<PAGE> 1
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 28, 1998
PHILIP MORRIS COMPANIES INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 1-8940 13-3260245
- --------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction File Number) Identification No.)
of incorporation)
120 Park Avenue, New York, New York 10017-5592
- --------------------------------------------------------------------------------
(Address of principal
executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 880-5000
--------------
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
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, 1997 and 1996, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997 (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, 1997.
Item 7. Financial Statements and Exhibits.
The Financial Statements, together with the independent accountants'
report thereon, are included herein.
(c) Exhibits
12. Statement regarding computation of ratios of earnings to fixed
charges.
23. Consent of independent accountants.
27. Financial Data Schedule.
99. Financial Statements.
2
<PAGE> 3
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 28, 1998
3
<PAGE> 4
EXHIBIT INDEX
Exhibit No.
- -----------
12. Statement regarding computation of ratios of earnings to fixed charges.
23. Consent of independent accountants.
27. Financial Data Schedule.
99. Financial Statements.
<PAGE> 1
EXHIBIT 12
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(dollars in millions)
-------------------
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings before
income taxes and
cumulative effect
of accounting changes $ 10,611 $ 10,683 $ 9,347 $ 8,216 $ 6,196
Add (Deduct):
Equity in net earnings of
less than 50% owned
affiliates (207) (227) (246) (184) (164)
Dividends from less than
50% owned affiliates 138 160 202 165 151
Fixed charges 1,438 1,421 1,495 1,537 1,716
Interest capitalized, net
of amortization (16) 13 2 (1) (13)
-------- -------- -------- ------- -------
Earnings available for
fixed charges $ 11,964 $ 12,050 $ 10,800 $ 9,733 $ 7,886
======== ======== ======== ======= =======
Fixed charges:
Interest incurred:
Consumer products $ 1,224 $ 1,197 $ 1,281 $ 1,317 $ 1,502
Financial services and
real estate 67 81 84 78 87
-------- -------- -------- ------- -------
$ 1,291 $ 1,278 $ 1,365 $ 1,395 $ 1,589
Portion of rent expense
deemed to represent
interest factor 147 143 130 142 127
-------- -------- -------- ------- -------
Fixed charges $ 1,438 $ 1,421 $ 1,495 $ 1,537 $ 1,716
======== ======== ======== ======= =======
Ratio of earnings to
fixed charges 8.3 8.5 7.2 6.3 4.6
======== ======== ======== ======= =======
</TABLE>
<PAGE> 1
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. 333-28631, 333-20747,
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 26, 1998 (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 28, 1998, as indicated in item 7
herein.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
January 28, 1998
<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,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,282
<SECURITIES> 0
<RECEIVABLES> 4,456
<ALLOWANCES> 162
<INVENTORY> 9,039
<CURRENT-ASSETS> 17,440
<PP&E> 20,002
<DEPRECIATION> 8,381
<TOTAL-ASSETS> 55,947
<CURRENT-LIABILITIES> 15,071
<BONDS> 12,430
0
0
<COMMON> 935
<OTHER-SE> 13,985
<TOTAL-LIABILITY-AND-EQUITY> 55,947
<SALES> 72,055
<TOTAL-REVENUES> 72,055
<CGS> 26,689
<TOTAL-COSTS> 42,630
<OTHER-EXPENSES> 17,762
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,052
<INCOME-PRETAX> 10,611
<INCOME-TAX> 4,301
<INCOME-CONTINUING> 6,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,310
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 2.58
</TABLE>
<PAGE> 1
Exhibit 99
PHILIP MORRIS COMPANIES INC.
and SUBSIDIARIES
Consolidated Financial Statements
for the period ended December 31, 1997
<PAGE> 2
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, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
New York, New York
January 26, 1998
<PAGE> 3
PHILIP MORRIS COMPANIES INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS, at December 31,
(in millions of dollars, except per share data)
----------
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Consumer products
Cash and cash equivalents $ 2,282 $ 240
Receivables, net 4,294 4,466
Inventories:
Leaf tobacco 4,348 4,143
Other raw materials 1,689 1,854
Finished product 3,002 3,005
-------- -------
9,039 9,002
Other current assets 1,825 1,482
-------- -------
Total current assets 17,440 15,190
Property, plant and equipment, at cost:
Land and land improvements 666 664
Buildings and building equipment 5,114 5,168
Machinery and equipment 12,667 12,481
Construction in progress 1,555 1,659
-------- -------
20,002 19,972
Less accumulated depreciation 8,381 8,221
-------- -------
11,621 11,751
Goodwill and other intangible assets
(less accumulated amortization of
$4,814 and $4,391) 17,789 18,998
Other assets 3,211 3,015
-------- -------
Total consumer products assets 50,061 48,954
Financial services and real estate
Finance assets, net 5,712 5,345
Other assets 174 572
-------- -------
Total financial services and
real estate assets 5,886 5,917
-------- -------
TOTAL ASSETS $55,947 $54,871
======== =======
1997 1996
-------- -------
LIABILITIES
Consumer products
Short-term borrowings $ 157 $ 260
Current portion of long-term debt 1,516 1,846
Accounts payable 3,318 3,409
Accrued liabilities:
Marketing 2,149 2,106
Taxes, except income taxes 1,234 1,331
Employment costs 1,083 942
Other 3,780 2,726
Income taxes 862 1,269
Dividends payable 972 978
-------- -------
Total current liabilities 15,071 14,867
Long-term debt 11,585 11,827
Deferred income taxes 889 731
Accrued postretirement health care costs 2,432 2,372
Other liabilities 6,218 5,773
-------- -------
Total consumer products liabilities 36,195 35,570
Financial services and real estate
Short-term borrowings 173
Long-term debt 845 1,134
Deferred income taxes 3,877 3,636
Other liabilities 110 140
-------- -------
Total financial services and
real estate liabilities 4,832 5,083
-------- -------
Total liabilities 41,027 40,653
Contingencies (Note 15)
STOCKHOLDERS' EQUITY
Common stock, par value $0.33 1/3 per share
(2,805,961,317 shares issued) 935 935
Earnings reinvested in the business 24,924 22,478
Currency translation adjustments (1,109) 192
-------- -------
24,750 23,605
Less cost of repurchased stock
(380,474,028 and 374,615,043 shares) 9,830 9,387
-------- -------
Total stockholders' equity 14,920 14,218
-------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 55,947 $54,871
======== =======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
CONSOLIDATED STATEMENTS of EARNINGS
for the years ended December 31,
(in millions of dollars, except per share data)
----------
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Operating revenues $72,055 $69,204 $66,071
Cost of sales 26,689 26,560 26,685
Excise taxes on products 15,941 14,651 12,932
------- ------- -------
Gross profit 29,425 27,993 26,454
Marketing, administration and research costs 15,720 15,630 15,337
Settlement charges (Note 15) 1,457
Amortization of goodwill 585 594 591
------- ------- -------
Operating income 11,663 11,769 10,526
Interest and other debt expense, net 1,052 1,086 1,179
------- ------- -------
Earnings before income taxes and
cumulative effect of accounting changes 10,611 10,683 9,347
Provision for income taxes 4,301 4,380 3,869
------- ------- -------
Earnings before cumulative effect
of accounting changes 6,310 6,303 5,478
Cumulative effect of accounting changes (28)
------- ------- -------
Net earnings $ 6,310 $ 6,303 $ 5,450
======= ======= =======
Per share data:
Basic earnings per share before
cumulative effect of accounting changes $ 2.61 $ 2.57 $ 2.18
Cumulative effect of accounting changes (.01)
------- ------- -------
Basic earnings per share $ 2.61 $ 2.57 $ 2.17
======= ======= =======
Diluted earnings per share before
cumulative effect of accounting changes $ 2.58 $ 2.54 $ 2.16
Cumulative effect of accounting changes (.01)
------- ------- -------
Diluted earnings per share $ 2.58 $ 2.54 $ 2.15
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY
(in millions of dollars, except per share data)
----------
<TABLE>
<CAPTION>
Earnings Currency Cost of Total
Common Reinvested in Translation Repurchased Stockholders'
Stock the Business Adjustments Stock Equity
------ ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995 $935 $17,489 $ (47) $(5,591) $12,786
Net earnings 5,450 5,450
Exercise of stock options and issuance
of other stock awards (77) 470 393
Cash dividends declared
($1.22 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
($1.47 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
Net earnings 6,310 6,310
Exercise of stock options and issuance
of other stock awards 14 300 314
Cash dividends declared
($1.60 per share) (3,880) (3,880)
Currency translation adjustments (1,301) (1,301)
Stock repurchased (743) (743)
Net unrealized appreciation on securities 2 2
---- ------- ------- ------- -------
Balances, December 31, 1997 $935 $24,924 $(1,109) $(9,830) $14,920
==== ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
CONSOLIDATED STATEMENTS of CASH FLOWS
for the years ended December 31,
(in millions of dollars)
----------
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - Consumer products $ 6,152 $ 6,180 $ 5,345
- Financial services and real estate 158 123 105
------- ------- -------
Net earnings 6,310 6,303 5,450
Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Depreciation and amortization 1,700 1,691 1,671
International food realignment 630
Deferred income tax (benefit) provision (188) 163 15
Gain on sale of Brazilian ice cream businesses (774)
Gains on sales of other businesses (196) (320) (275)
Cumulative effect of accounting changes 46
Cash effects of changes, net of the effects from acquired and
divested companies:
Receivables, net (168) 35 (466)
Inventories (531) (952) (5)
Accounts payable 37 60 (260)
Income taxes 48 373 266
Other working capital items 726 (448) (482)
Other 582 467 354
Financial services and real estate
Deferred income tax provision 257 224 299
Gain on sale of business (103)
Other 10 38 74
------- ------- -------
Net cash provided by operating activities 8,340 7,634 6,687
------- ------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures (1,874) (1,782) (1,621)
Purchase of businesses, net of acquired cash (630) (616) (217)
Proceeds from sales of businesses 1,784 612 2,202
Other 42 (47) 17
Financial services and real estate
Investments in finance assets (652) (439) (613)
Proceeds from finance assets 287 217 123
Proceeds from sale of business 424
------- ------- -------
Net cash used in investing activities (619) (2,055) (109)
------- ------- -------
</TABLE>
See notes to consolidated financial statements.
Continued
5
<PAGE> 7
CONSOLIDATED STATEMENTS of CASH FLOWS (Continued)
for the years ended December 31,
(in millions of dollars)
----------
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net repayment of short-term borrowings $(1,482) $(1,119) $ (21)
Long-term debt proceeds 2,893 2,699 564
Long-term debt repaid (1,987) (1,979) (1,302)
Financial services and real estate
Net (repayment) issuance of short-term borrowings (173) (498) 67
Long-term debt proceeds 174 363
Long-term debt repaid (387) (139)
Repurchase of outstanding stock (805) (2,770) (2,111)
Dividends paid (3,885) (3,462) (2,939)
Issuance of shares 205 448 291
Stock rights redemption (9)
Other (74) (88) (28)
------- ------- -------
Net cash used in financing activities (5,521) (6,406) (5,627)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (158) (71) 3
------- ------- -------
Cash and cash equivalents:
Increase (decrease) 2,042 (898) 954
Balance at beginning of year 240 1,138 184
------- ------- -------
Balance at end of year $ 2,282 $ 240 $ 1,138
======= ======= =======
Cash paid: Interest - Consumer products $ 1,219 $ 1,244 $ 1,293
======= ======= =======
- Financial services and real estate $ 79 $ 95 $ 89
======= ======= =======
Income taxes $ 3,794 $ 3,424 $ 3,067
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 8
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.
Certain prior years' amounts have been reclassified to conform with the
current year's presentation.
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.
Impairment of long-lived assets:
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable. The Company performs
undiscounted cash flow analyses to determine if an impairment exists.
If an impairment is determined to exist, any related impairment loss is
calculated based on fair value. Impairment losses on assets to be
disposed, if any, are based on the estimated proceeds to be received,
less costs of disposal.
Depreciation, amortization and goodwill valuation:
Depreciation is recorded by the straight-line method. Goodwill and other
intangible assets is substantially comprised of brand names, purchased
through acquisitions, which are amortized on the straight-line method
over 40 years. The Company periodically evaluates the recoverability of
its intangible assets and measures any impairment by comparison to
estimated undiscounted cash flows from future operations.
Advertising costs:
Advertising costs are expensed generally as incurred.
Continued
7
<PAGE> 9
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Revenue recognition:
The Company recognizes operating revenues generally upon shipment of goods
to customers.
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 currency contracts that are
effective as hedges of assets, liabilities and commitments are deferred
and recognized in income as the related transaction is realized.
Commodity futures and forward contracts are used by the Company to
procure raw materials, primarily coffee, cocoa, sugar, wheat and corn.
Commodity futures and options are also used to hedge the price of
certain commodities, primarily coffee and cocoa. Realized gains and
losses on commodity futures, forward contracts and options are deferred
as a component of raw materials and are recognized when related
materials costs are charged to cost of sales.
Accounting changes:
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No.
128 establishes standards for computing and presenting earnings per
share ("EPS") and requires the presentation of both basic and diluted
EPS. Prior years' EPS have been restated to conform with the standards
established by SFAS No. 128. The calculation of basic and diluted EPS
is presented in Note 10.
Effective January 1, 1997, the Company adopted the American Institute of
Certified Public Accountants' Accounting Standards Executive
Committee's Statement of Position ("SOP") No. 96-1, "Environmental
Remediation Liabilities." The adoption of SOP No. 96-1 at January 1,
1997 and its application during 1997 had no material effect on the
Company's 1997 financial position or results of operations.
Effective December 31, 1997, the Company adopted Emerging Issues Task
Force ("EITF") Issue No. 97-13, "Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project That
Combines Business Process Reengineering and Information Technology
Transformation." EITF Issue No. 97-13 requires companies to expense
rather than capitalize certain costs related to contracts or internal
projects that combine business process reengineering and information
technology transformation. The adoption of EITF Issue No. 97-13 during
the fourth quarter of 1997 had no material effect on the Company's 1997
financial position or results of operations.
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." 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
Continued
8
<PAGE> 10
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
no material effect 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 continues 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 9.
Effective January 1, 1995, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for
non-U.S. postretirement benefits other than pensions. The Company also
adopted SFAS No. 116, "Accounting for Contributions Received and
Contributions Made." The cumulative effect at January 1, 1995 of
adopting SFAS No. 106, for the non-U.S. plans, and SFAS No. 116 reduced
1995 net earnings and basic EPS by $28 million and $.01, respectively.
The application of SFAS No. 106, for non-U.S. plans, and SFAS No. 116
did not materially reduce 1995 earnings before cumulative effect of
accounting changes.
Note 2. Divestitures:
During 1997, the Company sold several domestic and international food
businesses, including its Brazilian ice cream businesses and its North
American maple-flavored syrup businesses, for total proceeds of $1.5
billion and net pretax gains of $958 million. In addition, the Company
sold its equity interest in a Canadian beer operation and sold a
minority interest in a beer import operation for proceeds of $306
million and a pretax gain of $12 million. The Company also sold its
real estate operations for total proceeds of $424 million and a pretax
gain of $103 million. The operating results of businesses divested in
1997 were not material to the Company's consolidated operating results
in any of the periods presented.
During 1996, the Company sold several domestic and international food
businesses, including its North American bagel business, for total
proceeds of $612 million and net pretax gains of $320 million. The
operating results of businesses divested in 1996 were not material to
the Company's consolidated operating results in any of the periods
presented.
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. 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.
Note 3. Acquisitions:
During 1997, the Company acquired a controlling interest in a Portuguese
tobacco company at a cost of $217 million and increased its ownership
interest in a Mexican cigarette business from 28.8% to 50.0% at a cost
of $403 million.
Continued
9
<PAGE> 11
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
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.
The effects of these and other smaller acquisitions were not material to
the Company's financial position or results of operations in any of the
periods presented.
Note 4. Food Realignment Charges
In the fourth quarter of 1997, the Company recorded a charge of $342
million related primarily to the downsizing or closure of manufacturing
and other facilities, as well as the discontinuance of certain
low-margin product lines of its international food operations. The
Company also recorded a charge of $288 million for incremental
postemployment benefits, primarily related to severance. These charges,
which were recorded to marketing, administration and research costs,
reduced 1997 earnings before income taxes by $630 million.
In 1996 and 1995, the Company recorded to marketing, administration and
research costs, charges of $320 million and $275 million, respectively,
related primarily to the downsizing and closure of certain food
manufacturing facilities, related incremental postemployment costs,
primarily severance, and an early retirement program.
Note 5. Inventories:
The cost of approximately 50% of inventories in 1997 and 1996 was
determined using the LIFO method. The stated LIFO values of inventories
were approximately $1.0 billion lower than the current cost of
inventories at December 31, 1997 and 1996, respectively.
Note 6. Short-Term Borrowings and Borrowing Arrangements:
At December 31, the Company's short-term borrowings and related average
interest rates consisted of the following:
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
(in millions)
Average Average
Amount Year-end Amount Year-end
Outstanding Rate Outstanding Rate
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Consumer products:
Bank loans $ 194 8.8% $ 295 8.1%
Commercial paper 1,373 5.7%
Amount reclassified
as long-term debt (37) (1,408)
------- -------
$ 157 $ 260
======= =======
Financial services and
real estate:
Commercial paper $ - $ 173 6.0%
======= =======
</TABLE>
The fair values of the Company's short-term borrowings at December 31,
1997 and 1996, 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 $12.0 billion at
Continued
10
<PAGE> 12
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
December 31, 1997. Approximately $11.8 billion of these facilities were
unused at December 31, 1997. Certain of these facilities are used to
support commercial paper borrowings, are available for acquisitions and
other corporate purposes and require the maintenance of a fixed charges
coverage ratio.
The Company's credit facilities include revolving bank credit agreements
totaling $10.0 billion. An agreement for $2.0 billion expires in
October 1998. An agreement for $8.0 billion, expiring in 2002, enables
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 7. Long-Term Debt:
At December 31, the Company's long-term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
(in millions)
<S> <C> <C>
Consumer products:
Short-term borrowings, reclassified $ 37 $ 1,408
Notes, 6.15% to 9.25% (average effective
rate 7.53%), due through 2008 9,735 9,550
Debentures, 6.00% to 8.50%
(average effective rate 9.66%),
$2.0 billion face amount,
due through 2027 1,830 1,046
Foreign currency obligations:
Swiss franc, 1.72% to 6.88%
(average effective rate 5.77%),
due through 2000 857 957
German mark, 5.63% and 6.38%
(average effective rate 6.0%),
due through 2002 341 411
Other foreign 61 49
Other 240 252
------- -------
13,101 13,673
Less current portion of long-term debt (1,516) (1,846)
------- -------
$11,585 $11,827
======= =======
Financial services and real estate:
Eurodollar note, 6.63%, due 1999 $ 200 $ 400
Foreign currency obligations:
ECU note, 8.50%, due 1998 165 372
German mark, 6.50% and 5.38%,
(average effective rate 5.88%)
due 2003 and 2004 311 166
French franc, 6.88%, due 2006 169 196
------- -------
$ 845 $ 1,134
======= =======
</TABLE>
Continued
11
<PAGE> 13
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Aggregate maturities of long-term debt, excluding short-term borrowings
reclassified as long-term debt, are as follows:
<TABLE>
<CAPTION>
Financial services and
Consumer products real estate
----------------- ----------------------
(in millions)
<S> <C> <C>
1998 $1,516 $165
1999 1,756 200
2000 797
2001 1,722
2002 1,337
2003-2007 4,467 480
2008-2012 670
Thereafter 981
</TABLE>
The revolving credit facility under which the consumer products short-term
debt was reclassified as long-term debt expires in 2002 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, 1997 and 1996 was $14.6
billion and $15.3 billion, respectively.
Note 8. Capital Stock:
In February 1997, the Company's Board of Directors declared a
three-for-one split of the Company's common stock, effected by a
distribution on April 10, 1997, of two shares for each share held of
record at the close of business on March 17, 1997. In addition, the par
value of the Company's common stock was changed from $1.00 to $0.33 1/3
per share and authorized shares of common stock were increased from 4
billion to 12 billion shares. All references in the consolidated
financial statements to shares and related prices, weighted average
number of shares, per share amounts and stock plan data have been
adjusted to reflect the split.
Shares of common stock issued, repurchased and outstanding were as
follows:
<TABLE>
<CAPTION>
Shares Shares Net Shares
Issued Repurchased Outstanding
------ ----------- -----------
<S> <C> <C> <C>
Balances, January 1, 1995 2,805,961,317 (247,384,122) 2,558,577,195
Exercise of stock options and
issuance of other stock awards 19,410,786 19,410,786
Repurchased (84,477,963) (84,477,963)
------------- ------------ -------------
Balances, December 31, 1995 2,805,961,317 (312,451,299) 2,493,510,018
Exercise of stock options and
issuance of other stock awards 23,672,505 23,672,505
Repurchased (85,836,249) (85,836,249)
------------- ------------ -------------
Balances, December 31, 1996 2,805,961,317 (374,615,043) 2,431,346,274
Exercise of stock options and
issuance of other stock awards 12,345,228 12,345,228
Repurchased (18,204,213) (18,204,213)
------------- ------------ -------------
Balances, December 31, 1997 2,805,961,317 (380,474,028) 2,425,487,289
============= ============ =============
</TABLE>
Continued
12
<PAGE> 14
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
At December 31, 1997, 188,254,449 shares of common stock were reserved for
stock options and other stock awards under the Company's stock plans
and 10 million shares of Serial Preferred Stock, $1.00 par value, were
authorized, none of which have been issued.
Note 9. Stock Plans:
Under the Philip Morris 1997 Performance Incentive Plan (the "Plan"), the
Company may grant to eligible employees stock options, stock
appreciation rights, restricted stock, and other stock-based awards, as
well as cash-based annual and long-term incentive awards. Up to 120
million shares of common stock may be issued under the Plan, of which
no more than 36 million shares may be awarded as restricted stock.
Shares available to be granted at December 31, 1997 were 104,181,840.
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 methodology 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 on the fair value at the grant date, the Company's net
earnings, basic EPS and diluted EPS would have been $6,218 million,
$2.57 and $2.55, respectively, for the year ended December 31, 1997;
$6,235 million, $2.54 and $2.51, respectively, for the year ended
December 31, 1996; and $5,422 million, $2.15 and $2.14, respectively,
for the year ended December 31, 1995. The foregoing impact of
compensation cost, calculated in accordance with the fair value method
prescribed by SFAS No. 123, was determined under the modified
Black-Scholes method using the following assumptions:
<TABLE>
<CAPTION>
Weighted
Average Expected
Risk-free Expected Expected Dividend Fair Value
Interest Rate Life Volatility Yield at Grant Date
------------- ---- ---------- ----- -------------
<S> <C> <C> <C> <C> <C>
1997 6.38% 5 27.86% 3.65% $10.83
1996 6.70% 5 23.80% 3.83% $ 7.73
1995 5.98% 5 21.18% 4.89% $ 4.07
</TABLE>
Continued
13
<PAGE> 15
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Option activity was as follows for the years ended December 31, 1995, 1996
and 1997:
<TABLE>
<CAPTION>
Weighted
Shares Subject Options Average
to Option Exercisable Exercise Price
-------------- ----------- --------------
<S> <C> <C> <C>
Balance at January 1, 1995 83,295,471 81,760,641 $17.58
Options granted 23,949,600 24.93
Options exercised (20,250,336) 15.23
Options cancelled (1,770,363) 22.82
------------
Balance at December 31, 1995 85,224,372 62,102,802 20.09
Options granted 22,627,215 36.08
Options exercised (25,310,940) 18.94
Options cancelled (1,327,266) 26.21
------------
Balance at December 31, 1996 81,213,381 58,949,796 24.81
Options granted 16,105,390 43.88
Options exercised (12,782,568) 19.86
Options cancelled (890,644) 34.75
------------
------
Balance at December 31, 1997 83,645,559 67,827,399 $29.13
============
</TABLE>
The weighted average exercise prices of options exercisable at December
31, 1997, 1996 and 1995 were $25.69, $20.56 and $18.28, respectively.
The following table summarizes the status of stock options outstanding and
exercisable as of December 31, 1997, by range of exercise price:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<C> <C> <C> <C> <C> <C>
$ 6.97-$15.66 6,234,769 2 years $13.31 6,234,769 $13.31
$15.67-$24.99 39,874,474 6 years 22.17 39,874,474 22.17
$25.00-$45.16 37,536,316 8 years 39.15 21,718,156 35.70
---------- ----------
83,645,559 67,827,399
========== ==========
</TABLE>
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 1997, 1996 and 1995 the Company granted
692,100, 180,000 and 636,000 shares, respectively, of restricted stock
to eligible U.S. based employees and also issued to eligible non-U.S.
employees rights to receive 392,400 and 144,000 like shares,
respectively, in 1997 and 1995. At December 31, 1997, restrictions on
the stock, net of forfeitures, lapse as follows: 1998-150,000 shares;
1999-60,000 shares; 2000-774,600 shares; 2002-1,407,750 shares; and
2003 and thereafter-159,000 shares.
Continued
14
<PAGE> 16
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
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 $49 million on December 31, 1997.
Note 10. Earnings per Share:
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
per Share." Prior years' earnings per share have been restated. Basic
and diluted earnings per share were calculated using the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(in millions)
<S> <C> <C> <C>
Net earnings $6,310 $6,303 $5,450
====== ====== ======
Weighted average shares for
basic EPS 2,420 2,456 2,517
Plus incremental shares from conversions:
Restricted stock and stock rights 1 8 7
Stock options 21 18 14
------ ------ ------
Weighted average shares for
diluted EPS 2,442 2,482 2,538
====== ====== ======
</TABLE>
In 1997, 1996, and 1995, options on 11,988,118, 18,737,224 and 19,971,870
shares of common stock, respectively, were not included in the
calculation of weighted average shares for diluted EPS because their
effects were antidilutive.
Note 11. Pretax Earnings and Provision for Income Taxes:
Pretax earnings and provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- ------
(in millions)
<S> <C> <C> <C>
Pretax earnings:
United States $ 7,515 $ 7,399 $6,622
Outside United States 3,096 3,284 2,725
------- -------- ------
Total pretax earnings $10,611 $ 10,683 $9,347
======= ======== ======
Provision for income taxes:
United States federal:
Current $ 2,027 $ 1,836 $1,946
Deferred 12 438 97
------- -------- ------
2,039 2,274 2,043
State and local 354 430 434
------- -------- ------
Total United States 2,393 2,704 2,477
------- -------- ------
Outside United States:
Current 1,851 1,727 1,175
Deferred 57 (51) 217
------- -------- ------
Total outside United States 1,908 1,676 1,392
------- -------- ------
Total provision for income taxes $ 4,301 $ 4,380 $3,869
======= ======== ======
</TABLE>
Continued
15
<PAGE> 17
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
At December 31, 1997, applicable United States federal income taxes and
foreign withholding taxes have not been provided on approximately $3.0
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 $167 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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Provision computed at U.S. federal
statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes, net of
federal tax benefit 2.2 2.6 3.0
Rate differences - foreign operations 3.7 3.3 1.9
Goodwill amortization 1.7 1.8 2.1
Other (2.1) (1.7) (0.6)
---- ---- ----
Provision for income taxes 40.5% 41.0% 41.4%
==== ==== ====
</TABLE>
The tax effects of temporary differences which gave rise to consumer
products deferred income tax assets and liabilities consisted of the
following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
(in millions)
<S> <C> <C>
Deferred income tax assets:
Accrued postretirement and postemployment
benefits $ 1,084 $ 1,070
Accrued liabilities 577 588
Restructuring, strategic and other reserves 427 315
Settlement charges 261
Other 249 399
------- -------
Gross deferred income tax assets 2,598 2,372
Valuation allowance (82) (87)
------- -------
Total deferred income tax assets 2,516 2,285
------- -------
Deferred income tax liabilities:
Property, plant and equipment (1,695) (1,699)
Prepaid pension costs (326) (286)
------- -------
Total deferred income tax liabilities (2,021) (1,985)
------- -------
Net deferred income tax assets $ 495 $ 300
======= =======
</TABLE>
Financial services and real estate deferred income tax liabilities are
primarily attributable to temporary differences from investments in
finance leases.
Continued
16
<PAGE> 18
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Note 12. 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 general corporate expenses. Substantially all goodwill
amortization is attributable to the food segment. Identifiable assets
are those assets applicable to the respective industry segments.
See Notes 2, 3 and 4 regarding divestitures, acquisitions and the
realignment of international food operations. Additionally, operating
profit for the year ended December 31, 1997 for the tobacco segment
included charges of $1,457 million for the settlement of certain
domestic tobacco litigation.
Continued
17
<PAGE> 19
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Reportable segment data were as follows:
<TABLE>
<CAPTION>
Data by Segment for the years ended December 31,
------------------------------------------------
1997 1996 1995
------- ------- -------
(in millions)
<S> <C> <C> <C>
Operating revenues:
Tobacco $39,824 $36,549 $32,316
Food 27,690 27,950 29,074
Beer 4,201 4,327 4,304
Financial services and real estate 340 378 377
------- ------- -------
Total operating revenues $72,055 $69,204 $66,071
======= ======= =======
Operating profit:
Tobacco $ 7,830 $ 8,263 $ 7,177
Food 3,647 3,362 3,188
Beer 456 437 444
Financial services and real estate 296 192 164
------- ------- -------
Total operating profit 12,229 12,254 10,973
General corporate expenses 566 485 447
------- ------- -------
Operating income $11,663 $11,769 $10,526
======= ======= =======
Identifiable assets:
Tobacco $14,820 $13,314 $11,196
Food 30,926 32,934 33,447
Beer 1,455 1,707 1,751
Financial services and real estate 5,886 5,917 5,632
------- ------- -------
53,087 53,872 52,026
Other assets 2,860 999 1,785
------- ------- -------
Total assets $55,947 $54,871 $53,811
======= ======= =======
Depreciation expense:
Tobacco $ 407 $ 378 $ 350
Food 514 538 556
Beer 104 104 101
Capital expenditures:
Tobacco $ 937 $ 829 $ 525
Food 738 812 948
Beer 115 122 115
</TABLE>
Continued
18
<PAGE> 20
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
<TABLE>
<CAPTION>
Data by Geographic Region for the years ended December 31,
----------------------------------------------------------
1997 1996 1995
------- ------- -------
(in millions)
<S> <C> <C> <C>
Operating revenues:
United States - domestic $33,208 $31,993 $32,479
- export 6,705 6,476 5,920
Europe 24,796 24,232 23,076
Other 7,346 6,503 4,596
------- ------- -------
Total operating revenues $72,055 $69,204 $66,071
======= ======= =======
Operating profit:
United States $ 8,149 $ 8,762 $ 8,031
Europe 2,560 2,635 2,366
Other 1,520 857 576
------- ------- -------
Total operating profit 12,229 12,254 10,973
General corporate expenses 566 485 447
------- ------- -------
Operating income $11,663 $11,769 $10,526
======= ======= =======
Identifiable assets:
United States $33,734 $33,314 $32,521
Europe 15,209 15,836 15,981
Other 4,144 4,722 3,524
------- ------- -------
53,087 53,872 52,026
Other assets 2,860 999 1,785
------- ------- -------
Total assets $55,947 $54,871 $53,811
======= ======= =======
</TABLE>
Note 13. 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
19
<PAGE> 21
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
U.S. Plans
Net pension (income) cost consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -------
(in millions)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 137 $ 143 $ 110
Interest cost on projected benefit obligation 382 373 367
Return on assets - actual (1,308) (980) (1,344)
- deferred gain 744 447 848
Amortization of net gain upon
adoption of SFAS No. 87 (24) (25) (26)
Amortization of unrecognized net loss (gain)
from experience differences 9 (13)
Amortization of prior service cost 14 14 13
Other (income) cost (22) (35) 75
------- ----- -------
Net pension (income) cost $ (77) $ (54) $ 30
======= ===== =======
</TABLE>
During 1997, 1996 and 1995, the Company sold businesses and instituted
early retirement and workforce reduction programs resulting in
settlement gains of $22 million in 1997, settlement gains of $69
million and additional pension cost of $34 million in 1996, and
additional pension cost of $103 million and curtailment gains of $28
million in 1995.
The funded status of U.S. plans at December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(in millions)
<S> <C> <C>
Actuarial present value of accumulated
benefit obligation - vested $ 4,221 $ 3,871
- nonvested 458 359
------- -------
4,679 4,230
Benefits attributable to projected salaries 844 650
------- -------
Projected benefit obligation 5,523 4,880
Plan assets at fair value 8,085 7,101
------- -------
Excess of assets over projected
benefit obligation 2,562 2,221
Unamortized net gain upon
adoption of SFAS No. 87 (83) (108)
Unrecognized prior service cost 121 124
Unrecognized net gain from
experience differences (1,659) (1,404)
------- -------
Prepaid pension cost $ 941 $ 833
======= =======
</TABLE>
The projected benefit obligation at December 31, 1997, 1996 and 1995 was
determined using an assumed discount rate of 7.25%, 7.75% and 7.25%,
respectively, and assumed compensation increases of 4.5% at December
31, 1997, 1996 and 1995. The assumed long-term rate of return on plan
assets was 9% at December 31, 1997, 1996 and 1995. Plan assets consist
principally of common stock and fixed income securities.
Continued
20
<PAGE> 22
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 $200
million, $199 million and $191 million in 1997, 1996 and 1995,
respectively.
In addition, certain of the Company's subsidiaries participate in
multiemployer defined benefit plans. Contributions to these plans were
immaterial in 1997, 1996 and 1995.
Non-U.S. Plans
Net pension cost consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 83 $ 80 $ 80
Interest cost on projected benefit obligation 163 166 160
Return on assets - actual (269) (201) (195)
- deferred gain 134 70 74
Amortization of net deferred charges 5 3 1
----- ----- -----
Net pension cost $ 116 $ 118 $ 120
===== ===== =====
</TABLE>
The funded status of the non-U.S. plans at December 31 was as follows:
<TABLE>
<CAPTION>
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
-------------------- --------------------
1997 1996 1997 1996
------- ------- ----- -----
(in millions)
<S> <C> <C> <C> <C>
Actuarial present value of
accumulated benefit
obligation - vested $ 1,387 $ 1,336 $ 731 $ 721
- nonvested 38 39 83 77
------- ------- ----- -----
1,425 1,375 814 798
Benefits attributable to
projected salaries 341 342 121 127
------- ------- ----- -----
Projected benefit obligation 1,766 1,717 935 925
Plan assets at fair value 2,074 1,891 115 36
------- ------- ----- -----
Plan assets in excess of (less
than) projected benefit
obligation 308 174 (820) (889)
Unamortized net (gain) loss
upon adoption of SFAS No. 87 (11) (14) 22 13
Unrecognized net (gain) loss
from experience differences (156) (22) 9 (5)
------- ------- ----- -----
Prepaid (accrued) pension cost $ 141 $ 138 $(789) $(881)
======= ======= ===== =====
</TABLE>
Continued
21
<PAGE> 23
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
The assumptions used in 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rates 3.5% to 12.0% 4.0% to 12.0% 4.5% to 10.0%
Compensation increases 3.0% to 10.0% 3.0% to 10.5% 3.5% to 9.0%
Long-term rates of
return on plan assets 4.0% to 13.0% 4.0% to 13.0% 4.5% to 11.0%
</TABLE>
Plan assets consist primarily of common stock and fixed income securities.
Note 14. 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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in millions)
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 54 $ 59 $ 46
Interest cost on accumulated postretirement
benefit obligation 182 180 179
Amortization of unrecognized net (gain) loss
from experience differences (3) 4 (2)
Amortization of unrecognized prior service cost (12) (12) (13)
Other income (8) (13)
----- ----- -----
Net postretirement health care costs $ 221 $ 223 $ 197
===== ===== =====
</TABLE>
During 1996 and 1995, the Company sold businesses and instituted early
retirement and workforce reduction programs resulting in curtailment
gains included above in other income.
The Company's postretirement health care plans currently are not funded.
The status of the plans at December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(in millions)
<S> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $ 1,522 $ 1,289
Fully eligible active plan participants 222 278
Other active plan participants 883 859
------- -------
2,627 2,426
Unrecognized net loss from experience
differences (173) (75)
Unrecognized prior service cost 109 127
------- -------
Accrued postretirement health care costs $ 2,563 $ 2,478
======= =======
</TABLE>
Continued
22
<PAGE> 24
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for U.S. plans was 8.5% in 1996, 8.0%
in 1997 and 7.5% in 1998, 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 14.0% in 1996, 13.0% in 1997 and 12.0%
in 1998, gradually declining to 4.0% 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, 1997
and net postretirement health care cost for the year then ended by
approximately 15.0% and 10.0%, respectively.
The accumulated postretirement benefit obligations for U.S. plans at
December 31, 1997, 1996 and 1995 were determined using assumed discount
rates of 7.25%, 7.75% and 7.25%, respectively. The accumulated
postretirement benefit obligation at December 31, 1997, 1996 and 1995
for Canadian plans was determined using an assumed discount rate of
6.50%, 7.50% and 8.25%, respectively.
Continued
23
<PAGE> 25
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Note 15. Contingencies:
Legal proceedings covering a wide range of matters are pending in various
U.S. and foreign jurisdictions against the Company, its subsidiaries,
including Philip Morris Incorporated ("PM Inc."), the Company's
domestic tobacco subsidiary, and their respective indemnitees. Various
types of claims are raised in these proceedings, including products
liability, consumer protection, antitrust, securities law, tax, patent
infringement, employment matters and claims for contribution.
OVERVIEW OF TOBACCO-RELATED LITIGATION
Types and Number of Cases
Pending claims related to tobacco products generally fall within three
categories: (i) smoking and health cases alleging personal injury
brought on behalf of individual plaintiffs, (ii) smoking and health
cases alleging personal injury and purporting to be brought on behalf
of a class of individual plaintiffs, and (iii) health care cost
recovery cases, including class actions, brought by state and local
governments, unions, federal and state taxpayers, native American
tribes and others seeking reimbursement for Medicaid and/or other
health care expenditures allegedly caused by cigarette smoking. Damages
claimed in some of the smoking and health class actions and health care
cost recovery cases range into the billions of dollars.
In recent years there has been a substantial increase in the number of
smoking and health cases being filed in the United States, a trend
which accelerated in 1997.
As of December 31, 1997, there were approximately 375 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 (excluding
approximately 50 cases in Texas that were voluntarily dismissed but
which may be refiled under certain conditions), compared with
approximately 185 such cases as of December 31, 1996. Many of the new
cases were filed in Florida and New York. Seventeen of the individual
cases involve allegations of various personal injuries allegedly
related to exposure to environmental tobacco smoke ("ETS").
In addition, as of December 31, 1997, there were approximately 50
purported smoking and health class actions pending in the United States
against PM Inc. and, in some cases, the Company (including six that
involve allegations of various personal injuries related to exposure to
ETS), compared with approximately 20 such cases on December 31, 1996.
Most of these actions purport to constitute statewide class actions and
were filed after May 1996 when the Fifth Circuit Court of Appeals, in
the Castano case, reversed a federal district court's certification of
a purported nationwide class action on behalf of persons who were
allegedly "addicted" to tobacco products. As of December 31, 1997,
there were three purported smoking and health class actions pending
overseas against affiliates and subsidiaries of the Company, in Canada,
Brazil and Nigeria.
The number of health care cost recovery actions also increased during
1997, with approximately 105 such cases pending as of December 31,
1997, compared with approximately 25 such cases on December 31, 1996.
Continued
24
<PAGE> 26
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Recent Verdicts
In August 1996, a Florida 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.), and
that manufacturer was subsequently ordered to pay approximately $1.8
million in attorneys' fees and costs. Neither PM Inc. nor the Company
was a party to that litigation. The 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 filed a motion seeking
a new trial based on the alleged discovery of new evidence. In May and
October 1997, Florida juries also returned verdicts for defendants in
smoking and health cases involving another United States cigarette
manufacturer (Connor v. R.J. Reynolds Tobacco Company; Karbiwnyk v.
R.J. Reynolds Tobacco Company). In September 1997, a court in Brazil
awarded plaintiffs in a smoking and health case the Brazilian currency
equivalent of $81,000, attorneys' fees (in an amount to be determined
by the court) and a monthly annuity for 35 years equal to two-thirds of
the deceased smoker's last monthly salary (Alves v. Souza Cruz).
Defendant is appealing the judgment. Neither the Company nor its
affiliates were parties to that action.
Recent Settlements
In June 1997, PM Inc. and other companies in the United States tobacco
industry agreed to a proposed Resolution to support federal legislation
and ancillary undertakings that would resolve many of the regulatory
and litigation issues affecting the industry. (See "Proposed Resolution
of Certain Regulatory and Litigation Issues" below). In furtherance of
the proposed Resolution, PM Inc. and other companies in the United
States tobacco industry settled health care cost recovery actions
brought by the States of Mississippi, Florida and Texas and a smoking
and health class action brought on behalf of airline flight attendants,
all on terms consistent with the proposed Resolution. These settlements
are discussed below.
Trial Dates
Trial in a health care cost recovery case brought by the State of
Minnesota began in January 1998. A number of other health care cost
recovery and smoking and health cases pending against PM Inc. and, in
some cases, the Company, are scheduled for trial during 1998. The
following health care cost recovery actions are currently scheduled for
trial later in 1998: Washington (September), Arizona (October) and
Oklahoma (November). Approximately 25 individual cases are currently
scheduled for trial in 1998 against PM Inc. and, in some cases, the
Company, of which approximately 20 are set for trial in Florida
commencing in June 1998. Trials in New York and Florida class actions,
previously scheduled to begin in February, have been delayed (Frosina,
et al. v. Philip Morris, Inc., et al.; and Engle, et al. v. R.J.
Reynolds Tobacco Company, et al.).
A description of the smoking and health litigation, health care cost
recovery litigation and certain other proceedings pending against the
Company and/or its subsidiaries and affiliates follows.
Continued
25
<PAGE> 27
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, breach of
special duty, conspiracy, concert of action, violations of deceptive
trade practice laws and consumer protection statutes, and claims under
the federal Racketeer Influenced and Corrupt Organization Act ("RICO")
and state RICO statutes. Plaintiffs in these actions seek various forms
of relief, including compensatory and punitive damages, treble/multiple
damages and other statutory damages and penalties, creation of medical
monitoring funds, disgorgement of profits, and injunctive and equitable
relief. Defenses raised in these cases include lack of proximate cause,
assumption of the risk, comparative fault and/or contributory
negligence, statutes of limitations, and preemption by the Federal
Cigarette Labeling and Advertising Act (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 further 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.
In May 1996, the Fifth Circuit Court of Appeals held that a purported
class consisting of all "addicted" smokers nationwide did not meet the
standards and requirements of the federal rules governing class actions
(Castano, et al. v. The American Tobacco Company, et al.). Since this
class decertification, lawyers for plaintiffs have filed numerous
smoking and health class action suits in various state and federal
courts. In general, these cases purport to be brought on behalf of
residents of a particular state or states and raise "addiction" claims
similar to those raised in the Castano case and, in some cases, claims
of physical injury as well. As of December 31, 1997, smoking and health
class actions were pending in Alabama, Arkansas, California, the
District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana,
Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Mississippi,
Nevada, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania,
Puerto Rico, South Carolina, South Dakota, Tennessee, Texas, West
Virginia and Wisconsin, as well as in Canada, Brazil and Nigeria.
Classes have been certified in four of these smoking and health class
actions, in Florida, Louisiana and New York (2). Class certification
has been denied or reversed in three cases involving PM Inc., in
Louisiana, the District of Columbia and Pennsylvania. One smoking and
health class action was settled in 1997 as discussed below.
Continued
26
<PAGE> 28
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
The Broin Settlement
The Broin, et al. v. Philip Morris Incorporated, et al. class action was
settled in October 1997 by PM Inc. and other companies in the domestic
tobacco industry, subject to final approval by the Florida state
court. A number of third parties have filed objections to the
settlement.
The Broin class consisted of "all non-smoking flight attendants who are
or have been employed by airlines based in the United States and are
suffering from various diseases and disorders caused by their exposure
to second-hand smoke in airline cabins." Under the settlement, the
settling defendants will pay $300 million to establish a foundation to
sponsor scientific research with respect to diseases associated with
cigarette smoking. These funds will be paid in three equal annual
installments, with interest, commencing in April 1998. Settling
defendants also agreed to pay attorneys' fees of up to $46 million and
costs of $3 million, subject to court approval. PM Inc.'s share of all
the foregoing payments (exclusive of interest) is approximately $175
million and was charged to expense in the third quarter of 1997. Under
the settlement, all defendants (and certain other entities and
persons) are released from liability for the claims asserted in the
present action. Each individual member of the class, however, may
later bring an individual action for diseases and conditions existing
on or before January 15, 1997 ("retained claims"), based upon certain
legal theories against the settling defendants, but may only seek
compensatory, and not punitive, damages.
The defendants expressly did not admit liability for injury of any member
of the settlement class or that ETS can cause any disease. In any
individual lawsuits brought by members of the settlement class for
retained claims, the settling defendants would assume the burden of
proof as to whether ETS can cause certain conditions, but the
plaintiff would retain the burden of proving that his or her condition
was caused by exposure to ETS. The settling defendants have also
agreed not to raise a statute of limitations defense with respect to
any retained claims brought by a member of the settlement class within
one year after final court approval of the settlement. The settlement
does not apply to, nor does it have any effect on, "future" claims
brought by members of the settlement class for any new and unrelated
diseases or conditions arising after January 15, 1997.
HEALTH CARE COST RECOVERY LITIGATION
In certain of the pending proceedings, foreign, state and local
government entities, unions, federal and state taxpayers, native
American tribes and others seek reimbursement for Medicaid and/or
other health care expenditures allegedly caused by tobacco products
and, in some cases, for future expenditures and damages as well.
Certain of these cases purport to be brought on behalf of a class of
plaintiffs, and in some cases, the class has been certified by the
court. In two health care cost recovery cases, private citizens seek
recovery of alleged tobacco-related health care expenditures incurred
by the federal Medicare and/or Medicaid programs and, in another case,
seek recovery of such expenditures by the Department of Defense and
the Department of Veterans Administration. In one purported class
action, Blue Cross/Blue Shield subscribers in the United States are
seeking reimbursement of allegedly increased medical insurance
premiums caused by tobacco products. In the native American cases,
claims are also asserted for alleged lost
Continued
27
<PAGE> 29
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
productivity of tribal government employees. Other relief sought by
some but not all plaintiffs includes punitive damages,
treble/multiple damages and other statutory damages and penalties,
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.
The claims asserted in these health care cost recovery actions vary. In
most cases, 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 federal
and state statutes governing consumer fraud, antitrust, deceptive
trade practices and false advertising, and claims under federal and
state RICO statutes.
Defenses raised 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 the plaintiff benefits economically from the
sale of cigarettes through the receipt of excise taxes or otherwise.
Defendants also argue that 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 declaratory judgment actions in a number of states seeking to
block the state's health care cost recovery action and/or to prevent
the state from hiring contingency fee counsel.
As of December 31, 1997, there were approximately 105 health care cost
recovery cases pending against PM Inc. and, in some cases, the
Company, including cases filed by states, through their attorneys
general and/or other state agencies, in Alaska, Arizona, Arkansas,
California, Colorado, Connecticut, Georgia, Hawaii, Idaho, Illinois,
Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New
Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania,
Rhode Island, South Carolina, Utah, Vermont, Washington, West Virginia
and Wisconsin. In addition, approximately 45 of the pending health
care cost recovery
Continued
28
<PAGE> 30
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
actions were filed by unions, eight by city and county governments,
six by federal and state taxpayers and four by native American
tribes. Health care cost recovery actions have also been brought by
the Republic of the Marshall Islands and the Commonwealth of Puerto
Rico. Three health care cost recovery cases were settled recently as
discussed below.
The Mississippi, Florida and Texas Settlements
In June 1997, PM Inc. and other companies in the United States tobacco
industry agreed to a proposed Resolution to support federal
legislation and ancillary undertakings that would resolve much of the
litigation facing the United States tobacco industry. (See "Proposed
Resolution of Certain Regulatory and Litigation Issues" below.) In
furtherance of the proposed Resolution, PM Inc. and other companies in
the United States tobacco industry settled health care cost recovery
actions brought by the States of Mississippi, Florida and Texas on
terms consistent with the proposed Resolution. The Mississippi action
was settled in July 1997, Florida was settled in September 1997 and
Texas was settled in January 1998.
Under the Mississippi settlement agreement, the settling defendants paid
$170 million, representing Mississippi's estimated share of the $10
billion initial payment under the proposed Resolution, and paid an
additional $15 million to reimburse Mississippi and its private
counsel for out-of-pocket costs. The settling defendants also paid
approximately $62 million to support a pilot program aimed at reducing
the use of tobacco products by persons under the age of eighteen. PM
Inc.'s share of all the foregoing payments, approximately $153
million, was charged to expense in the third quarter of 1997.
Beginning December 31, 1998, the settling defendants will pay Mississippi
amounts based on its anticipated share of the annual industry payments
under the proposed Resolution. These payments, which (except for the
payment with respect to 1998) will be adjusted as provided in the
proposed Resolution, are estimated to be $68 million with respect to
1998 and will increase annually thereafter to an estimated $136
million by 2003, continuing at that level thereafter, and will be
allocated among the settling defendants in accordance with their
relative unit volume of domestic tobacco product sales.
Under the Florida settlement agreement, the settling defendants paid $550
million, representing Florida's estimated share of the $10 billion
initial payment under the proposed Resolution, and also reimbursed
Florida's expenses and those of its private counsel. The settling
defendants also paid $200 million to support a pilot program by
Florida aimed at reducing the use of tobacco products by persons under
the age of eighteen. PM Inc.'s share of all the foregoing payments,
approximately $484 million, was charged to expense in the third
quarter of 1997.
On September 15, 1998, and annually thereafter on December 31, the
settling defendants will make ongoing payments to Florida in the
following estimated amounts - 1998: $220 million; 1999: $247.5
million; 2000: $275 million; 2001: $357.5 million; 2002: $357.5
million; and each year thereafter: $440 million. These amounts are
projected to approximate that portion of the annual industry payments
under the proposed Resolution which is contemplated to be paid to
Florida. These payments
Continued
29
<PAGE> 31
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
(except for the payment with respect to 1998) will be adjusted as
provided in the proposed Resolution and will be allocated among the
settling defendants in accordance with their relative unit volume of
domestic tobacco product sales.
Under the Texas settlement agreement, the settling defendants agreed to
pay Texas an up-front payment of $725 million in 1998, representing
Texas's estimated share of the $10 billion initial payment under the
proposed Resolution, and agreed to reimburse Texas and its private
counsel for expenses in the estimated amount of $45 million. The
settling defendants also agreed to pay Texas $264 million to support a
pilot program aimed at reducing the use of tobacco by persons under
the age of eighteen. PM Inc.'s share of all of the foregoing payments,
approximately $645 million, was charged to expense in the fourth
quarter of 1997.
Beginning in November and December 1998, and on December 31 of each
subsequent year, the settling defendants will pay Texas 7.25% of the
annual industry payments contemplated to be paid to the states under
the proposed Resolution. These payments, which (except for the
payments with respect to 1998) will be adjusted as provided in the
proposed Resolution, will be in the following estimated amounts -
1998: $290 million; 1999: $326 million; 2000: $363 million; 2001: $471
million; 2002: $471 million; and 2003 and each year thereafter: $580
million. These payments will be allocated among the settling
defendants in accordance with their relative unit volume of domestic
tobacco product sales.
The settling defendants have also agreed to pay reasonable attorneys'
fees of private contingency fee counsel of Mississippi, Florida and
Texas as set by a panel of independent arbitrators. Each of these
payments would be allocated among the settling defendants in
accordance with their relative unit volume of domestic tobacco product
sales and will be subject to an aggregate national annual cap of $500
million. Certain of Florida's private contingency fee counsel have
challenged the attorneys' fees provision set forth in the Florida
settlement agreement, arguing that the settlement agreement has no
effect on their rights under their contingency fee agreement with
Florida. In November 1997, the court ordered all parties to comply
with the provisions for obtaining attorneys' fees, as set forth in the
settlement agreement. Certain contingency fee counsel are appealing
this ruling. One of these contingency fee counsel has filed suit
against PM Inc. and others alleging, among other things, tortious
interference with such counsel's contingency fee agreement with the
State.
If legislation implementing the proposed Resolution or its substantial
equivalent is enacted, the settlements will remain in place, but the
terms of the federal legislation will supersede the settlement
agreements (except for the terms of the pilot programs and payments
thereunder, the initial payments and the annual payments with respect
to 1998), and the other payments described above will be adjusted so
that Mississippi, Florida and Texas will receive the same payments as
they would receive under such legislation.
Continued
30
<PAGE> 32
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
If the settling defendants enter into any future pre-verdict settlement
agreement with a non-federal governmental plaintiff on more favorable
terms (after due consideration of relevant differences in population
or other appropriate factors), Mississippi, Florida and Texas will
obtain treatment at least as relatively favorable as such governmental
plaintiff.
If federal legislation implementing the proposed Resolution or its
substantial equivalent is enacted, the parties contemplate that
Mississippi, Florida and Texas and any other state that has made an
exceptional contribution to secure resolution of these matters may
apply to a panel of independent arbitrators for reasonable
compensation for its efforts in securing the proposed Resolution. The
settling defendants have agreed not to oppose applications for $75
million by Mississippi, $250 million by Florida and $329.5 million by
Texas, subject to a nationwide annual cap for all such payments of
$100 million.
Finally, the settlement agreements provide that they are not an admission
or concession or evidence of any liability or wrongdoing on the part
of any party, and were entered into by the settling defendants solely
to avoid the further expense, inconvenience, burden and uncertainty of
litigation.
CERTAIN OTHER TOBACCO-RELATED LITIGATION
In June 1995, an action was filed in federal court in Maryland against PM
Inc. seeking certification of a purported class consisting of "all
persons and estates injured as a result of the defendant's alleged
failure to manufacture a fire safe cigarette since 1987" (Sacks, et
al. v. Philip Morris Inc.). 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 granting defendant's motion to
dismiss. Plaintiffs have appealed the order.
In September 1997, a purported class action was commenced by private
plaintiffs in Alabama state court alleging that the U.S. tobacco
companies and others conspired to fix cigarette prices in Alabama,
that agreements leading to price increases were reached during the
negotiations leading to the proposed Resolution discussed below, and
that prices were increased pursuant to the alleged conspiracy in 1997
(Mosley, et al. v. Philip Morris Companies Inc., et al.). The
purported class consists of Alabama residents who purchased cigarettes
in 1997. Plaintiffs seek actual damages of no more than $500 per class
member and statutory damages of $500 for each instance of injury or
damages, and costs and interest. In September 1997, the state court
conditionally certified the class. Defendants subsequently removed the
case to federal court, and the federal court then vacated the state
court's conditional class certification.
Since September 1997, six suits have been filed by former asbestos
manufacturers and asbestos manufacturers' personal injury settlement
trusts against domestic tobacco manufacturers, including PM Inc., and
others (Raymark Industries, Inc. v. Brown & Williamson Tobacco
Corporation, et al.; Raymark Industries, Inc. v. R.J. Reynolds Tobacco
Continued
31
<PAGE> 33
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Company, et al.; Fibreboard Corporation and Owens Corning v. The
American Tobacco Company, et al.; Robert A. Falise, et al., Trustees
of the Manville Personal Injury Settlement Trust v. The American
Tobacco Company, et al.; Keene Creditors Trust v. Brown & Williamson
Tobacco Corporation, et al.; and H.K. Porter Company, Inc. v. B.A.T.
Industries, PLC, et al.). These cases seek, among other things,
contribution or reimbursement for amounts expended for the defense
and payment of asbestos claims that were allegedly caused in whole
or in part by cigarette smoking. Plaintiffs in most of these cases
also seek punitive damages.
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.). Plaintiffs allege that defendants violated
the federal securities laws by maintaining artificially high levels of
profitability through an inventory management practice pursuant to
which defendants allegedly shipped more inventory to customers than
was necessary to satisfy market demand. In August 1995, the court
granted plaintiffs' motion for class certification, certifying a class
of all persons who purchased common stock of the Company between July
10, 1991 and April 1, 1993, and who held such stock at the close of
business on April 1, 1993.
In April 1994, the Company, PM Inc. and certain officers and directors
were named as defendants in several purported class actions that were
later consolidated in the United States District Court in the Southern
District of New York (Kurzweil, et al. v. Philip Morris Companies
Inc., et al. and State Board of Administration of Florida, et al. v.
Philip Morris Companies Inc., et al.). In those cases, plaintiffs
asserted that defendants violated federal securities laws by making
allegedly false and misleading statements regarding the allegedly
"addictive" qualities of cigarettes. In September 1995, the court
granted defendants' motion to dismiss the two complaints in their
entirety. The court then granted plaintiffs in the State Board action
leave to replead one of their claims. The court dismissed the State
Board claims in April 1996 and the Kurzweil claims in August 1996. In
April 1997, the court granted a motion filed by the Kurzweil
plaintiffs to vacate the judgment and for leave to amend their
complaint.
Since April 1996, five purported class action suits have been filed in
Wisconsin alleging that Kraft Foods, Inc. ("Kraft") and others engaged
in a conspiracy to fix and depress the prices of bulk cheese and milk
through their trading activity on the National Cheese Exchange
(Stuart, et al. v. Kraft Foods, Inc., et al.; Sheeks, et al. v. Kraft
Foods, Inc., et al.; Servais, et al. v. Kraft Foods, Inc. and the
National Cheese Exchange, Inc.; Dodson, et al. v. Kraft Foods, Inc.,
et al.; and Noll, et al. v. Kraft Foods, Inc., et al.). Plaintiffs
seek injunctive and equitable relief and treble damages. The court has
granted the Sheeks and Stuart plaintiffs' motions for voluntary
dismissal without prejudice. Plaintiffs in the three remaining cases
have filed a consolidated class action complaint in Wisconsin seeking
certification
Continued
32
<PAGE> 34
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
of a class consisting of all milk producers in the U.S. In October 1997,
a purported class action suit was filed in Illinois against Kraft only
(Vincent, et al. v. Kraft Foods, Inc.). This suit contains allegations
similar to those in the consolidated Wisconsin class action, but only
seeks a class comprising Kraft's milk suppliers.
Tax assessments alleging the nonpayment of taxes in Italy (value-added
taxes for the years 1988 to 1995 and income taxes for the years 1987
to 1995) have been served upon certain affiliates of the Company. The
aggregate amount of unpaid taxes assessed to date is alleged to be the
Italian lira equivalent of $2.5 billion. In addition, the Italian lira
equivalent of $6.0 billion in interest and penalties has been
assessed. The Company anticipates that value-added and income tax
assessments may also be received in respect of 1996. In September
1997, in the first of several appeals filed by an affiliate of the
Company, the Italian administrative tax court in Milan overturned one
of the assessments for value-added taxes. A hearing on a second appeal
was held in October 1997, and hearings on additional appeals were held
in December 1997 and January 1998. Additional hearings are anticipated
over the course of 1998. In a separate proceeding in Naples, a court
has dismissed charges of criminal association against certain present
and former officers and directors of affiliates of the Company, but
permitted charges of tax evasion to proceed to trial. The Company, its
affiliates and the officers and directors who are subject to the
proceedings believe they have complied with applicable Italian tax
laws and are vigorously contesting the pending tax assessments and the
pending proceedings in Naples.
It is not possible to predict the outcome of the litigation pending
against the Company and its subsidiaries. Litigation is subject to
many uncertainties, and it is possible that some of these actions
could be decided unfavorably. An unfavorable outcome of a pending
smoking and health case could encourage the commencement of additional
similar litigation. There have also been a number of adverse
legislative, regulatory, political and other developments concerning
cigarette smoking and the tobacco industry that have received
widespread media attention, including a decision by a federal district
court on a motion for summary judgment not to preclude the United
States Food and Drug Administration (the "FDA") from asserting
jurisdiction over cigarettes as "drugs" or "medical devices," which
decision is now under appeal. These developments, as well as the
widespread media attention given to the proposed Resolution discussed
below and the settlements of the Mississippi, Florida and Texas health
care cost recovery actions and the Broin class action, may negatively
affect the perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending
litigation, and may prompt the commencement of additional similar
litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of 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 unfavorable outcome of
certain pending litigation or by the proposed Resolution discussed
below or by settlement, if any, of certain pending cases. However,
implementation of the proposed Resolution should resolve the most
significant tobacco litigation against the Company and its
subsidiaries. Furthermore, the Company and each of its subsidiaries
named as a defendant believe, and each has been so advised by counsel
handling the
Continued
33
<PAGE> 35
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
respective cases, that it has a number of valid defenses to all
litigation pending against it. Except as described below under the
heading "Proposed Resolution of Certain Regulatory and Litigation
Issues--Effects on Litigation," all such cases are, and will
continue to be, vigorously defended.
PROPOSED RESOLUTION OF CERTAIN REGULATORY AND LITIGATION ISSUES
On June 20, 1997, PM Inc. and other companies in the United States
tobacco industry entered into a Memorandum of Understanding (the
"Resolution") to support the adoption of federal legislation and
ancillary undertakings that would resolve many of the regulatory and
litigation issues affecting the United States tobacco industry and,
thereby, reduce uncertainties facing the industry and increase
stability in business and capital markets.
There can be no assurance that federal legislation in the form of the
proposed Resolution will be enacted or that it will be enacted without
modification that is materially adverse to the Company or that any
modification would be acceptable to the Company or that, if enacted,
the legislation would not face legal challenges. Moreover, the
negotiation and signing of the proposed Resolution could affect other
federal, state and local regulation of the United States tobacco
industry and regulation of the international tobacco industry.
The proposed Resolution includes provisions relating to advertising and
marketing restrictions, product warnings and labeling, access
restrictions, licensing of tobacco retailers, the adoption and
enforcement of "no sales to minors" laws by states, surcharges against
the industry for failure to achieve underage smoking reduction goals,
regulation of tobacco products by the FDA, public disclosure of
industry documents and research, smoking cessation programs,
compliance programs by the industry, public smoking and smoking in the
workplace, enforcement of the proposed Resolution, industry payments
and litigation.
Surcharge for Failure to Achieve Underage Smoking Reduction Goals
The proposed Resolution would require the FDA to impose annual surcharges
on the industry if targeted reductions in underage smoking are not
achieved in accordance with a legislative timetable. The surcharge
would be based upon an approximation of the present value of the
profit the companies would earn over the lives of all underage
consumers in excess of the target and would be allocated among
participating manufacturers based on their market share of the United
States cigarette industry.
Industry Payments
The proposed Resolution would require participating manufacturers to make
substantial payments in the year of implementation and thereafter
("Industry Payments"). Participating manufacturers would be required
to make an aggregate $10 billion initial Industry Payment on the date
that federal legislation implementing the terms of the proposed
Resolution is signed. This Industry Payment would be based on relative
market capitalizations, and the Company currently estimates that PM
Inc.'s share of the initial Industry Payment would be approximately
$6.6 billion (to be adjusted downward for initial payments made to
Mississippi, Florida and Texas pursuant to settlements of health care
cost recovery actions described above). Thereafter, the companies
would
Continued
34
<PAGE> 36
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
be required to make specified annual Industry Payments determined
and allocated among the companies based on volume of domestic sales
as long as the companies continue to sell tobacco products in the
United States. These Industry Payments, which would begin on
December 31 of the first full year after implementing federal
legislation is signed, would be in the following amounts (at 1996
volume levels) - year 1: $8.5 billion; year 2: $9.5 billion; year 3:
$11.5 billion; year 4: $14 billion; and each year thereafter: $15
billion. These Industry Payments would be increased by the greater
of 3% or the previous year's inflation rate, and would be adjusted
to reflect changes from 1996 domestic sales volume levels.
The Industry Payments would be separate from any surcharges discussed
above. The Industry Payments would receive priority and would not be
dischargeable in any bankruptcy or reorganization proceeding and would
be the obligation only of entities selling tobacco products in the
United States (and not their affiliated companies). The proposed
Resolution provides that all payments by the industry would be
ordinary and necessary business expenses in the year of payment, and
no part thereof would be either in settlement of an actual or
potential liability for a fine or penalty (civil or criminal) or the
cost of a tangible or intangible asset. The proposed Resolution would
provide for the pass-through to consumers of the annual Industry
Payments in order to promote the maximum reduction in underage use.
Effects on Litigation
If enacted, the federal legislation provided for in the proposed
Resolution would settle present attorney general health care cost
recovery actions (or similar actions brought by or on behalf of any
governmental entity other than the federal government), parens patriae
and smoking and health class actions and all "addiction"/dependence
claims, and would bar similar actions from being maintained in the
future. However, the proposed Resolution provides that no stay
applications will be made in pending governmental actions without the
mutual consent of the parties. In recent months, PM Inc. and other
companies in the domestic tobacco industry agreed to settle three
health care cost recovery actions in Mississippi, Florida and Texas,
and a smoking and health class action brought on behalf of flight
attendants alleging injury caused by exposure to ETS aboard aircraft.
The Company may enter into discussions to postpone or settle other
actions, pending the enactment of the legislation contemplated by the
proposed Resolution. No assurance can be given whether a postponement
or settlement will be achieved or, if achieved, as to the terms
thereof. The proposed Resolution would not affect any smoking and
health class action or any health care cost recovery action that is
reduced to final judgment before implementing federal legislation is
effective.
Under the proposed Resolution, the rights of individuals to sue the
tobacco industry would be preserved, as would existing legal doctrine
regarding the types of tort claims that can be brought under
applicable statutory and case law except as expressly changed by
implementing federal legislation. Claims, however, could not be
maintained on a class or other aggregated basis and could be
maintained only against tobacco manufacturing companies (and not their
retailers, distributors or affiliated companies). In addition, all
punitive damage claims based on past conduct would be resolved as part
of the proposed Resolution, and future claimants could seek punitive
damages only with respect to claims predicated upon conduct taking
place after the effective date of
Continued
35
<PAGE> 37
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
implementing federal legislation. Finally, except with respect to
actions pending as of June 9, 1997, third-party payor (and similar)
claims could be maintained only if based on subrogation of
individual claims. Under subrogation principles, a payor of medical
costs can seek recovery from a third party only by "standing in the
shoes" of the injured party and being subject to all defenses
available against the injured party.
The proposed Resolution contemplates that participating tobacco
manufacturers would enter into a joint sharing agreement for civil
liabilities relating to past conduct. Judgments and settlements
arising from tort actions would be paid as follows. The proposed
Resolution would set an annual aggregate cap of up to 33% of the
annual base Industry Payment (including any reductions for volume
declines). Any judgments or settlements exceeding the cap in a
particular year would roll over into the next year. While judgments
and settlements would run against the defendant, they would give rise
to an 80-cents-on-the-dollar credit against the annual Industry
Payment. Finally, any individual judgments in excess of $1 million
would be paid at the rate of $1 million per year unless every other
judgment and settlement could first be satisfied within the annual
aggregate cap. In all circumstances, however, the companies would
remain fully responsible for costs of defense and certain costs
associated with the fees of attorneys representing certain plaintiffs
in the litigation that would be settled by the proposed Resolution.
Financial Effects
The Company anticipates that PM Inc.'s share of the industry's $10
billion initial payment, which it currently estimates would be
approximately $6.6 billion (adjusted downward for initial payments
made to Mississippi, Florida and Texas pursuant to settlements of
health care cost recovery actions), would be charged to expense in the
period in which federal legislation implementing the terms of the
proposed Resolution is enacted. In addition, the Company currently
anticipates that implementation of the proposed Resolution would
require a significant charge to expense in the period of enactment to
comply with the proposed Resolution's regulations on advertising,
marketing and production. The initial payment would be funded from a
combination of available cash, commercial paper issuances, bank
borrowings and long-term debt issuances in global markets. The initial
payment would have a material adverse effect on the Company's
operating income and cash flows in the quarter and year in which the
proposed Resolution is enacted and on its financial position. The
initial payment would result in higher debt and higher interest
expense, the amounts of which would depend upon the final form of the
proposed Resolution, borrowing requirements and interest rates.
Continued
36
<PAGE> 38
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
The Company anticipates that PM Inc.'s share of future annual Industry
Payments related to cigarette sales would be charged to expense as the
related sales occur, and would be funded through price increases. The
Company anticipates that annual surcharges, if any, imposed by the FDA
for failure to meet required reduction levels in underage smoking,
beginning in the fifth year after the proposed Resolution is
implemented, would be charged to expense in the year of assessment or
in the year prior thereto if it is then probable that such assessment
will be made.
The Company believes that implementation of the proposed Resolution would
materially adversely affect the volume, operating revenues, cash flows
and/or operating income of the Company in future years. The degree of
the adverse impact would depend, among other things, on the rates of
decline in United States cigarette sales in the premium and discount
segments, PM Inc.'s share of the domestic premium and discount
cigarette segments, interest rates and the timing of principal
payments on debt incurred to finance the initial payment due under the
proposed Resolution, and the effect of the proposed Resolution on
cigarette consumption and the regulatory and litigation environment
outside the United States.
Continued
37
<PAGE> 39
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Note 16. Additional Information:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(in millions)
<S> <C> <C> <C>
Years ended December 31:
Depreciation expense $ 1,045 $ 1,038 $ 1,024
======= ======= =======
Research and development expense $ 533 $ 515 $ 481
======= ======= =======
Advertising expense $ 3,451 $ 3,633 $ 3,724
======= ======= =======
Interest and other debt expense, net:
Interest expense $ 1,180 $ 1,183 $ 1,259
Interest income (133) (97) (80)
------- ------- -------
$ 1,047 $ 1,086 $ 1,179
======= ======= =======
Interest expense of financial services
and real estate operations included
in cost of sales $ 67 $ 80 $ 84
======= ======= =======
Rent expense $ 443 $ 430 $ 390
======= ======= =======
</TABLE>
Note 17. Financial Services and Real Estate Operations:
Philip Morris Capital Corporation ("PMCC") is a wholly-owned subsidiary
of the Company. PMCC invests in leveraged and direct finance leases,
other tax-oriented financing transactions and third party financial
instruments. During 1997, PMCC sold its wholly-owned subsidiary,
Mission Viejo Company, which was engaged 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 1997, 1996 or 1995.
Continued
38
<PAGE> 40
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Condensed balance sheet data at December 31, follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(in millions)
<S> <C> <C>
Assets
Finance leases $8,561 $7,554
Other investments 214 474
------ ------
8,775 8,028
Less unearned income and allowances 3,063 2,682
------ ------
Finance assets, net 5,712 5,346
Other assets 175 572
------ ------
Total assets $5,887 $5,918
====== ======
Liabilities and stockholder's equity
Intercompany payables $ 550 $ 5
Short-term borrowings 173
Long-term debt 845 1,134
Deferred income taxes 3,877 3,636
Other liabilities 110 140
Stockholder's equity 505 830
------ ------
Total liabilities and stockholder's equity $5,887 $5,918
====== ======
</TABLE>
The amounts shown above include receivables and payables with the Company
and its other subsidiaries. These amounts were eliminated in the
Company's consolidated balance sheets.
Finance leases consist of a portfolio of investments in transportation,
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. The total estimated fair
value of other investments, which principally includes commercial
receivables at December 31, 1997 and 1996, 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
39
<PAGE> 41
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------
Condensed income statement data follow for the years ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in millions)
<S> <C> <C> <C>
Revenues:
Financial services $241 $222 $197
Real estate 99 157 184
---- ---- ----
Total revenues 340 379 381
Expenses:
Financial services 104 107 107
Real estate 66 98 129
---- ---- ----
Total expenses 170 205 236
Gain on disposal of real estate
subsidiary 103
Equity in earnings of limited
partnership investments 17 15 15
---- ---- ----
Earnings before income taxes 290 189 160
Provision for income taxes 132 66 55
---- ---- ----
Net earnings $158 $123 $105
==== ==== ====
</TABLE>
Note 18. Financial Instruments:
Derivative financial instruments
The Company operates internationally, with manufacturing and sales
facilities in various locations around the world. Derivative financial
instruments are used by the Company for purposes other than trading,
principally to reduce exposures to market risks resulting from
fluctuations in interest rates and foreign exchange rates by creating
offsetting exposures. The Company is not a party to leveraged
derivatives.
The Company has foreign currency and related interest rate swap
agreements which were executed to reduce the Company's borrowing costs
and serve as hedges of the Company's net assets in foreign
subsidiaries, principally those denominated in Swiss francs. At
December 31, 1997 and 1996, the notional principal amounts of these
agreements were $1.4 billion and $2.2 billion, respectively. Aggregate
maturities at December 31, 1997 were as follows (in millions):
1998-$166; 1999-$350; 2000-$215; 2002-$171; and 2003 and
thereafter-$492. 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 and foreign currency options 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, 1997, the Company had forward exchange
and option contracts, all maturing within one year, with U.S. dollar
equivalent values of $1.4 billion and $1.1 billion, respectively. At
December 31, 1996, the Company had foreign exchange contracts, all
maturing within one year, with U.S. dollar equivalent values of $1.7
billion.
Continued
40
<PAGE> 42
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, 1997, 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, 1997 was $14.7 billion as compared to its
carrying value of $14.1 billion. The aggregate fair value 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 estimated fair
value of financial services' other investments and receivables
approximated their carrying values at December 31, 1997 and 1996.
The carrying values of the foreign currency and related interest rate
swap agreements, the forward currency contracts and the currency
option contracts, which did not differ materially from their fair
values, were not material.
See Notes 6, 7 and 17 for additional disclosures of fair value for
short-term borrowings, long-term debt and financial instruments within
the financial services and real estate operations, respectively.
Note 19. Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
1997 Quarters
-------------------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
(in millions, except per share data)
<S> <C> <C> <C> <C>
Operating revenues $18,217 $18,413 $18,092 $17,333
======= ======= ======= =======
Gross profit $ 7,376 $ 7,600 $ 7,420 $ 7,029
======= ======= ======= =======
Net earnings $ 1,773 $ 1,836 $ 1,406 $ 1,295
======= ======= ======= =======
Per share data:
Basic EPS $ 0.73 $ 0.76 $ 0.58 $ 0.54
======= ======= ======= =======
Diluted EPS $ 0.72 $ 0.75 $ 0.58 $ 0.53
======= ======= ======= =======
Dividends declared $ 0.40 $ 0.40 $ 0.40 $ 0.40
======= ======= ======= =======
Market price - high $46-37/64 $48-1/8 $46- 9/16 $45- 7/8
- low $36 $37-1/4 $39-15/16 $36-15/16
</TABLE>
During the fourth quarter of 1997, the Company sold several international
food businesses, including its Brazilian ice cream businesses, for
total proceeds of $1.1 billion and net pretax gains of $775 million.
In addition, the Company sold its equity interest in a Canadian beer
operation and sold a minority interest in a beer import operation for
proceeds of $306 million and a pretax gain of $12 million.
Continued
41
<PAGE> 43
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Concluded
-------------
During the fourth quarter of 1997, the Company recorded a charge of $342
million related primarily to the downsizing or closure of
manufacturing and other facilities, as well as the discontinuance of
certain low-margin product lines of its international food operations.
The Company also recorded a charge of $288 million for incremental
postemployment benefits, primarily related to severance.
During the third and fourth quarters of 1997, the Company recorded
litigation settlement charges of $812 million and $645 million,
respectively.
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:
Basic EPS $ 0.63 $ 0.66 $ 0.67 $ 0.61
======= ======= ======= =======
Diluted EPS $ 0.62 $ 0.65 $ 0.67 $ 0.60
======= ======= ======= =======
Dividends declared $ 0.33 1/3 $ 0.33 1/3 $ 0.40 $ 0.40
======= ======= ======= =======
Market price - high $34- 7/8 $35- 3/4 $35-53/64 $39-43/64
- low $28-35/64 $28-35/64 $28-35/64 $29-59/64
During 1996, 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.
During 1996, the Company initiated cost saving programs that included the
downsizing and closure of certain food manufacturing facilities, with
related workforce reductions, which resulted in a charge to pretax
earnings of $320 million.
Concluded
42
