights of stockholders, except that they may not sell, assign, pledge or
otherwise encumber such shares and rights. Such shares and rights are
subject to forfeiture if certain employment conditions are not met. During
1996, 1995 and 1994 the Company granted 60,000, 212,000 and 2,636,940
shares, respectively, of restricted stock to eligible U.S. based employees
and also issued to eligible non-U.S. employees rights to receive 48,000
and 1,034,320 like shares in 1995 and 1994, respectively. At December 31,
1996, restrictions on the stock, net of forfeitures, lapse as follows:
1997-2,433,985 shares; 1998-50,000 shares; 1999-20,000 shares;
2000-262,000 shares; and 2002 and thereafter-223,000 shares.
The fair value of the restricted shares and rights at the date of grant is
amortized to expense ratably over the restriction period. The unamortized
portion is reported as a reduction of earnings reinvested in the business
and was $47 million on December 31, 1996.
Note 8. Earnings per Share:
Earnings per common share have been calculated on the weighted average number
of shares of common stock outstanding for each year, which was
821,108,904, 841,558,296 and 867,288,869 for 1996, 1995 and 1994,
respectively.
Note 9. Pretax Earnings and Provision for Income Taxes:
Pretax earnings and provision for income taxes consisted of the following:
1996 1995 1994
---- ---- ----
(in millions)
Pretax earnings:
United States $ 7,399 $6,622 $5,781
Outside United States 3,284 2,725 2,435
------- ------ ------
Total pretax earnings $10,683 $9,347 $8,216
======= ====== ======
Continued
13
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
1996 1995 1994
---- ---- ----
(in millions)
Provision for income taxes:
United States federal:
Current $1,836 $1,946 $1,540
Deferred 438 97 458
------ ------ ------
2,274 2,043 1,998
State and local 430 434 419
------ ------ ------
Total United States 2,704 2,477 2,417
------ ------ ------
Outside United States:
Current 1,727 1,175 919
Deferred (51) 217 155
------ ------ ------
Total outside United States 1,676 1,392 1,074
------ ------ ------
Total provision for income taxes $4,380 $3,869 $3,491
====== ====== ======
At December 31, 1996, applicable United States federal income taxes and
foreign withholding taxes have not been provided on approximately $4.2
billion of accumulated earnings of foreign subsidiaries that are expected
to be permanently reinvested abroad. If these amounts were not considered
permanently reinvested, additional deferred income taxes of approximately
$240 million would have been provided.
The Company and its subsidiaries are subject to tax examinations in various
U.S. and foreign jurisdictions. The Company believes that adequate tax
payments have been made and accruals recorded for all years.
The effective income tax rate on pretax earnings differed from the U.S.
federal statutory rate for the following reasons:
1996 1995 1994
---- ---- ----
Provision computed at U.S. federal
statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes, net of
federal tax benefit 2.6 3.0 3.3
Rate differences - foreign operations 3.3 1.9 1.0
Goodwill amortization 1.8 2.1 2.4
Other (1.7) (0.6) 0.8
---- ---- ----
Provision for income taxes 41.0% 41.4% 42.5%
==== ==== ====
Continued
14
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
The tax effects of temporary differences which gave rise to consumer products
deferred income tax assets and liabilities consisted of the following:
December 31,
1996 1995
---- ----
(in millions)
Deferred income tax assets:
Accrued postretirement and postemployment
benefits $ 1,070 $ 1,018
Accrued liabilities 588 451
Restructuring, strategic and other reserves 315 331
Other 399 764
------- -------
Gross deferred income tax assets 2,372 2,564
Valuation allowance (87) (125)
------- -------
Total deferred income tax assets 2,285 2,439
------- -------
Deferred income tax liabilities:
Property, plant and equipment (1,699) (1,687)
Prepaid pension costs (286) (197)
------- -------
Total deferred income tax liabilities (1,985) (1,884)
------- -------
Net deferred income tax assets $ 300 $ 555
======= =======
Financial services and real estate deferred income tax liabilities are
primarily attributable to temporary differences from investments in
finance leases.
Note 10. Segment Reporting:
Tobacco, food, beer, and financial services and real estate are the major
segments of the Company's operations. The Company's major products are
cigarettes, coffee, cheese, chocolate confections, processed meat
products, various packaged grocery products and beer. The Company's
consolidated operations outside the United States, which are principally
in the tobacco and food businesses, are organized into geographic regions
by segment, with Europe the most significant. Intersegment transactions
are not reported separately since they are not material.
For purposes of segment reporting, operating profit is operating income
exclusive of certain unallocated corporate expenses. Substantially all
goodwill amortization is attributable to the food segment. Identifiable
assets are those assets applicable to the respective industry segments.
See Note 2 regarding divestitures and acquisitions.
Continued
15
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Reportable segment data were as follows:
Data by Segment for the years ended December 31,
1996 1995 1994
---- ---- ----
(in millions)
Operating revenues:
Tobacco $36,549 $32,316 $28,671
Food 27,950 29,074 31,669
Beer 4,327 4,304 4,297
Financial services and real estate 378 377 488
------- ------- -------
Total operating revenues $69,204 $66,071 $65,125
======= ======= =======
Operating profit:
Tobacco $ 8,263 $ 7,177 $ 6,162
Food 3,362 3,188 3,108
Beer 437 444 413
Financial services and real estate 192 164 208
------- ------- -------
Total operating profit 12,254 10,973 9,891
Unallocated corporate expenses 485 447 442
------- ------- -------
Operating income $11,769 $10,526 $ 9,449
======= ======= =======
Identifiable assets:
Tobacco $13,314 $11,196 $ 9,926
Food 32,934 33,447 34,822
Beer 1,707 1,751 1,706
Financial services and real estate 5,917 5,632 5,193
------- ------- -------
53,872 52,026 51,647
Other assets 999 1,785 1,002
------- ------- -------
Total assets $54,871 $53,811 $52,649
======= ======= =======
Depreciation expense:
Tobacco $ 378 $ 350 $ 360
Food 538 556 539
Beer 104 101 108
Capital expenditures:
Tobacco $ 829 $ 525 $ 529
Food 812 948 1,072
Beer 122 115 121
Continued
16
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Data by Geographic Region for the years ended December 31,
----------------------------------------------------------
1996 1995 1994
---- ---- ----
(in millions)
Operating revenues:
United States - domestic $31,993 $32,479 $35,936
- export 6,476 5,920 4,942
Europe 24,232 23,076 19,888
Other 6,503 4,596 4,359
------- ------- -------
Total operating revenues $69,204 $66,071 $65,125
======= ======= =======
Operating profit:
United States $ 8,762 $ 8,031 $ 7,306
Europe 2,635 2,366 1,914
Other 857 576 671
------- ------- -------
Total operating profit 12,254 10,973 9,891
Unallocated corporate expenses 485 447 442
------- ------- -------
Operating income $11,769 $10,526 $ 9,449
======= ======= =======
Identifiable assets:
United States $33,314 $32,521 $33,622
Europe 15,836 15,981 14,845
Other 4,722 3,524 3,180
------- ------- -------
53,872 52,026 51,647
Other assets 999 1,785 1,002
------- ------- -------
Total assets $54,871 $53,811 $52,649
======= ======= =======
Note 11. Pension Plans:
The Company and its subsidiaries sponsor noncontributory defined benefit
pension plans covering substantially all U.S. employees. The plans provide
retirement benefits for salaried employees based generally on years of
service and compensation during the last years of employment. Retirement
benefits for hourly employees generally are a flat dollar amount for each
year of service. The Company funds these plans in amounts consistent with
the funding requirements of federal laws and regulations.
Pension coverage for employees of the Company's non-U.S. subsidiaries is
provided, to the extent deemed appropriate, through separate plans, many
of which are governed by local statutory requirements. The plans provide
pension benefits that are based primarily on years of service and
employees' salaries near retirement. The Company provides for obligations
under such plans by depositing funds with trustees or purchasing insurance
policies. The Company records liabilities for unfunded foreign plans.
Continued
17
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
U.S. Plans
Net pension (income) cost consisted of the following:
1996 1995 1994
---- ---- ----
(in millions)
Service cost - benefits earned during the year $ 143 $ 110 $ 130
Interest cost on projected benefit obligation 373 367 342
(Return) loss on assets - actual (980) (1,344) 94
- deferred gain (loss) 447 848 (605)
Amortization of net gain upon
adoption of SFAS No. 87 (25) (26) (28)
Amortization of unrecognized net loss (gain)
from experience differences 9 (13) (12)
Amortization of prior service cost 14 13 12
Other (income) cost (35) 75 49
------ ------ ------
Net pension (income) cost $ (54) $ 30 $ (18)
====== ====== ======
During 1996, 1995 and 1994, the Company sold businesses and instituted early
retirement and workforce reduction programs resulting in curtailment and
settlement gains of $69 million and additional pension cost of $34 million
in 1996, additional pension cost of $103 million and curtailment gains of
$28 million in 1995 and additional pension cost of $49 million in 1994.
The funded status of U.S. plans at December 31 was as follows:
1996 1995
---- ----
(in millions)
Actuarial present value of accumulated
benefit obligation - vested $3,871 $4,116
- nonvested 359 354
------ ------
4,230 4,470
Benefits attributable to projected salaries 650 786
------ ------
Projected benefit obligation 4,880 5,256
Plan assets at fair value 7,101 6,649
------ ------
Excess of assets over projected
benefit obligation 2,221 1,393
Unamortized net gain upon
adoption of SFAS No. 87 (108) (140)
Unrecognized prior service cost 124 131
Unrecognized net gain from
experience differences (1,404) (807)
------ ------
Prepaid pension cost $ 833 $ 577
====== ======
The projected benefit obligation at December 31, 1996, 1995 and 1994 was
determined using an assumed discount rate of 7.75%, 7.25% and 8.5%,
respectively, and assumed compensation increases of 4.5% at December 31,
1996 and 1995 and 5.0% at December 31, 1994. The assumed long-term rate of
return on plan assets was 9% at December 31, 1996, 1995 and 1994. Plan
assets consist principally of common stock and fixed income securities.
Continued
18
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
The Company and certain of its subsidiaries sponsor deferred profit-sharing
plans covering certain salaried, nonunion and union employees.
Contributions and costs are determined generally as a percentage of pretax
earnings, as defined by the plans. Certain other subsidiaries of the
Company also maintain defined contribution plans. Amounts charged to
expense for defined contribution plans totaled $210 million, $201 million
and $191 million in 1996, 1995 and 1994, respectively.
In addition, certain of the Company's subsidiaries participate in
multiemployer defined benefit plans. Contributions to these plans were
immaterial in 1996, 1995 and 1994.
Non-U.S. Plans
Net pension cost consisted of the following:
1996 1995 1994
---- ---- ----
(in millions)
Service cost - benefits earned during the year $ 80 $ 80 $ 72
Interest cost on projected benefit obligation 166 160 136
(Return) loss on assets - actual (201) (195) 4
- deferred gain (loss) 70 74 (113)
Amortization of net loss (gain) upon adoption
of SFAS No. 87 3 1 (1)
----- ----- -----
Net pension cost $ 118 $ 120 $ 98
===== ===== =====
The funded status of the non-U.S. plans at December 31 was as follows:
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
-------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
(in millions)
Actuarial present value of
accumulated benefit
obligation - vested $1,336 $1,257 $ 721 $ 703
- nonvested 39 46 77 69
------ ------ ------ ------
1,375 1,303 798 772
Benefits attributable to
projected salaries 342 324 127 125
------ ------ ------ ------
Projected benefit obligation 1,717 1,627 925 897
Plan assets at fair value 1,891 1,780 36 59
------ ------ ------ ------
Plan assets in excess of (less
than) projected benefit
obligation 174 153 (889) (838)
Unamortized net (gain) loss
upon adoption of SFAS No. 87 (14) 11 13 14
Unrecognized net gain from
experience differences (22) (42) (5) (34)
------ ------ ------ ------
Prepaid (accrued) pension cost $ 138 $ 122 $ (881) $ (858)
====== ====== ======= ======
Continued
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
The assumptions used in 1996, 1995 and 1994 were as follows:
1996 1995 1994
---- ---- ----
Discount rates 4.0% to 12.0% 4.5% to 10.0% 5.0% to 13.0%
Compensation increases 3.0% to 8.0% 3.5% to 9.0% 3.5% to 11.0%
Long-term rates of
return on plan assets 4.5% to 11.0% 4.5% to 11.0% 5.5% to 12.0%
Plan assets consist primarily of common stock and fixed income securities.
Note 12. Postretirement Benefits Other Than Pensions:
The Company and its subsidiaries have accrued the estimated cost of retiree
health care benefits during the active service periods of employees in the
United States and Canada. Health care benefits for retirees outside the
United States and Canada are generally covered through local government
plans. The Company and its U.S. and Canadian subsidiaries provide health
care and other benefits to substantially all retired employees, their
covered dependents and beneficiaries. Generally, employees who have
attained age 55 and who have rendered at least 5 to 10 years of service
are eligible for these benefits. Certain health care plans are
contributory; others are noncontributory.
Net postretirement health care costs consisted of the following:
1996 1995 1994
---- ---- ----
(in millions)
Service cost - benefits earned during the period $ 59 $ 46 $ 57
Interest cost on accumulated postretirement
benefit obligation 180 179 165
Amortization of unrecognized net loss (gain)
from experience differences 4 (2) 6
Amortization of unrecognized prior service cost (12) (13) (15)
Other (income) cost (8) (13) 32
---- ---- ----
Net postretirement health care costs $223 $197 $245
==== ==== ====
During 1996, 1995 and 1994, the Company sold businesses and instituted early
retirement and workforce reduction programs resulting in additional income
or cost.
Continued
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
The Company's postretirement health care plans currently are not funded.
The status of the plans at December 31 was as follows:
1996 1995
------ ------
(in millions)
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $1,289 $1,353
Fully eligible active plan participants 278 253
Other active plan participants 859 927
------ ------
2,426 2,533
Unrecognized net loss from experience
differences (75) (303)
Unrecognized prior service cost 127 140
------ ------
Accrued postretirement health care costs $2,478 $2,370
====== ======
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for U.S. plans was 9.0% in 1995, 8.5% in
1996 and 8.0% in 1997, gradually declining to 5.0% by the year 2003 and
remaining at that level thereafter. For Canadian plans, the assumed health
care cost trend rate was 15.0% in 1995, 14.0% in 1996 and 13.0% in 1997,
gradually declining to 5.0% by the year 2005 and remaining at that level
thereafter. A one-percentage-point increase in the assumed health care
cost trend rates for each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996 and net
postretirement health care cost for the year then ended by approximately
12% and 16%, respectively.
The accumulated postretirement benefit obligations for U.S. plans at December
31, 1996, 1995 and 1994 were determined using assumed discount rates of
7.75%, 7.25% and 8.5%, respectively. The accumulated postretirement
benefit obligation at December 31, 1996 and 1995 for Canadian plans was
determined using an assumed discount rate of 8.25% and 9.75%,
respectively.
Note 13. Contingencies:
Legal proceedings covering a wide range of matters are pending in various
U.S. and foreign jurisdictions against the Company and its subsidiaries,
including Philip Morris Incorporated ("PM Inc."), the Company's
wholly-owned domestic tobacco subsidiary. Various types of claims are
raised in these proceedings, including but not limited to products
liability, antitrust, securities law, tax and patent infringement matters.
Pending claims related to tobacco products generally fall within three
categories: (i) smoking and health cases alleging personal injury brought
on behalf of individual smokers, (ii) smoking and health cases alleging
personal injury and purporting to be brought on behalf of a class of
plaintiffs, and (iii) health care cost recovery actions brought primarily
by states and local governments seeking reimbursement for Medicaid and
other health care expenditures allegedly caused by cigarette smoking.
In the individual and class action smoking and health cases pending against
PM Inc. and, in some cases, the Company and/or certain of its other
subsidiaries, plaintiffs allege personal injury resulting from cigarette
smoking, "addiction" to cigarette smoking or exposure to environmental
tobacco smoke ("ETS") and seek compensatory and, in some cases, punitive
Continued
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
damages in amounts ranging into the billions of dollars. During the past
two years, there has been a substantial increase in the number of such
smoking and health cases in the United States, with a majority of the new
cases having been filed in Florida on behalf of individual plaintiffs. As
of December 31, 1996, there were 185 smoking and health cases filed and
served on behalf of individual plaintiffs in the United States against PM
Inc. and, in some cases, the Company, compared to 115 such cases as of
December 31, 1995, and 84 such cases as of December 31, 1994. One hundred
twenty-two of the cases filed and served as of December 31, 1996, were
filed on behalf of individual plaintiffs in the state of Florida. Ten of
the individual cases involve allegations of various personal injuries
allegedly related to exposure to ETS.
In addition to the foregoing individual smoking and health cases, there are
17 purported smoking and health class actions pending in the United States
against PM Inc. and, in some cases, the Company, including one that
involves allegations of various personal injuries related to exposure to
ETS. Twelve of these actions purport to constitute state-wide class
actions and were filed after the Fifth Circuit Court of Appeals, in the
Castano case discussed below, reversed a federal district court's
certification of a purported nation-wide class action on behalf of persons
who were allegedly addicted to tobacco products. One purported smoking and
health class action is pending in Canada and another in Brazil against
affiliates of the Company. In California, individuals and local
governments and other organizations purportedly acting as "private
attorneys general" have filed suits seeking, among other things,
injunctive relief, restitution and disgorgement of profits for alleged
violations of California's consumer protection statutes. As discussed
below, 26 health care cost recovery actions are currently pending.
In August 1996, a jury awarded a former smoker and his spouse $750,000 in a
smoking and health case against another United States cigarette
manufacturer (Carter v. American Tobacco Co., et al.). Neither PM Inc. nor
the Company was a party to that litigation. Defendant in that action has
appealed the verdict. Later that month, a jury returned a verdict for
defendants in a smoking and health case in Indiana against United States
cigarette manufacturers, including PM Inc. (Rogers v. R.J. Reynolds
Tobacco Company, et al.). Plaintiff has appealed the verdict.
Several smoking and health cases and health care cost recovery actions are
scheduled for trial in 1997, although trial dates are subject to change.
One individual smoking and health case in which PM Inc. is a defendant is
scheduled for trial during the first quarter of 1997 and a number of other
individual cases against the industry are scheduled for trial later in the
year. A purported class action on behalf of flight attendants alleging
injury caused by exposure to ETS aboard aircraft is set for trial in June
1997 in Florida state court. A purported class action on behalf of Florida
residents who allege injury from alleged nicotine addiction is set for
trial in September 1997. A similar action on behalf of Pennsylvania
residents is set for trial in October 1997. Health care cost recovery
actions are currently scheduled for trial in Mississippi in June 1997, in
Florida in August 1997 and in Texas in September 1997.
A description of smoking and health class actions, health care cost recovery
litigation and certain other actions pending against the Company and/or
its subsidiaries and affiliates follows.
Continued
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
SMOKING AND HEALTH LITIGATION
Plaintiffs' allegations of liability in smoking and health cases 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, and violations of deceptive trade practice laws and consumer
protection statutes. Defenses raised by defendants in these cases include
lack of proximate cause, assumption of the risk, comparative fault and/or
contributory negligence, statutes of limitations or repose, and preemption
by the Federal Cigarette Labeling and Advertising Act, as amended (the
"Labeling Act"). In June 1992, the United States Supreme Court held that
the Labeling Act, as enacted in 1965, does not preempt common law damage
claims but that the Labeling Act, as amended in 1969, preempts claims
arising after July 1969 against cigarette manufacturers "based on failure
to warn and the neutralization of federally mandated warnings to the
extent that those claims rely on omissions or inclusions in advertising or
promotions." The Court also held that the 1969 Labeling Act does not
preempt claims based on express warranty, fraudulent misrepresentation or
conspiracy. The Court also held that claims for fraudulent concealment
were preempted except "insofar as those claims relied on a duty to
disclose...facts through channels of communication other than advertising
or promotion." (The Court did not consider whether such common law damage
claims were valid under state law.) The Court's decision was announced by
a plurality opinion. The effect of the decision on pending and future
cases will be the subject of further proceedings in the lower federal and
state courts. Additional similar litigation could be encouraged if
legislation to eliminate the federal preemption defense, proposed in
Congress in recent years, were enacted. It is not possible to predict
whether any such legislation will be enacted.
A smoking and health class action against United States cigarette
manufacturers has been pending in Florida state court since October 1991
in which a class has been certified consisting of "all non-smoking flight
attendants who are or have been employed by airlines based in the United
States" and who are allegedly suffering from 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. Various challenges to the class certification have been
denied on appeal, and the case is currently set for trial in June 1997.
Another smoking and health class action against United States cigarette
manufacturers has been pending in Florida state court since May 1994 in
which a class has been certified consisting of all Florida citizens and
residents and their survivors who have suffered injury "caused by their
addiction to cigarettes that contain nicotine." 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. Various
challenges to the class certification have been denied on appeal, and the
case is currently set for trial in September 1997.
In March 1994, a smoking and health class action was filed in Alabama state
court against three United States cigarette manufacturers, and was
subsequently removed 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. 94-4-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
Continued
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
compensatory and punitive damages not to exceed $48,500 per each class
member as well as injunctive relief arising from defendants' alleged
failure to disclose additives used in their cigarettes. In August 1996,
the judge orally granted defendants' motion for summary judgment on the
grounds that the suit is preempted by the Labeling Act.
In March 1994, a smoking and health class action was filed in federal
district court in Louisiana against United States cigarette manufacturers
and others, including the Company, seeking certification of a purported
class consisting of all United States residents who allege that they are
addicted, or are the legal survivors of persons who were addicted, to
tobacco products. Castano, et al. v. The American Tobacco Company Inc., et
al., United States District Court, Eastern District of Louisiana, Case No.
94-1044. Plaintiffs alleged that the cigarette manufacturers concealed
and/or misrepresented information regarding the addictive nature of
nicotine and manipulated the levels of nicotine in their tobacco products
to make such products addictive. In February 1995, the trial court
certified the class and in May 1996, the Fifth Circuit Court of Appeals
reversed the trial court's class certification and remanded the case with
instructions that the class allegations be dismissed. Summary judgment
motions against the two remaining named plaintiffs in this case are
pending.
Following the announcement of the Fifth Circuit's class decertification
decision in Castano, lawyers for the plaintiffs announced that they would
file "state-wide" smoking and health class actions in state courts.
Subsequently, smoking and health class actions based on claims similar to
those in Castano (a "nicotine-dependence class action") and, in some
cases, claims of physical injury as well (a "physical injury class
action") were filed in a number of states, as described below.
Immediately prior to the Fifth Circuit's decision in the Castano case, a
purported nicotine-dependence class action was filed in Indiana state
court against United States cigarette manufacturers and others. In June
1996, defendants removed the case to federal court. Norton, et al. v. RJR
Nabisco Holdings Corporation, et al., United States District Court for the
Southern District of Indiana, Case No. IP96-0798-C-M/S. Plaintiffs' motion
to remand the case to state court is pending.
In May 1996, a purported physical injury class action was filed in Maryland
state court against United States cigarette manufacturers and others,
including the Company. The case was removed by defendants to federal court
and was subsequently remanded to state court. Richardson, et al. v. Philip
Morris Incorporated, et al., Circuit Court for Baltimore City, No.
96145050.
In May 1996, a purported nicotine-dependence class action was filed in
Louisiana state court against four United States cigarette manufacturers
and others, including the Company. Scott, et al. v. The American Tobacco
Company, Inc., et al., Civil District Court for the Parish of Orleans,
State of Louisiana, Docket No. 96-8461. A hearing on plaintiffs' motion
for class certification has been scheduled for February 1997.
In June 1996, a purported nicotine-dependence class action was filed in New
York state court against PM Inc., the Company, the Tobacco Institute and
the Council for Tobacco Research--U.S.A., Inc. Frosina, et al. v. Philip
Morris Inc., et al., Supreme Court of the State of New York, County of New
York, Case No. 96110950. In December 1996, defendants filed motions to
dismiss the complaint and to deny class certification.
Continued
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
In June 1996, a purported physical injury class action was filed in the
Superior Court of the District of Columbia against United States cigarette
manufacturers and others, including the Company. Reed v. Philip Morris
Incorporated, et al., Superior Court of the District of Columbia, Case No.
CA-05070-96. A hearing on whether plaintiffs can pursue a class action has
been scheduled for June 1997.
In August 1996, a purported nicotine-dependence class action was filed in
Pennsylvania state court against United States cigarette manufacturers and
others, including the Company, and was subsequently removed to federal
court. Arch, et al. v. American Tobacco Company Inc., et al., United
States District Court for the Eastern District of Pennsylvania, Case No.
96-5903-CN. A hearing on class certification is set for March 1997, and
the trial is scheduled for October 1997.
In August 1996, a purported nicotine-dependence class action was filed in
Alabama state court, on behalf of Alabama and North Carolina residents,
against four United States cigarette manufacturers and others, including
the Company. In September 1996, the case was removed by defendants to
federal court. Lyons, et al. v. The American Tobacco Co., Inc., et al.,
United States District Court for the Southern District of Alabama,
Southern Division, Civil Action No. 96-0881-BH-S. Plaintiffs' motion to
remand the case to state court is pending.
In August 1996, a purported nicotine-dependence class action was filed in
Ohio state court against United States cigarette manufacturers and others,
including the Company, and was subsequently removed to federal court.
Chamberlain, et al. v. The American Tobacco Co., et al., United States
District Court, Northern District of Ohio, Case No. 1:96CV2005.
Plaintiffs' motion to remand the case to state court is pending.
In August 1996, a purported physical injury class action was filed in Florida
state court against United States cigarette manufacturers, and others.
Walters, et al. v. Brown & Williamson Tobacco Corp., et al., Circuit
Court, Fourth Judicial District, Duval County, Florida.
In September 1996, a purported nicotine-dependence class action was filed in
Minnesota state court against four United States cigarette manufacturers
and others, including the Company. The case was removed by defendants to
federal court in September 1996. Masepohl, et al. v. The American Tobacco
Co., Inc., et al., United States District Court, District of Minnesota,
Third Division, Case No. CV3-96-888. Plaintiffs' motion to remand the case
to state court is pending.
In October 1996, a purported nicotine-dependence class action was filed in
New Mexico state court against four United States cigarette manufacturers
and others, including the Company. Connor, et al. v. The American Tobacco
Co., et al., Second Judicial District Court, County of Bernalillo, State
of New Mexico, Case No. CV-96-9422.
In October 1996, a purported nicotine-dependence class action was filed in
federal court in Puerto Rico against four United States cigarette
manufacturers and others. Ruiz, et al. v. The American Tobacco Co., et
al., United States District Court for the District of Puerto Rico, Civil
Action No. 96-2300.
In November 1996, a purported nicotine-dependence class action was filed in
federal court in Arkansas against United States cigarette manufacturers
and others, including the Company. McGinty, et al. v. The American
Continued
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Tobacco Co., et al., United States District Court for the Eastern District
of Arkansas, Western Division, Case No. LRC 96-881.
In February 1995, Rothmans, Benson & Hedges, Inc. (in which the Company,
through subsidiaries, owns a 40% interest) was served with a statement of
claim commencing a purported class action in the Ontario Court of Justice,
Toronto, Canada, against Imperial Tobacco Limited, RJR-MacDonald Inc., and
Rothmans, Benson & Hedges, Inc. LeTourneau v. Rothmans et al., Ontario
Court of Justice, Toronto, Canada, Court File No. 95-CU-82186 (now
captioned Caputo v. Imperial Tobacco Limited, et al.). The lawsuit seeks
damages in the amount of $1,000,000 (Canadian) per class member and
punitive and exemplary damages and an order requiring the funding of
rehabilitation centers. Plaintiffs seek certification of a class of
persons consisting of all current and former cigarette smokers in Ontario,
their families and the estates of deceased smokers. Defendants' request
for a more particular statement of claim prior to delivering their
statement of defense was partially granted and partially denied in April
1996. Defendants have appealed that order.
In July 1995, a purported class action on behalf of all Brazilian smokers and
former smokers was filed in state court in Sao Paulo, Brazil, naming
Philip Morris Marketing, S.A., a wholly-owned subsidiary of the Company,
as a co-defendant. The Smoker Health Defense Association, et al. v. Souza
Cruz, S.A. and Philip Morris Marketing, S.A., 19th Lower Civil Court of
the Central Courts of the Judiciary District of Sao Paulo, Brazil.
Plaintiffs allege that defendants failed to warn that smoking is
"addictive" and engaged in misleading advertising. Plaintiffs have
obtained an order, which was upheld on appeal, reversing the burden of
proof and placing the burden on defendants. Defendants are seeking further
appellate review of this order.
Pro se prisoners have filed two purported class actions against United States
cigarette manufacturers and others seeking, in one case, class
certification on behalf of prisoners in two Mississippi prisons based on
alleged exposure to ETS (Lyle, et al. v. Brown & Williamson Tobacco
Corporation, et al., United States District Court for the Northern
District of Mississippi, Civil Action No. 3:96-CV-268WS) and, in the
other, on behalf of all allegedly nicotine-dependent persons in the United
States (Harris, et al. v. Philip Morris Incorporated, et al., United
States District Court for the Eastern District of Pennsylvania, Civil
Action No. 3:96-CV 652). In October 1996, the court issued an order
dismissing the Lyle action. In November 1996, the court in Harris entered
an order denying class certification.
HEALTH CARE COST RECOVERY LITIGATION
In certain of the pending proceedings, state and local government entities
and others seek reimbursement for Medicaid and/or other health care
expenditures allegedly caused by tobacco products. The claims asserted in
these health care cost recovery actions vary. All plaintiffs assert the
equitable claim that the tobacco industry was "unjustly enriched" by
plaintiffs' payment of health care costs allegedly attributable to smoking
and seek reimbursement of those costs. Other claims made by some but not
all plaintiffs include the equitable claim of indemnity, common law claims
of negligence, strict liability, breach of express and implied warranty,
violation of a voluntary undertaking or special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under state and
federal statutes governing consumer fraud, antitrust,
Continued
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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deceptive trade practices and false advertising, and claims under the
Federal Racketeer Influenced and Corrupt Organization Act ("RICO") or
state RICO statutes.
Each plaintiff seeks reimbursement of Medicaid and/or other health care
costs. Other relief sought by some but not all plaintiffs includes
punitive damages, treble damages for alleged antitrust law violations,
injunctions prohibiting alleged marketing and sales to minors, disclosure
of research, disgorgement of profits, funding of anti-smoking programs,
disclosure of nicotine yields and payment of attorney and expert witness
fees.
Defenses raised by defendants include failure to state a valid claim, lack of
benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs
cannot recover because they participated in, and benefited from, the sale
of cigarettes), lack of antitrust injury, federal preemption, lack of
proximate cause and statute of limitations. In addition, defendants argue
that they should be entitled to "set-off" any alleged damages to the
extent a state benefits economically from the sale of cigarettes through
the receipt of excise taxes or otherwise. Defendants also argue that all
of these cases are improper because plaintiffs must proceed under
principles of subrogation and assignment. Under traditional theories of
recovery, a payor of medical costs (such as an insurer or a state) can
seek recovery of health care costs from a third party solely by "standing
in the shoes" of the injured party. Defendants argue that plaintiffs
should be required to bring an action on behalf of each individual health
care recipient and should be subject to all defenses available against the
injured party. In certain of these cases, defendants have also challenged
the ability of the plaintiffs to use contingency fee counsel to prosecute
these actions. Further, certain cigarette companies, including PM Inc.,
have filed related declaratory judgment actions in several states seeking
to block the health care cost recovery actions in those states and/or to
prevent the state from hiring contingency fee counsel.
The following is a summary of certain developments in each of the health care
cost recovery suits pending against PM Inc. and, in some cases, the
Company and the related declaratory judgment actions filed by cigarette
manufacturers.
Florida -- In May 1994, the State of Florida enacted a statute which
purports, among other things, to abolish affirmative defenses in Medicaid
recovery actions. In June 1994, PM Inc. and others filed suit in Florida
state court challenging the constitutionality of the statute. Associated
Industries of Florida, Inc., et al. v. State of Florida Agency for Health
Care Administration, et al., Circuit Court of the Second Judicial Circuit
in and for Leon County, Florida, Case No. 94-3128. In June 1996, the
Florida Supreme Court ruled that the provisions of the statute that
permitted the state to pursue its action without identifying individual
Medicaid recipients violated defendants' due process rights under the
Florida constitution and that defendants may rebut the state's claims of
causation and damages on a recipient-by-recipient basis. The court held
constitutional on its face the statutory provision abolishing affirmative
defenses normally available to a third party, including assumption of the
risk, but stated that this provision might be unconstitutional as applied
in the state's case. The court also held that the state's independent
cause of action created by the statute could apply only to Medicaid costs
paid after the amendment became effective in July 1994, that defendants
could be held individually liable under a market share theory, that the
state could
Continued
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
use statistical evidence to present its case, and that the agency charged
with enforcing the statute was constitutionally established. In September
1996, plaintiffs' petition for rehearing on the Florida Supreme Court's
rulings on abrogation of affirmative defenses and application of the
statute to conduct occurring before July 1994 was denied. In December
1996, PM Inc. and another party filed a petition for a writ of certiorari
to the United States Supreme Court on the grounds that the statute
violates due process because it creates a unique cause of action on behalf
of the state which abrogates certain common law and equitable principles,
including affirmative defenses.
In February 1995, the State of Florida filed a health care cost recovery
action under the statute in Florida state court. The State of Florida, et
al. v. The American Tobacco Company, et al., Circuit Court of the
Fifteenth Judicial Circuit in and for Palm Beach County, Florida, Case No.
CL 95 1466 AO. In September 1996, the trial court dismissed all of the
state's claims except for its negligence and strict liability counts
arising from Medicaid payments made after July 1, 1994, and its count for
injunctive relief. The court also ordered the state to disclose the
identity of the Medicaid recipients. In October 1996, the state filed a
coded listing (without names) for all Medicaid recipients with alleged
smoking-related illnesses. The trial court accepted the coded listing and,
in January 1997, the Florida Supreme Court determined not to hear and
denied defendants' challenge to the sufficiency of the state's purported
identification of Medicaid recipients. In November 1996, plaintiffs
amended their complaint to add claims for violations of Florida's RICO and
consumer protection statutes. In December 1996, the court granted
defendants' motion to dismiss various claims brought under state statutes
and denied the motion to dismiss claims based on Florida's RICO statute
and on a state false advertising statute. In January 1997, defendants
waived their rights to a pretrial determination of whether plaintiffs can
amend their complaint to include a punitive damages claim. Defendants have
reserved their rights to challenge the punitive damages claim on factual
or legal bases. Plaintiffs' motion to strike defendants' affirmative
defenses was heard on January 24, 1997. The trial in this case is
scheduled to begin in August 1997.
Mississippi -- In May 1994, the Attorney General of Mississippi filed a
health care cost recovery action in Mississippi state court. Moore v. The
American Tobacco Company, et al., Chancery Court of Jackson County,
Mississippi, Case No. 94-1429. In February 1995, the court granted
plaintiff's motion to strike certain of defendants' challenges to the
sufficiency of the complaint and denied defendants' motion for judgment on
the pleadings. In July 1995, plaintiff filed a motion seeking to preclude
defendants from asserting their "set off" defenses. That motion is
pending. The Governor of Mississippi and defendants have filed petitions
with the Mississippi Supreme Court challenging the authority of the
Attorney General to pursue this action. The Mississippi Supreme Court
heard arguments on both petitions in September 1996, but has not issued a
decision on either petition. The trial is scheduled to begin in June 1997.
Minnesota -- In August 1994, the Attorney General of Minnesota and Blue Cross
and Blue Shield of Minnesota filed a health care cost recovery action in
Minnesota state court. Minnesota, et al. v. Philip Morris Incorporated, et
al., Minnesota District Court, Second Judicial District, County of Ramsey,
Case No. C1-94-8565. In July 1996, the Minnesota Supreme Court ruled that
Blue Cross did not have standing to pursue its tort claims against
defendants, but that it could proceed against defendants for claims
brought under antitrust and consumer
Continued
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
protection statutes. The Supreme Court also held that Blue Cross could
pursue directly its equitable claims, but only for injunctive (not
monetary) relief. The case is scheduled to go to trial in January 1998.
West Virginia -- In September 1994, the Attorney General of West Virginia
filed a health care cost recovery action in West Virginia state court.
McGraw v. The American Tobacco Company, et al., Circuit Court of Kanawha
County, West Virginia, Case No. 94-1707. In October 1995, the court
dismissed eight of ten counts of the complaint and granted defendants'
motion to prohibit prosecution of this case pursuant to a contingent fee
agreement with private counsel. In June 1996, the Attorney General added
the Public Employees' Insurance Agency as a plaintiff. In November 1996,
plaintiffs added the West Virginia Department of Health and Human
Resources as a plaintiff, and three law firms as defendants, and asserted
additional counts under theories of indemnity, negligent
misrepresentation, negligence, and strict product liability. In December
1996, the court heard oral argument on defendants' motion to dismiss
plaintiff's common law and equitable claims. A hearing on defendants'
motion to dismiss plaintiff's statutory claims is scheduled for February
1997.
Texas -- In March 1996, the Texas Attorney General filed a health care cost
recovery action in federal court in Texas. The State of Texas v. The
American Tobacco Company, et al., United States District Court, Eastern
District of Texas, Civil No. 5-96CV91. Trial in this action is set for
September 1997 and defendants have filed a number of motions to dismiss
it. Defendants and others had previously filed an action in Texas state
court in November 1995, seeking a declaration that the Texas Attorney
General cannot pursue a health care cost recovery action. 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
state court has stayed the action for declaratory relief pending the
outcome of the Attorney General's suit.
Massachusetts -- In December 1995, the Massachusetts Attorney General filed a
health care cost recovery action in Massachusetts state court.
Commonwealth of Massachusetts v. Philip Morris Inc., et al., Superior
Court, Middlesex County, Civil Action No. 95-7378. Defendants have moved
to dismiss the complaint. Defendants had previously filed an action in
Massachusetts federal court in November 1995, seeking to enjoin the
Attorney General from prosecuting a health care cost recovery action.
Philip Morris Incorporated, et al. v. Scott Harshbarger, United States
District Court, District of Massachusetts, Case No. 95-12574-GAO. In
November 1996, the federal district court denied the Attorney General's
motion to dismiss the complaint and stayed the injunction action.
Maryland -- In May 1996, the State of Maryland filed a health care cost
recovery action in Maryland state court. State of Maryland v. Philip
Morris Incorporated, et al., Circuit Court for Baltimore County, Maryland,
Case No. 96-122017/CL211017. Defendants' motion to dismiss the state's
complaint is scheduled to be heard on January 28, 1997. The trial is
scheduled for January 1999. Defendants and others had previously filed a
separate action in Maryland state court seeking to enjoin the Maryland
Attorney General from prosecuting a health care cost recovery action
pursuant to a contingent fee arrangement with special counsel. Philip
Morris Incorporated, et al. v. Parris N. Glendening, Governor of the State
of Maryland, et al., Circuit Court for Talbot County, Maryland, Case No.
CG 2829. In August 1996, the court granted
Continued
29
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
defendants' motion for summary judgment and dismissed the injunction
action. Plaintiffs have appealed.
Louisiana -- In March 1996, the Attorney General of Louisiana filed a health
care cost recovery action in Louisiana state court. Ieyoub, et al. v. The
American Tobacco Company, et al., 14th Judicial District Court, Parish of
Calcasieu, Louisiana, Case No. 96-1209. In January 1997, the court denied
defendants' motion to dismiss which argued that the Attorney General
lacked the authority to bring this action.
San Francisco -- In June 1996, the City and County of San Francisco filed a
health care cost recovery action in California federal court and has since
been joined by ten other California counties. City and County of San
Francisco, et al. v. Philip Morris, Inc. et al., United States District
Court, Northern District of California, Civil No. C 96-2090. In January
1997, the court denied defendants' motion to disqualify plaintiffs'
contingency-fee counsel and took under advisement defendants' motion to
dismiss. In September 1996, plaintiffs in the federal court action, joined
by several medical associations, filed an action in California state court
seeking, among other things, injunctive relief and disgorgement of profits
for alleged violations of California's consumer protection statutes.
People of the State of California, et al. v. Philip Morris, Inc. et al.,
San Francisco Superior Court, County of San Francisco, Case No. 980864. In
January 1997, the court granted in part defendants' motion to dismiss by
requiring plaintiffs to replead certain causes of action and denied the
motion on other grounds.
Washington -- In June 1996, the Attorney General of the State of Washington
filed a health care cost recovery action in Washington state court. State
of Washington v. American Tobacco Co., Inc., et al., Superior Court of
Washington, King County, No. 96-2-15056-8. In November 1996, the court
dismissed claims based on special duty, unjust enrichment and restitution
to the state, but did not dismiss claims brought under Washington's
antitrust laws. The State of Washington recently moved to amend its
complaint with the stated intention of correcting deficiencies found by
the court to exist in the special duty and unjust enrichment claims and to
add a claim for restitution under Washington's consumer protection
statute. Trial is scheduled for September 1998.
Connecticut -- In July 1996, the State of Connecticut filed a health care
cost recovery action in Connecticut state court. State of Connecticut v.
Philip Morris Inc., et al., Superior Court, Judicial District of
Litchfield, Case No. CV-96-01534405. Defendants had previously filed an
action in federal district court in June 1996, seeking to enjoin the
Connecticut Attorney General from bringing the health care cost recovery
action. Philip Morris Inc., et al. v. Richard Blumenthal, United States
District Court, District of Connecticut, Case No. 396CV01221 (PCD). This
injunction action was dismissed in December 1996 and, in January 1997,
plaintiffs appealed the dismissal.
Utah -- In September 1996, the Utah Attorney General filed a health care cost
recovery action in federal court in Utah. State of Utah v. R.J. Reynolds
Tobacco Company, et al., United States District Court, District of Utah,
Case No. 2:96CV 0829W. Defendants had previously filed an action in Utah
state court in July 1996, challenging the right of the Attorney General to
bring such an action and to prosecute the case pursuant to a contingent
fee arrangement with special counsel. Philip Morris Incorporated, et al.
v. Janet C. Graham, Attorney General of the
Continued
30
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
State of Utah, et al., Third Judicial District Court of Salt Lake County,
Utah, No. 960904948CV. The parties have agreed that the state court action
will be stayed while the federal action is proceeding, except for the
challenge to the Attorney General's contingent fee arrangement with
special counsel. In December 1996, a motion for partial summary judgment
challenging the contingent fee arrangement was argued before the state
court.
Los Angeles County -- In August 1996, the County of Los Angeles filed a
health care cost recovery action in California state court. County of Los
Angeles v. R.J. Reynolds Tobacco Company, et al., Superior Court of
California, San Diego County.
Alabama -- In August 1996, a health care cost recovery action was filed in
Alabama state court as a putative class action on behalf of taxpayers of
the State of Alabama. Following local rules, the state court entered an
order conditionally certifying the class. This action was subsequently
removed by defendants to federal court. Crozier, et al. v. The American
Tobacco Company, et al., United States District Court for the Middle
District of Alabama, Case No. 96-A-1403-N. Plaintiffs' motion to remand to
state court is pending.
Kansas -- In August 1996, the Attorney General of Kansas filed a health care
cost recovery action in Kansas state court. State of Kansas, ex rel. Carla
J. Stovall, Attorney General v. R.J. Reynolds Tobacco Co., et al.,
District Court of Shawnee County, Kansas, Case No. 96-CV-919. Defendants'
motion to dismiss this case is scheduled to be heard in April 1997.
Michigan -- In August 1996, the Attorney General of Michigan filed a health
care cost recovery action in Michigan state court. Frank J. Kelley,
Attorney General, ex rel. State of Michigan v. Philip Morris Incorporated,
et al., Circuit Court for the 30th Judicial Circuit, Ingham County,
Michigan, Case No. 96-84281-CZ. In October 1996, defendants moved to
dismiss certain counts of the complaint and to strike claims for
compensatory and punitive damages.
Oklahoma -- In August 1996, the Attorney General of Oklahoma filed a health
care cost recovery action in Oklahoma state court. State of Oklahoma, et
al. v. R.J. Reynolds Tobacco Co., et al., District Court for Cleveland
County, Oklahoma, Case No. CJ-96-1499-L.
Arizona -- In August 1996, the Attorney General of Arizona filed a health
care cost recovery action in Arizona state court. State of Arizona, et al.
v. American Tobacco Co., Inc., et al., Superior Court, Maricopa County,
Arizona, No. CV 96-14769. The Governor of Arizona has instructed the
Attorney General to dismiss the case. Subsequently, the Attorney General
filed an amended complaint that abandons claims for Medicaid payments, but
seeks recovery of other health care costs as well as other damages and
forms of relief. Motions to dismiss the complaint are pending. The trial
is scheduled for October 1998.
Hawaii -- In August 1996, PM Inc. and three other cigarette manufacturers
filed suit against the Hawaii Attorney General in federal district court
in Hawaii seeking declaratory and injunctive relief invalidating a
threatened health care cost recovery action by Hawaii. A hearing on
defendant's motion to dismiss is scheduled for March 1997. The action is
scheduled to go to trial in December 1997. Philip Morris Inc., et al. v.
Margery Bronster, U.S. District Court, Hawaii, Civ. No. 96-00722 HG.
Continued
31
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Ohio -- In September 1996, two Ohio local officials filed a health care cost
recovery action in Ohio state court, purportedly on behalf of the State of
Ohio and all Ohio taxpayers. Defendants removed the case to federal court
in Ohio and have filed a motion to dismiss challenging the standing of
plaintiffs to bring this action. State ex rel. Coyne, Jr., et al. v. The
American Tobacco Co., et al., United States District Court, Northern
District of Ohio, Case No. 96-2247. Plaintiffs motion to remand this
action to state court is pending.
New Jersey -- In September 1996, the New Jersey Attorney General filed a
health care cost recovery action in New Jersey state court. The State of
New Jersey v. R.J. Reynolds Tobacco Company, et al., Chancery Court,
Middlesex County, Case No. C-254-96. In August 1996, defendants filed a
separate suit challenging the right of the Attorney General to bring such
an action and to prosecute the case pursuant to a contingent fee
arrangement with special counsel. Philip Morris Incorporated, et al. v.
Peter Verniero, Attorney General of the State of New Jersey, et al.,
Superior Court of New Jersey, Chancery Division, Mercer County, Case No.
MER-C-000114-96. Defendants' motion to dismiss the complaint and
plaintiffs' motion for summary judgment are pending.
New York City -- In October 1996, the City of New York and the New York City
Health and Hospitals Corporation filed a health care cost recovery action
in New York state court. City of New York, et al. v. The Tobacco
Institute, et al., Supreme Court of the State of New York, County of New
York, Case No. 406225/96.
Illinois -- In November 1996, the Attorney General of Illinois filed a health
care cost recovery action in Illinois state court. People of the State of
Illinois v. Philip Morris, Inc., et al., Circuit Court of Cook County,
Illinois, Case No. 96 L 13146.
Iowa -- In November 1996, the State of Iowa filed a health care cost recovery
action in Iowa state court. State of Iowa, ex rel. Thomas J. Miller, in
his capacity as Attorney General of the State of Iowa v. R.J. Reynolds
Tobacco Co., et al., District Court for Polk County, Iowa, Case No.
CL71048.
Alaska -- In January 1997, PM Inc. and three other cigarette manufacturers
filed suit against the Alaska Attorney General in federal district court
seeking declaratory and injunctive relief to prohibit a threatened health
care cost recovery action by Alaska on grounds that it would violate
federal law. Philip Morris Inc., et al. v. Bruce Botelho, U.S. District
Court, Alaska, No. A 97-003 Civil (JWS).
Erie County -- In January 1997, the County of Erie filed a health care cost
recovery action in New York state court. County of Erie v. The Tobacco
Institute, Inc., et al., Supreme Court of the State of New York, County of
Erie, Case No. I1997/359.
New York -- On January 27, 1997, it was reported in the press that the State
of New York filed a health care cost recovery action.
Other state and local government entities have announced that they are
considering filing similar health care cost recovery actions.
In September 1996, a purported class action was filed in Tennessee state
court against four United States cigarette manufacturers and others on
behalf of all individuals and entities in the United States who have
Continued
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
paid premiums to a Blue Cross or Blue Shield organization for medical
insurance. The complaint alleges that defendants' actions have resulted in
increased medical insurance premiums for all class members and seeks
recovery under various consumer protection statutes as well as under
theories of breach of special duty and unjust enrichment. This case was
removed by defendants to federal court. Perry, et al. v. Philip Morris
Incorporated, et al., United States District Court for the Eastern
District of Tennessee, Winchester Division, Civil Action No. 4:96-CV-106.
Plaintiffs' motion to remand the case to state court is pending.
OTHER TOBACCO RELATED CLASS ACTIONS
In May 1995, PM Inc. announced a recall of certain of its products and in
June and July four purported class actions relating to the recall were
filed. Three of these cases have been dismissed. In October 1995,
plaintiffs in the remaining action, Tijerina, et al. v. Philip Morris,
Inc., et al., United States District Court, Northern District of Texas,
Amarillo Division, Case No. 2-95-CV-120, filed an amended complaint
alleging that PM Inc. has, for many years, knowingly manufactured filtered
products that are defective because they contain "defective filters."
Plaintiffs purport to bring this action on behalf of all persons who "are
Texas residents and who have smoked Philip Morris filtered cigarettes
manufactured with Hoechst Celanese filter materials" and who have suffered
adverse health effects. Plaintiffs allege that the filters in these
products contain hazardous chemicals and that cellulose acetate fibers
break away from the filters and are inhaled and ingested by the consumer
when the filtered products are used. Plaintiffs further allege that they
relied on PM Inc.'s false and fraudulent misrepresentations, made through
advertising, regarding the safety of the use of the filters. Motions to
dismiss certain of plaintiffs' claims and motions for summary judgment are
pending. In October 1996, the court denied plaintiffs' motion for class
certification.
In June 1995, an action was filed in federal court in Maryland against PM
Inc. seeking certification of a purported class consisting of "all persons
and estates injured as a result of the defendant's alleged failure to
manufacture a fire safe cigarette since 1987." Sacks, et al. v. Philip
Morris Inc., United States District Court, District of Maryland, Case No.
WMN-95-1840. Plaintiffs alleged in their complaint that PM Inc.
intentionally withheld and suppressed material information relating to
technology to produce a cigarette less likely to cause fires and failed to
design and sell its cigarettes using the alleged technology. Compensatory
and punitive damages were sought. In September 1996, an order was entered
denying plaintiffs' motion for leave to file an amended complaint and
granting defendant's motion to dismiss. Plaintiffs have appealed the
order.
CERTAIN OTHER ACTIONS
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in a complaint filed as a purported class action in
federal court in New York. Lawrence, et al. v. Philip Morris Companies
Inc., et al., United States District Court, Eastern District of New York,
Case No. 94 Civ. 1494 (JG). Plaintiffs allege that defendants violated the
federal securities laws by maintaining artificially high levels of
profitability through an inventory management practice pursuant to which
defendants allegedly shipped more inventory to customers than was
necessary to satisfy market demand. In August 1995,
Continued
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
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 September
1996, the United States Court of Appeals for the Second Circuit denied the
Company's Petition for Writ of Mandamus which had requested that the Court
of Appeals direct the trial court to withdraw its order granting class
certification. In January 1997, the court granted a motion by an alleged
class member to intervene in the action and to be named 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. In April 1996, the court entered an order stipulating the
dismissal of the State Board claims. In August 1996, the court entered
judgment dismissing the claims in Kurzweil. In September 1996, the
Kurzweil plaintiffs filed an appeal from the judgment in the United States
Court of Appeals for the Second Circuit; plaintiffs withdrew the appeal
without prejudice in December 1996. In September 1996, the Kurzweil
plaintiffs filed a motion in the district court to vacate the judgment and
for leave to amend their complaint; this motion remains pending.
In March 1995, an antitrust action was filed in California state court
against four United States cereal manufacturers, including the Post
Division of Kraft Foods, Inc. ("Kraft"), by plaintiffs purporting to
represent all California residents who purchased defendants' cereal
products during the four years preceding the date upon which the complaint
was filed. McIver, et al. v. General Mills, Inc., et al., Superior Court
of the State of California, County of Santa Barbara, Case No. 206663.
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 and, in January 1997, the Court of Appeals affirmed the trial
court's dismissal of this action.
In April 1996, an antitrust action was filed in federal court in Wisconsin
against Kraft as a purported class action. Stuart, et al. v. Kraft Foods,
Inc., et al., United States District Court, Eastern District of Wisconsin,
Case No. 96-C-391. An amended complaint filed in July 1996,
Continued
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
named two other leading dairy products manufacturers and the National
Cheese Exchange as defendants. Plaintiff purports to represent all persons
and entities in the United States (excluding governmental entities and
political subdivisions) that sold milk and/or bulk cheese directly to
Kraft or any of its alleged co-conspirators at any time since January 1,
1988. Plaintiff alleges that defendants engaged in a conspiracy to fix and
depress the prices of bulk cheese and milk through their trading activity
on the National Cheese Exchange and failed to deal in good faith with
their bulk cheese and milk suppliers by paying them prices based on the
National Cheese Exchange. Plaintiff seeks injunctive and equitable relief
and treble damages. In December 1996, plaintiffs' motion for class
certification was denied and defendants' motion to dismiss plaintiffs'
action was denied without prejudice.
In September 1996, a second antitrust action was filed in federal court in
Wisconsin against Kraft as a purported class action. Sheeks, et al. v.
Kraft Foods, Inc., et al., United States District Court, Eastern District
of Wisconsin, Case No. 96-C-1100. Plaintiffs are dairy farmers and assert
virtually identical claims to those in the Stuart case discussed above. In
December 1996, the court denied plaintiffs' motion to consolidate this
action with the Stuart case.
During 1996, tax assessments alleging the underpayment of Italian value added
taxes for the years 1988 to 1994 and income taxes for the year 1987 were
asserted against certain affiliates of the Company. The aggregate amount
of taxes claimed to be assessed to date, together with interest and
penalties, is $798.4 million. The Company anticipates that further
substantial value added and income tax assessments may be claimed. The
Company and its affiliates believe they have complied with applicable
Italian tax laws and intend to vigorously contest the assessments. A
hearing concerning value added taxes is scheduled in the Italian tax court
for February 4, 1997.
The Company and each of its subsidiaries named as a defendant believe, and
each has been so advised by counsel handling the respective cases, that it
has a number of valid defenses to all litigation pending against it. All
such cases are, and will continue to be, vigorously defended. It is not
possible to predict the outcome of this litigation. Litigation is subject
to many uncertainties, and it is possible that some of these actions could
be decided unfavorably. An unfavorable outcome of a pending smoking and
health case, such as the Carter case discussed above, could encourage the
commencement of additional similar litigation. There have also been a
number of adverse legislative, regulatory, political and other
developments concerning cigarette smoking and the tobacco industry. These
developments generally receive widespread media attention. The Company is
not able to evaluate the effect of these developing matters on pending
litigation and the possible commencement of additional litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of all pending
litigation. It is possible that the Company's results of operations or
cash flows in a particular quarterly or annual period or its financial
position could be materially affected by an ultimate unfavorable outcome
of certain pending litigation. Management believes, however, that the
ultimate outcome of all pending litigation should not have a material
adverse effect on the Company's financial position.
Continued
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Note 14. Additional Information:
1996 1995 1994
------ ------ ------
(in millions)
Years ended December 31:
Depreciation expense $1,038 $1,024 $1,027
====== ====== ======
Rent expense $ 430 $ 390 $ 426
====== ====== ======
Research and development expense $ 515 $ 481 $ 435
====== ====== ======
Advertising expense $3,633 $3,724 $3,358
====== ====== ======
Interest and other debt expense, net:
Interest expense $1,183 $1,259 $1,288
Interest income (97) (80) (55)
------ ------ ------
$1,086 $1,179 $1,233
====== ====== ======
Interest expense of financial services
and real estate operations included
in cost of sales $ 80 $ 84 $ 78
====== ====== ======
Note 15. Financial Services and Real Estate Operations:
Philip Morris Capital Corporation ("PMCC") is a wholly-owned subsidiary of
the Company. PMCC invests in leveraged and direct finance leases, other
tax-oriented financing transactions, third party financial instruments and
engages in various financing activities for customers and suppliers of the
Company's subsidiaries. Additionally, PMCC is engaged, through its
wholly-owned subsidiary, Mission Viejo Company, in land planning,
development and sales activities in California and Colorado.
Pursuant to a support agreement, the Company has agreed to retain ownership
of 100% of the voting stock of PMCC and make periodic payments to PMCC to
the extent necessary to ensure that earnings available for fixed charges
equal at least 1.25 times its fixed charges. No payments were required in
1996, 1995 or 1994.
Continued
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Condensed balance sheet data at December 31, follow:
1996 1995
------ ------
(in millions)
Assets
Finance leases $7,554 $6,858
Other investments 474 471
------ ------
8,028 7,329
Less unearned income and allowances 2,682 2,336
------ ------
Finance assets, net 5,346 4,993
Real estate held for development and sale 314 339
Other assets 258 302
------ ------
Total assets $5,918 $5,634
====== ======
Liabilities and stockholder's equity
Short-term borrowings $ 173 $ 671
Long-term debt 1,134 783
Deferred income taxes 3,636 3,382
Other liabilities 145 121
Stockholder's equity 830 677
------ ------
Total liabilities and stockholder's equity $5,918 $5,634
====== ======
The amounts shown above include receivables and payables with the Company and
its other subsidiaries. These amounts were eliminated in the Company's
consolidated balance sheets.
Finance leases consist of a portfolio of investments in transportation,
manufacturing facilities, power generation and real estate. Rentals
receivable for finance leases represent unpaid rentals, less principal and
interest on third-party nonrecourse debt, if any.
PMCC's investment securities, included in other investments, are classified
as available for sale and are recorded at fair value, with unrealized
gains and losses included as a component of stockholder's equity, net of
related deferred income taxes. Other investments also include real estate
and commercial receivables, the total estimated fair values of which, at
December 31, 1996 and 1995, approximated their carrying values. Fair
values were estimated by discounting projected cash flows using the
current rates for similar loans to borrowers with similar credit ratings
and maturities.
Continued
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Condensed income statement data follow for the years ended December 31,
1996 1995 1994
---- ---- ----
(in millions)
Revenues:
Financial services $222 $197 $257
Real estate 157 184 236
---- ---- ----
Total revenues 379 381 493
Expenses:
Financial services 107 107 114
Real estate 98 129 190
---- ---- ----
Total expenses 205 236 304
Equity in earnings of limited
partnership investments 15 15 17
---- ---- ----
Earnings before income taxes 189 160 206
Provision for income taxes 66 55 72
---- ---- ----
Net earnings $123 $105 $134
==== ==== ====
Note 16. Financial Instruments:
Derivative financial instruments
The Company operates internationally, with manufacturing and sales facilities
in various locations around the world. Derivative financial instruments
are used by the Company for purposes other than trading, principally to
reduce exposures to market risks resulting from fluctuations in interest
rates and foreign exchange rates by creating offsetting exposures. The
Company is not a party to leveraged derivatives.
The Company has foreign currency and related interest rate swap agreements
which were executed to reduce the Company's borrowing costs and serve as
hedges of the Company's net assets in foreign subsidiaries, principally
those denominated in Swiss francs. At December 31, 1996 and 1995, the
notional principal amounts of these agreements were $2.2 billion and $2.0
billion, respectively. Aggregate maturities at December 31, 1996 were as
follows (in millions): 1997-$853; 1998-$186; 1999-$391; 2000-$215 and 2002
and thereafter-$540. The notional amount is the amount used for the
calculation of interest payments which are exchanged over the life of the
swap transaction and is equal to the amount of foreign currency or dollar
principal exchanged at maturity.
Forward exchange contracts are used by the Company to reduce the effect of
fluctuating foreign currencies on short-term foreign currency denominated
intercompany and third party transactions. At December 31, 1996 and 1995,
the Company had forward exchange contracts, with maturities of less than
one year, of $1.7 billion and $1.2 billion, respectively.
Continued
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------
Credit exposure and credit risk
The Company is exposed to credit loss in the event of nonperformance by
counterparties to the swap agreements. However, such exposure was not
material at December 31, 1996, and the Company does not anticipate
nonperformance. Further, the Company does not have a significant credit
exposure to an individual counterparty.
Fair value
The aggregate fair value, based on market quotes, of the Company's total debt
at December 31, 1996 was $15.7 billion as compared to its carrying value
of $15.2 billion. The aggregate fair value of the Company's total debt at
December 31, 1995 was $16.7 billion as compared to its carrying value of
$15.8 billion. The estimated fair value of financial services and real
estate other investments, including commercial and real estate
receivables, approximated their carrying values at December 31, 1996 and
1995.
The carrying values of the foreign currency and related interest rate swap
agreements and of the forward contracts, which did not differ materially
from their fair values, were not material.
See Notes 4, 5 and 15 for additional disclosures of fair value for short-term
borrowings, long-term debt and financial instruments within the financial
services and real estate operations, respectively.
Note 17. Quarterly Financial Data (Unaudited):
1996 Quarters
-------------------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
(in millions, except per share data)
Operating revenues $17,491 $17,509 $17,414 $16,790
======= ======= ======= =======
Gross profit $ 6,989 $ 7,100 $ 7,092 $ 6,812
======= ======= ======= =======
Net earnings $ 1,565 $ 1,621 $ 1,646 $ 1,471
======= ======= ======= =======
Per share data:
Net earnings $ 1.89 $ 1.97 $ 2.01 $ 1.81
======= ======= ======= =======
Dividends declared $ 1.00 $ 1.00 $ 1.20 $ 1.20
======= ======= ======= =======
Market price - high $104-5/8 $107-1/4 $107-1/2 $119
- low $ 85-5/8 $ 85-5/8 $ 85-5/8 $ 89-3/4
During the year, the Company sold several domestic and international food
businesses at net pretax gains of $320 million, most of which were
reflected in fourth quarter earnings. In addition, the Company initiated
cost saving programs that included downsizing facilities and workforce
reductions. The cost of these actions substantially offset the gains from
businesses sold. The net impact of these divestitures and provisions was
not material to fourth quarter operating income, pretax earnings or
earnings per share.
Continued
39
<PAGE>
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Concluded
----------
1995 Quarters
-------------------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
(in millions, except per share data)
Operating revenues $16,517 $17,129 $16,689 $15,736
======= ======= ======= =======
Gross profit $ 6,467 $ 6,816 $ 6,764 $ 6,407
======= ======= ======= =======
Earnings before cumulative
effect of accounting
changes $ 1,363 $ 1,410 $ 1,433 $ 1,272
Cumulative effect of
changes in method of
accounting
(See Note 1) (28)
------- ------- ------- -------
Net earnings $ 1,335 $ 1,410 $ 1,433 $ 1,272
======= ======= ======= =======
Per share data:
Earnings before cumulative
effect of accounting
changes $ 1.60 $ 1.67 $ 1.71 $ 1.53
Cumulative effect of
changes in method of
accounting (.03)
------- ------- ------- -------
Net earnings $ 1.57 $ 1.67 $ 1.71 $ 1.53
======= ======= ======= =======
Dividends declared $ .825 $ .825 $ 1.00 $ 1.00
======= ======= ======= =======
Market price - high $68 $76-5/8 $84-1/8 $94-3/8
- low $55-3/4 $65-1/4 $71-3/8 $82-5/8
During the year, the Company sold its bakery businesses and its North
American margarine, specialty oils, marshmallows, caramels and Kraft
Foodservice distribution businesses. In addition, several smaller
international food businesses were sold. Net pretax gains from the sales
of these businesses were $275 million, most of which were reflected in
fourth quarter earnings. In the fourth quarter of 1995, the Company also
recorded provisions in connection with these divestitures, primarily for
an early retirement program and the write-down of assets of food
facilities to be downsized or closed. The net impact of these divestitures
and provisions was not material to fourth quarter operating income, pretax
earnings or earnings per share.
Concluded
40
