LOGO
PHILIP MORRIS COMPANIES INC.
FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1994
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBERFor the fiscal year ended December 31, 1994
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER1995
Commission file number 1-8940
PHILIP MORRIS COMPANIES INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 13-3260245
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
120 PARK AVENUE, NEW YORK, N.Y. 10017
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:Philip Morris Companies Inc.
(Exact name of registrant as specified in its charter)
Virginia 13-3260245
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
120 Park Avenue, New York, N.Y. 10017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-880-5000
SECURITIES REGISTERED PURSUANT TO SECTIONSecurities registered pursuant to Section 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTEREDof the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $1 par value New York Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
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At February 1, 1995,29, 1996, the aggregate market value of the shares of Common
Stock held by non-affiliates of the registrant was approximately $51.2$82.0
billion. At such date, there were 851,995,058829,752,427 shares of the registrant's
Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE--------------
Documents Incorporated by Reference
Portions of the registrant's annual report to stockholders for the year
ended December 31, 19941995, are incorporated in Item 1 of Part I, Part II and Part IV hereof
and made a part hereof. The registrant's definitive proxy statement for use in
connection with its annual meeting of stockholders to be held on April 27,
1995, to be filed with the Securities and Exchange Commission,25, 1996,
is incorporated in Part III hereof and made a part hereof.
PART I
ITEMItem 1. DESCRIPTION OF BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS
GENERALDescription of Business.
(a) General Development of Business
General
Philip Morris Companies Inc. is a holding company whose principal
wholly-
ownedwholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris
International Inc., Kraft Foods, Inc. and Miller Brewing Company, are engaged
primarily in the manufacture and sale of various consumer products. A
wholly-owned subsidiary of the Company, Philip Morris Capital Corporation,
engages in various financing and investment activities. As used herein, unless
the context indicates otherwise, the term "Company" means Philip Morris
Companies Inc. and its subsidiaries. The Company is the largest consumer
packaged goods company in the world.*
Philip Morris Incorporated ("PhilipPM Inc."), which conducts business under the
trade name "Philip Morris U.S.A."), and its subsidiaries and affiliates are
engaged primarily in the manufacture and sale of cigarettes. Philip Morris U.S.A.PM Inc. is the
largest cigarette company in the United States. Philip Morris International Inc.
("Philip Morris International") is a holding company whose subsidiaries and
affiliates and their licensees are engaged primarily in the manufacture and sale
of tobacco products (mainly cigarettes); certain Latin American subsidiaries and
affiliates manufacture and sell a wide variety of food products. A subsidiary of
Philip Morris International is the leading United States exporter of cigarettes.
Marlboro, the principal cigarette brand of these companies, has been the world's
largest selling cigarette brand since 1972.
The Company's food subsidiary, Kraft Foods, Inc. ("Kraft"), is the largest
processor and marketer of retail packaged foods in the United States and also
sells food ingredients.States. A wide
variety of grocery, coffee, cheese, confectionery and processed meat products
are manufactured and marketed in the United States and Canada by Kraft and by
its subsidiary, Kraft Foods International, Inc. ("Kraft Foods
International"), in Europe Canada and the Asia/Pacific region.
Miller Brewing Company ("Miller") is the second largest brewing company in
the United States.
SOURCE OF FUNDS -- DIVIDENDSSource of Funds--Dividends
Because the Company is a holding company, its principal source of funds is
dividends from its subsidiaries. The Company's principal wholly-owned
subsidiaries currently are not limited by long-term debt or other agreements
in their ability to pay cash dividends or make other distributions with
respect to their common stock.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS(b) Financial Information About Industry Segments
In 1994,1995, the Company's significant industry segments were tobacco products
(principally cigarettes), food products, beer, and financial services and
real estate. Operating revenues, operating profit (together with a
reconciliation to operating income) and identifiable assets attributable to
each such segment for each of the last three years are set forth in noteNote 11
to the Company's consolidated financial statements and are incorporated
herein by reference to the Company's annual report to stockholders for the
year ended December 31, 1994.1995 (the "1995 Annual Report").
In 1994 and 1993,1995, operating profit from tobacco products was approximately 62%65% of
the Company's total operating profit (up from 62% in 1994), with Philip Morris U.S.A.PM Inc. and
Philip Morris International contributing 34% and 31%, respectively (compared
with 33% and 29%, respectively, in each
year.1994). Food products, beer, and financial
services and real estate accounted for approximately 32%29%, 4% and 2%,
respectively, of the Company's total operating profit in 1994 (33%1995 (32%, 2%4% and
3%2%, respectively, in 1993)1994).
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* References to the Company's competitive ranking in its various businesses
are based on sales data or, in the case of cigarettes and beer, shipments,
unless otherwise indicated.
1
During 1993, the Company provided $741 million for the costs(c) Narrative Description of restructuring
its worldwide operations. In addition, the Company adopted, effective January
1, 1993, Statement of Financial Accounting Standards ("SFAS") No. 112, which
resulted in additional operating expense of $29 million in 1993. Excluding the
impacts of the restructuring and SFAS No. 112, the percentages of total
operating profit from tobacco, food, beer, and financial services and real
estate operations were approximately 59%, 34%, 4% and 3%, respectively, in
1993.
(C) NARRATIVE DESCRIPTION OF BUSINESS
TOBACCO PRODUCTS
Philip Morris U.S.A.Business
Tobacco Products
PM Inc. is responsible for the manufacture, marketing and sale of
cigarettes in the United States (including military sales); subsidiaries and
affiliates of Philip Morris International and their licensees are responsible
for the manufacture, marketing and sale of tobacco products outside the
United States; and a subsidiary of Philip Morris International is responsible
for tobacco product exports from the United States.
The tobacco industry continues to be subject to health concerns litigation,relating to the
use of tobacco products and exposure to environmental tobacco smoke,
legislation, governmental regulation, including tax increases, andgovernmental regulation, privately
imposed smoking restrictions, governmental and grand jury investigations and
litigation, any or all of which could have an adverse impact on the Company.
Domestic Tobacco Products
Philip Morris U.S.A.PM Inc. is the largest tobacco company in the United States, with total
cigarette shipments of 219.4221.8 billion units in 19941995 (an increase of 12.7%1.1% from
1993)1994), accounting for 44.8%46.1% of the cigarette industry's total estimated
shipments in the United States (an increase of 2.61.3 share points from 1993)1994).
The industry's estimated cigarette shipments in the United States increaseddecreased
by 6.2%1.7% in 1995, compared with 1994, as
comparedin line with the United States
industry's historical long-term average rate of decline of 1% to 1993, following a decrease of 9% in 1993 from 1992 (which decrease
was partially the result of increased distributor buying in 1992 in
anticipation of higher cigarette prices and the January 1, 1993 increase in the
federal excise tax).2% per
annum. The following table sets forth the industry's estimated cigarette
shipments in the United States, Philip Morris U.S.A.PM Inc.'s shipments and its share of United
States industry shipments (excluding in all cases export and overseas
military shipments):shipments:
PHILIP MORRIS
YEARS ENDED PHILIP MORRIS U.S.A. SHARE
DECEMBERYears Ended PM Inc.
December 31 INDUSTRY* U.S.A. OF INDUSTRY*
----------- --------- ------------- -------------
(IN BILLIONS OF UNITS)Industry* PM Inc. Share of Industry*
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(in billions of units) (%)
1994.................................1995..................... 481.1 221.8 46.1
1994** .................. 489.6 219.4 44.8
1993.................................1993 .................... 461.2 194.7 42.2
1992................................. 506.9 214.3 42.3
Philip Morris U.S.A.PM Inc.'s major premium brands are Marlboro, Benson & Hedges, Merit,
Virginia Slims and Parliament; itsParliament. Its principal discount brands are Basic and
Cambridge. All of its brands are marketed to satisfy differing preferences of
adult smokers. Philip Morris U.S.A.PM Inc. has been the leading cigarette company in the United
States market since 1983.* Marlboro is the largest selling brand in the
United States, with shipments of 137.7144.9 billion units in 1995 (up 5.2% from
1994, (up 27% from
1993, primarily the result of the strategy implemented by Philip Morris U.S.A.
in 1993, as discussed below)despite a limited product recall), with 28.1%equating to 30.1% of the United
States market (23.5%(up from 28.1% in 1993)1994).
During the first half of 1993,1995, domestic cigarette industry volume continued to shift from the full price (premium) segment to
the discount segment, which consists of "generic" and lower-priced cigarettes
that have a lower profit margin than premium brands. In Aprilbrands, to the full-price
(premium) segment (70% of industry shipments in 1995, compared with 67.5% in
1994). The shift from the discount segment began in the second half of 1993,
Philip Morris U.S.A. announced its
decisionreflecting a pricing strategy implemented by PM Inc. in response to institute,the
domestic tobacco market, which was becoming increasingly price-sensitive.
Previously, the discount segment of the industry had been growing markedly
and constituted as much as 40.7% of United States industry shipments in the
second quarter of 1993, up from 30.2% in 1992. PM Inc.'s 1995 share of the
premium segment was 54.5%, an extensive promotional
program to reduce the average retail priceincrease of Marlboro0.9 share points over 1994.
Shipments of premium cigarettes a major
shiftaccounted for 82.7% of PM Inc.'s 1995 volume,
up from 80.7% in pricing strategy designed to restore lost market share and improve
long-term profitability. In August 1993, Philip Morris U.S.A. lowered the price
of its premium brands and raised the price of its discount brands in further
response to the highly price sensitive market environment. These changes
produced lower profit margins but higher volume. As a result of these strategic
initiatives, retail sales data compiled by Nielsen Marketing Research indicate
that Marlboro's market share rose from 22% in March 1993 to 30% in December 1994. In addition, such retail sales data indicate that the shift to
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* Source: The Maxwell Consumer Report (issued by Wheat, First Securities,
Inc.).
2
1995, United States industry shipments within the
discount segment reverseddeclined 9.2% from 1994 levels; PM Inc.'s 1995 shipments
within this category declined 9.1%, resulting in the second half of 1993. The shift back to the
premium segment continued in 1994 (69.9% retaila share of the industry in
December 1994 compared with 67.6% in December 1993 and 62% in March 1993),
although the rate26.6% of the
shift to the premiumdiscount segment began to slow in the
latter part of 1994.(up 0.1 share points from 1994). These developments and
their impact on the Company's financial results,statements are more fully discussed
in Management's Discussion and Analysis of Financial Condition and Results of
Operations (the "MD&A"), incorporated herein by reference to the Company's
annual report to stockholders
for the year ended December 31, 1994.1995 Annual Report.
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* Source: The discount segment of the industry had been growing markedly prior to the
third quarter of 1993 and constituted 36.8% of United StatesMaxwell Consumer Report (issued by Wheat, First Securities,
Inc.).
** The increase in industry shipments in 1994 from 1993 up from 30.2%was due in 1992. However, after reaching a highpart to
increased distributor buying in 1992 (made in anticipation of 40.7%higher
cigarette prices and the January 1, 1993, increase in the federal excise
tax), which reduced 1993 shipments.
2
PM Inc. cannot predict change or rates of change in the relative sizes of
the marketpremium and discount segments or in the second quarter of 1993, the discount segment decreased to 32.5%
of industry shipments in December 1994, primarily as a result of the industry-
wide lower prices on premium brands and higher prices on discount brands.
Philip Morris U.S.A. accounted for 26.5% of the smaller discount segment in
1994, down from 29.4% in 1993 (reflecting a decrease in shipments of 15.2% in
1994), primarily the result of the changed product mix.
Philip Morris U.S.A. cannot predict whether, and there can be no assurance
that, the increases in Philip Morris U.S.A.PM Inc.'s shipments, shipmentmarket share
(based on shipments) or retail market share discussed above will continue or the shift in domestic
cigarette industry volume from discount brands to premium brands will continue.share.
International Tobacco Products
Philip Morris International's total cigarette shipments grew 10.7% in
19941995, to approximately 593.2 billion units. Philip Morris International's
share of the world cigarette market (excluding the United States) was
approximately 12% in 1995, up from approximately 11% in 1994. Philip Morris
International estimates that world cigarette industry unit shipments
(excluding the United States) were approximately 5365.0 trillion units in 1995,
which represents a compounded annual increase of approximately 1% per year
over the last five years. Philip Morris International estimates that the
American-style segment of the world market (excluding the United States) has
increased at a compounded annual rate of more than 3% per year over the last
five years. It also estimates that the American-style segment constituted
approximately 32% of the world cigarette market (excluding the United States)
in 1995, up from approximately 31% in 1994; shipments by Philip Morris
International accounted for approximately 36% of this segment in 1995, versus
approximately 34% in 1994. Unit sales of Philip Morris International's
principal brand, Marlboro, increased 6.4% in 1995 over 1994, to 276.7 billion
units, (an increase of 16.6% from 1993), approximately
10.8%more than 5% of the world cigarette market (excluding the United
States).
Philip Morris International estimates that world cigarette industry unit sales
(excluding the United States) were approximately 5 trillion units in 1994,
which representshas a compounded annual increase of approximately 1% over the last
five years. Philip Morris International also estimates that the American blend
segment of the world market has increased at a higher compounded annual rate
over the last five years, approximately 4%. The American blend segment
accounted for 98% of shipments by Philip Morris International and its
affiliates in 1994. Unit sales of Philip Morris International's principal
brand, Marlboro, increased 8.3% in 1994 over 1993 to 260 billion units, 5.2% of
the world cigarette market (excluding the United States).
Subsidiaries and affiliates of Philip Morris International and their
licensees have cigarette market sharesshare of at least
15% -- and--and in a number of instances substantially more than 15% -- in--in more than
30 markets, including Argentina, Australia, Belgium, the Canary Islands, the
Czech Republic, Finland, France, Germany, Hong Kong, Italy, Japan, Kuwait,
the Netherlands, the Philippines, Singapore, Spain and Switzerland. Philip
Morris International's leading international brands are Marlboro, L&M, Bond
Street, Philip Morris, Lark, Chesterfield, Parliament, Merit Parliament and Virginia
Slims.
A subsidiary of Philip Morris International is the leading United States
exporter of cigarettes. It exported 133.6164.1 billion units in 1994,1995, an increase
of 16.7%22.8% from 1993.1994. These exports constituted 25%28% of Philip Morris
International's total shipments.
Cigarette pricesunit volume in many international markets are government-controlled, and
this, as well as excise and other tax increases, higher costs, government price
restraints and local regulations regarding import quotas and other matters,
have restricted, and may continue to restrict, the sales and operating income
of1995.
In 1995, Philip Morris International increased capacity and improved
productivity through various capital projects. Philip Morris International
modernized and expanded a manufacturing plant in the Czech Republic, began
construction of a numbernew plant in Lithuania, and undertook plant renovations in
Krasnodar, Russia, and in Kharkov, Ukraine. It also began a program to
increase capacity in Holland, announced plans to upgrade its tobacco-
processing facility in Switzerland and to build a new factory in Kazakhstan,
completed construction of markets.a leaf-processing facility in Malaysia, and concluded
an agreement under which a third party will contract-manufacture Marlboro
cigarettes in China for the Chinese market. In 1994,February 1996, Philip Morris
International acquired aan initial 33% share of Poland's largest tobacco
company, Zaklady Przemyslu Tytoniowego w Krakowie S.A. ("ZPTK"). Within the
next three years, Philip Morris International will receive an additional 32% of
the company, provided it has completed certain investments in the
Ukraine, agreed to build a new cigarette factoryZPTK's
manufacturing facilities and at such time is in Kazakhstan, started
construction of a leaf processing facility in Malaysia and entered into a
contract for the manufacture of a new export brand in China.
3
compliance with other
contractual commitments.
Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and
Smoking
Currently,Cigarettes are subject to substantial excise taxes in the United States
and to similar taxes in most foreign markets. The United States federal
excise tax on cigarettes, last increased in 1993, is $12 per 1,000 ($.24 per
pack). During 1995, several measures were proposed to increase the federal
excise tax on cigarettes is $12 per thousand ($.24 per
pack). During 1994, increases in the excise tax ranging from $.45 to $1.75 per
packcigarettes. However, no hearings were proposed. Legislation in the United States Senateheld on any of these
measures, and House of
Representatives contained identical provisions which would have resulted in an
increase of $.45 per pack over a five-year period. Congress adjourned in 1994
without taking action on the proposals. It is impossible to predict whether
Congress in 1995 will consider excise tax increases.none was passed by Congress. In general, excise taxes, sales
taxes and other cigarette-related taxes levied by various states, counties
and municipalities affecting cigarettes have been increasing gradually.increasing. These taxes vary considerably and,
when combined with the current federal excise tax, may be as high as $1.08$1.26
per pack.
In the opinion of PM Inc. and Philip Morris U.S.A.,International, past increases in
the federal excise taxestax and the other taxes discussed above have had an adverse
impact on sales of cigarettes. FutureAny future increases, the extent of which cannot
be predicted, could result in volume declines for the domestic cigarette industry,
including PM Inc. and Philip Morris U.S.A.,International, and might cause shifts from
the premium segment to the discount segment.
3
Reports with respect to the alleged harmful physical effects of cigarette
smoking have been publicized for many years, and the sale, promotion and use
of cigarettes continuescontinue to be subject to increasing governmental regulation.
As a result, the tobacco industry, is subject to increased governmental restrictions,
both in the United States and abroad, is
subject to increased governmental restrictions, decreasing social acceptance
of smoking, increased pressure from anti-smoking groups, unfavorable press
reports, governmental investigations and substantial increases in federal and stateexcise
taxes. In the opinion of PM Inc. and Philip Morris U.S.A.,International, these
developments have had, and continue to have, an adverse effect upon tobacco
industry sales. Since 1964, the Surgeon General of the United States and the
Secretary of Health and Human Services have released a number of reports
which
purportpurporting to link cigarette smoking with a broad range of health hazards,
including various types of cancer, coronary heart disease and chronic lung
disease, and recommendrecommending various governmental measures to reduce the
incidence of smoking. The 1988, 1990, 1992 and 19921994 reports focus upon the
purported addictive"addictive" nature of cigarettes, the purported effects of smoking
cessation, the decrease in smoking in the United States and the economic and
regulatory aspects of smoking in the Western Hemisphere. The most recent report, released in February 1994, focuses
uponHemisphere, and cigarette
smoking by adolescents, particularly the purported addictive"addictive" nature of
cigarette smoking in adolescence.
The Comprehensive Smoking Education Act (the "Smoking Education Act"),
enacted in 1984, requires cigarette manufacturers and importers to include
the following warning statements in rotating sequence on cigarette packages
and in advertisements: SURGEON"SURGEON GENERAL'S WARNING: Smoking Causes Lung
Cancer, Heart Disease, Emphysema, And May Complicate Pregnancy; SURGEONPregnancy"; "SURGEON
GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious Risks to Your
Health; SURGEONHealth"; "SURGEON GENERAL'S WARNING: Smoking By Pregnant Women May Result in
Fetal Injury, Premature Birth, And Low Birth Weight;Weight"; and SURGEON"SURGEON GENERAL'S
WARNING: Cigarette Smoke Contains Carbon Monoxide." The Smoking Education Act
also covers the size and format of warnings on cigarette packages and in
cigarette advertising, and prescribes a modified version of the warnings for
outdoor billboard advertisements. In addition to the warning statements,
pursuant to an agreement sanctioned by the Federal Trade Commission (the
"FTC"), cigarette advertising in the United States must disclose the average
"tar" and nicotine deliveriesyields of the advertised brand or variety. It has been
reported that the FTC is considering changes to the test method used to rate
the "tar" and nicotine yields of cigarettes sold in the United States. It is
also possible that the FTC will promulgate new regulations governing or
restricting advertising or marketing claims based on "tar" and nicotine
ratings.
Cigarette manufacturers and importers are also required to provide
annually to the Secretary of Health and Human Services a list of ingredients
added to tobacco in the manufacture of cigarettes, and the Secretary is
directed to report to Congress concerning the health effects, if any, of such
ingredients.
Most of the cigarettes sold by the Company's subsidiaries, affiliates and
their licensees are sold in countries where warning statement requirements
for cigarette packages have been adopted. In countriesmarkets where such statements
are not legally required, the Company placesCompany's policy is to place the U.S.United States
Surgeon General's warnings on all of its cigarette packages.
Studies with respect to the alleged health risk to nonsmokers of diluted
and modified cigarette smoke, often referred to as environmental tobacco
smoke ("ETS"), have received significant publicity. In 1986, the Surgeon
General of the United States and the National Academy of Sciences reported
that nonsmokers were at increased risk of lung cancer and respiratory illness
due to ETS. In 1991, the U.S. Occupational Safety and Health Administration ("OSHA") issued a
Request for Information concerning the quality of indoor
4
air, including information regarding ETS. In April 1994, OSHA issued a proposed
rule which could, inter alia, ultimately ban smoking in the workplace. Hearings
on this proposed rule have begun and are continuing. In January 1993, the United States Environmental Protection
Agency (the "EPA") issued a report concluding, among other things, that ETS
is a human lung carcinogen and that ETS increases certain health risks for
young children. In June 1993, Philip
Morris U.S.A.PM Inc. joined five other representatives of
the tobacco manufacturing and related industries in a lawsuit against the
EPA, seeking a declaration that the EPA does not have the authority to
regulate ETS, and that, in view of the available scientific evidence and the
EPA's failure to follow its own guidelines in making the determination, the
EPA's final risk assessment be declared arbitrary and capricious.capricious and ordered
withdrawn. The EPA report, as well as adverse publicity on ETS, have resulted
in the enactment of legislation and privately imposed limitations that
restrict or ban cigarette smoking in certain public places and some places of
employment. Another federal statute establishedIt has been reported that the Interagency CommitteeInternational Agency for Research
on CigaretteCancer of the World Health Organization is conducting research on ETS that
may be published sometime during 1996.
4
Enactments by regulatory agencies and Little Cigar Fireother governmental authorities,
together with private initiatives, have restricted or prohibited smoking areas
aboard certain common carriers, including domestic and certain international
commercial airline flights, in certain public places and in some places of
employment.
In April 1994, the United States Occupational Safety to directand Health
Administration ("OSHA") issued a proposed rule that could ultimately ban
smoking in the workworkplace. Hearings on this proposed rule were held from
September 1994 through March 1995. The period for post-hearing submissions on
the proposed rule ended on February 9, 1996. OSHA has not yet issued either a
final rule or a proposed revised rule.
For several years, Congress has provided funds for the development of a Technical Study Group
created bytest
methodologies and standards aimed at measuring the same statute and to make policy recommendations to Congress. The
Technical Study Group, which consistedpropensity of representatives of designated
government agencies, the tobacco and furniture industries and various other
organizations, studied the feasibility and consequences of developing
cigarettes and little cigars that would have a minimum propensity
to ignite upholstered furniture or mattresses. Based on this research, the Interagency
Committee submitted its final technical report to CongressThe Company cannot predict
whether these efforts will result in December 1987,
which contained the conclusion of the Technical Study Group that it is
technically feasible and may be commercially feasible to develop cigarettes
that will have a significantly reduced propensity to ignite upholstered
furniture and mattresses. Legislation in August 1990 provided for further
research under the direction of the Consumer Product Safety Commission (the
"CPSC"), with advice from a new scientific committee, the Technical Advisory
Group. The CPSC reported to Congress in August 1993 that it is practicable to
develop a performance standard for cigarette ignition propensity, but that "it
is unclear that such a standard will effectively address the number of
cigarette-related fires."legislation or regulation.
Television and radio advertising of cigarettes is prohibited in the United
States and prohibited or restricted in many other countries. EnactmentsIn June 1995, PM
Inc. entered into a consent decree with the Department of Justice, pursuant
to which it agreed to reposition its brand advertising at professional
football, baseball, basketball and hockey arenas so as not to be
inadvertently exposed to prominent television coverage.
In June 1992, the Alcohol, Drug Abuse and Mental Health Act was enacted.
This act requires states to adopt a minimum age of at least 18 for purchases
of tobacco products and to establish a system to monitor, report and reduce
the illegal sale of tobacco products to minors in order to continue receiving
federal funding for mental health and drug abuse programs. In January 1996,
regulations implementing this legislation were announced by regulatory agenciesthe Department of
Health and other governmental authorities have restricted or
prohibited smoking areas aboard certain common carriers,Human Services.
In June 1995, PM Inc. announced that it has voluntarily undertaken a
program to limit minors' access to cigarettes. Elements of the program
include discontinuing free cigarette sampling to consumers in certain public
places and in some places of employment. Smoking is currently banned on all
commercial airline flights, regardless of duration, within and between the 48
contiguous states, the District of Columbia, the U.S. Virgin Islands and Puerto
Rico and within Alaska and Hawaii, and on all commercial flights to or from
Alaska and Hawaii scheduled for less than six hours. In addition, certain United
States, airlines have banned smokingdiscontinuing the distribution of cigarettes by mail to consumers in
the United States, placing a notice on international flightscigarette cartons and various
foreign airlines have banned smoking on certain flights.packs for sale
in the United States stating "Underage Sale Prohibited," working with others
in support of state legislation to prevent youth access to tobacco products,
taking measures to encourage retailer compliance with minimum-age laws, and
independent auditing of the program.
In February 1994,August 1995, President Clinton announced, and the United States Food and
Drug Administration (the "FDA"),
in initiated, a letterrulemaking proceeding purportedly
designed to an anti-smoking group, statedprevent minors from smoking. In the proposed regulations, the FDA
asserted that it may be possible for the
FDA to regulatehas jurisdiction over nicotine as a "drug" and over cigarettes
as a medical "device" (a nicotine delivery system) under the drug provisions of the
Food, Drug and Cosmetic Act. The FDA stated that such jurisdiction would arise if it found
that manufacturers intend that their products contain nicotine to satisfy an
alleged addictionproposed regulations include severe
restrictions on the part of some of their customers. The FDA stated that
any regulation would need to be based upon a record establishing such intent.
The letter indicated that regulationdistribution, marketing and advertising of cigarettes, underand
require cigarette manufacturers to fund a $150 million-a-year campaign to
discourage minors from using tobacco products. The period for public comment on
the Food, Drug, and
Cosmetic ActFDA's plan initially ended on January 2, 1996. The FDA's assertion of
jurisdiction, if not reversed by judicial or legislative action, could ultimately resultlead to
more expansive FDA-imposed restrictions on cigarette operations than those set
forth in the removal fromcurrent proposed regulations. PM Inc., four other domestic
cigarette manufacturers and an advertising firm have sued the market of products
containing nicotine at levels that cause or satisfy addiction. While Philip
Morris U.S.A. does not believe that cigarettes are addictive, denies the
allegation that its products are intended to satisfy an alleged addiction and
does not believeFDA, seeking a
judicial declaration that the FDA has the legalno authority to regulate cigarettes and
asking the court to issue an injunction requiring the FDA to withdraw its
proposed regulations. Similar suits have been filed against the FDA by
manufacturers of smokeless tobacco products, by a trade association of cigarette
brands, it cannot predictretailers and by advertising agency associations.
On March 18, 1996, the ultimate outcomeFDA placed in its rulemaking docket statements from
three former employees of PM Inc. concerning, according to the FDA's efforts.FDA Commissioner,
"the role of nicotine in the design and manufacture of cigarettes." As a result
of this and unrelated developments, the FDA has reopened for limited purposes
for thirty days the period during which the public may comment on the statements
and two specific aspects of its proposed regulations.
Legislation and other governmental action potentially affecting the
tobacco industry is proposed periodically at the federal, state and local
levels. During 1994,1995, members of Congress, the Clinton Administration and
the
Administrationstate officials proposed measures whichthat would ban or severely restrict smoking
in workplaces and in buildings with public access and on international
flights that have a nexus with the United States, require additional health
warning and product content information on packaging and in advertising,
eliminate the tax deductibility of a portion of the cost
5
of tobacco advertising, significantly increase the excise and similar taxes on
cigarettes, and authorize the FDA to regulate tobacco as a drugproducts (see above). Moreover,
5
In
November 1995, Congress passed a measure that bans or severely restricts
vending machines and the provision of free tobacco products in federal
buildings and on federal property. In recent years various Congressional committeesmembers of Congress
have introduced legislation--some of which has been the subject of hearings or
subcommittees have approved
legislation whichfloor debate--that would subject cigarettes to various regulations under the
Department of Health and Human Services or regulation under the Consumer
Products Safety Act, would establish anti-smoking educational campaigns or
anti-smoking programs or provide additional funding for governmental
antismokinganti-smoking activities, would further restrict the advertising of cigarettes,
including requiring additional warnings on packages and in advertising,
would
provide that the Federal Cigarette Labeling and LabelingAdvertising Act and the
Smoking Education Act could not be used as a defense against liability under
state statutory or common law, wouldand allow state and local governments to
restrict the sale and distribution of cigarettes and further restrict certain
advertising of cigarettes and would increase, in various ways, the cost of manufacturing
cigarettes. Numerous other legislative and regulatory measures have also been
proposed at the federal, state and local levels.
It is not possible to determine what, if any, governmental legislation or
regulations will be adopted relating to cigarettes or smoking. However, if any
or all of the foregoing were to be implemented, Philip Morris U.S.A.'s volume,
operating revenues and operating income could be adversely impacted, in amounts
which cannot be determined.
A number of foreign countries have also taken steps to restrict or
prohibit cigarette advertising and promotion, to increase taxes on
cigarettes, to control prices, to restrict imports and to discourage
cigarette smoking.
It is not possible to determine the outcome of the FDA regulatory
initiative announced by President Clinton or the related litigation, or to
predict what, if any, other foreign or domestic governmental legislation or
regulations will be adopted relating to the advertising, sale or use of
cigarettes or to the tobacco industry generally. However, if any or all of
the foregoing were to be implemented, the volume, operating revenues and
operating income of PM Inc., Philip Morris International and the Company
could be adversely impacted, in amounts that cannot be determined.
PM Inc. has received requests for information in connection with various
governmental investigations of the tobacco industry.
In some cases, such restrictions are more onerous
than thoseJune 1995, The New York Times published an article that made
allegations about PM Inc. documents and supposedly secret research relating
to nicotine. Following publication of that article, PM Inc. has received
grand jury subpoenas from the United States Attorney for the Southern
District of New York.
PM Inc. has received Civil Investigative Demands ("CIDs") from the United
States Department of Justice requiring PM Inc. to produce documents and
respond to interrogatories relating to the possibility of "joint activity to
restrain competition in the United States. For example, advertisingmanufacture and promotionsale of cigarettes, including
joint activity to limit or restrict research and development or product
innovations." Certain present and former employees of PM Inc. have been
deposed or have received CIDs noticing their depositions in connection with
the investigation.
The United States Attorney for the Eastern District of New York is
reviewing the status of a grand jury investigation, begun in 1992, of
possible violations of criminal law in connection with activities relating to
The Council for Tobacco Research -- U.S.A., Inc., a research organization of
which PM Inc. is a sponsor.
PM Inc. has been banned or severely restrictedreceived grand jury subpoenas from the United States Department
of Justice requesting documents relating to an investigation of testimony
provided by tobacco industry executives before Congress.
PM Inc. has received a grand jury subpoena from the United States Attorney
for a numberthe Eastern District of years in
Australia, Canada, Finland, France, Italy, SingaporeVirginia requesting documents relating to an
investigation of Healthy Buildings International, Inc.
While the outcomes of these investigations cannot be predicted, PM Inc.
believes it has acted lawfully.
Smoking and a number of other
countries.Health Litigation Involving the Tobacco Industry
There is litigation pending in various jurisdictions against the leading
United States cigarette manufacturers and others seeking compensatory and, in
some cases, punitive damages for cancer and other health effects alleged to
have resulted from cigarette smoking, "addiction" to cigarette smoking or
exposure to cigarette smoking.ETS. As of December 31, 1994,1995, there were 66125 such smoking and
as of February 15, 1995, 64 such actionshealth cases pending againstin the
leading United States against PM Inc. and, in some cases,
the Company. Of these cases, 88 were filed in the state of Florida and served
between April 28, 1995, and
6
December 31, 1995. One hundred and nine of the smoking and health cases, four of
which purport to be class actions, involve allegations of various injuries
allegedly related to cigarette manufacturerssmoking. Eleven of the smoking and others; 47 suchhealth cases,
wereincluding one that purports to be a class action, involve allegations of various
personal injuries allegedly related to exposure to ETS. Five of the cases
pending as of December 31, 1993. Philip Morris U.S.A. was1995, involve states that have commenced actions
seeking reimbursement for Medicaid and other expenditures claimed to have been
made to treat diseases allegedly caused by cigarette smoking. In addition, a
defendantpurported class action involving allegations of various personal injuries
allegedly related to cigarette smoking is pending in 40
actionsCanada against, among
others, an entity in which the Company has a 40% indirect ownership interest,
and another such action is pending asin Brazil against a subsidiary of December 31, 1994 and 39 such actions pending as of
February 15, 1995; there were 22 such cases as of December 31, 1993.the
Company, among others.
Note 15 to the Company's consolidated financial statements, which are
incorporated
herein by reference to the Company's annual report to stockholders
for1995 Annual Report, describes certain
litigation pending against the year ended December 31, 1994, describesCompany and its subsidiaries and related
entities, including smoking and health cases
pending against Philip Morris U.S.A. and, in certain instances, the Company, as
of January 23, 1995, the date of the Report of Independent Accountants with
respect to such financial statements.cases. Item 3 herein describes certain
subsequent developments in the smoking and health litigation since January 23, 1995.such litigation. Further reference is made to such
noteNote 15 and Item 3.
EachIn March 1996, Liggett Group, Inc., a United States manufacturer and
seller of cigarettes ("Liggett"), announced an agreement to settle the Castano
case described in such Note 15 and Item 3. The agreement is subject to court
approval. Liggett also announced an agreement to settle the Medicaid
reimbursement actions brought by the states of Florida, Louisiana,
Massachusetts, Mississippi and West Virginia as described in such Note 15 and
Item 3. As part of each settlement, Liggett agreed to comply with certain
aspects of the Companyregulations proposed by the FDA, to make certain payments and
Philip Morris U.S.A. believes,to cooperate in limited ways with otherwise adverse parties in certain
investigations and lawsuits. The terms of the settlements would be available
to any other defendant that has a share of the Untied States domestic
cigarette market of less than 30% if it acquires or is acquired by Liggett,
and each has been so
advisedsettlement can be terminated by counsel,Liggett upon the occurrence of
specified events. Liggett's sales account for approximately 2% of the Untied
States domestic cigarette market. The major cigarette manufacturers in the
United States, including PM Inc., have stated that it has a number of valid defensesthey do not intend to
allsettle any smoking and health cases pending against it, including, but not limited to, those defenses
based on preemption under the United States Supreme Court decision discussed in
note 15. In addition, in each such case naming the Company as a defendant, the
Company has soughtlitigation and obtained or is seeking dismissal on the grounds that it
is not a proper party to such action. All such cases are, andthey will continue to be, vigorously defended. It is not possible to predict the outcomedefend
all such actions vigorously.
The Attorneys General of this
litigation. Litigation is subject to many uncertainties, and it is possible
that some of these actions could be decided unfavorably. An unfavorable outcome
of a pending action could encourage the commencement of additional similar
litigation.
Philip Morris U.S.A. has been advised that there is a grand jury
investigation being conducted by the U.S. Attorney for the Eastern District of
New York which is looking into possible violations of criminal law in
connection with activities relating to the Council for Tobacco Research - USA,
Inc., of which Philip Morris U.S.A. is a sponsor. The outcome of this
investigation cannot be predicted.
Philip Morris U.S.A. has received a Civil Investigative Demand from the
Antitrust Division of the United States Department of Justice in an
investigation of possible joint activity among United States
6
manufacturers in the production and sale of cigarettes, including possible
joint activity to limit new product development. The outcome of this
investigation cannot be predicted.other states have announced they are considering
filing Medicaid reimbursement actions.
Distribution, Competition and Raw Materials
Philip Morris U.S.A.PM Inc. sells its tobacco products principally to wholesalers (including
distributors), large retail organizations, including chain stores, vending
machine operators and the armed services. Subsidiaries and affiliates of
Philip Morris International and their licensees market cigarettes and other
tobacco products worldwide, directly or through export sales organizations
and other entities with which they have contractual arrangements.
The market for tobacco products is highly competitive, characterized by
brand recognition and loyalty, with product quality, price, marketing and
packaging constituting the significant methods of competition. Promotional
activities include, in certain instances, allowances, the use of incentive
items, price reductions and other discounts. This highly competitive market, and Philip
Morris U.S.A.'s 1993 initiatives therein, are more fully described in "Tobacco
Products -- Domestic Tobacco Products" above and in the MD&A. The tobacco products of the
Company's subsidiaries, affiliates and their licensees are
extensively advertised and
promoted through various media, although television and radio advertising of
cigarettes is prohibited in the United States and is prohibited or restricted
in many other countries.
Philip Morris U.S.A.PM Inc. and Philip Morris International's subsidiaries and affiliates and
their licensees purchase domestic burley and flue curedflue-cured leaf tobaccos of
various grades and types each year, primarily at domestic auction. In
addition, oriental tobacco and certain other tobaccos are purchased outside
the United States. The tobacco is then graded, cleaned, stemmed and redried
prior to its storage for aging up to three years. Large quantities of leaf
tobacco inventory are maintained to support cigarette manufacturing
requirements. Tobacco is an agricultural commodity subject to United States
government controls, including the tobacco price support (subject to
Congressional review) and production adjustment programs administered by the
United States Department of Agriculture (the "USDA"), either of which can
substantially affect market prices. Philip Morris U.S.A.PM Inc. and Philip Morris International
believe there is an adequate supply of tobacco in the world marketmarkets to
satisfy their current production requirements.
7
As of January 1, 1994, legislation became effective requiring, subject to
financial penalties, the use of at least 75% American-grown tobacco, which is
more expensive than imported tobacco, in cigarettes manufactured in the
United States. A provision of the Uruguay Round Amendments Act, enacted in
December 1994, replaced this requirement with a tariff-rate quota system that
would
allowallows a specified quantity of tobacco to be imported at current tariff
levels, with additional quantities subject to a significantly higher duty.
The United
States is currently negotiating quota levels with foreign countries who are
traditional exporters of tobacco to the United States. Due to the high content of American-grown tobacco used in Philip Morris U.S.A.PM Inc.'s products
and those exported by subsidiaries of Philip Morris International, the
domestic purchase requirement has not had, and the new tariff-rate quota
system is not expected to have, a material adverse effect on the results of
operations of Philip
Morris U.S.A.PM Inc. or Philip Morris International.
FOOD PRODUCTSFood Products
Kraft's reporting and management structure currently consists of Kraft
Foods North America, which comprises thirteeneleven business divisions (including
Kraft Canada), and Kraft Foods International. Effective January 1995, the
North American food business was reorganized to fully integrate the
operations of the former Kraft U.S.A. and General Foods U.S.A. The combined
organization, named Kraft Foods, Inc., has begun to streamline operations and
improve effectiveness and customer response. In December 1995, Kraft Foods
International was realigned to capitalize on growth opportunities, and
reorganized into four separate regional business divisions: Western Europe;
Northern Europe; Central and Eastern Europe, Middle East and Africa; and
Asia/Pacific.
During 1995, Kraft sold its bakery businesses and its North American
margarine, specialty oils, marshmallows, caramels and Kraft Foodservice
distribution businesses and several small international food businesses. In
1994, Kraft sold The All American Gourmet Company, which produced frozen
meals and side dishes, and entered into an agreement to sell its Kraft
Foodservice distribution business.dishes. The salesales of Kraft Foodservice, which closed
early in 1995, will lower Kraft's operating revenues by approximately $3.5
billion but isthese businesses are not expected to have
a material effect on Kraft'sthe Company's future results of operations and are
expected to improve the profit margin of North American food operations.
7
North America
Kraft is the largest packaged food company in North America. Kraft's
principal products include ready-to-eat cereals, coffee and other beverages,
dinners, desserts, bakery products, cheese and cheese products, frozen toppings, stuffing mix, syrup,
vegetable oil-based products, such as salad dressings, margarine and related
products, barbecue sauce, confections,
cultured dairy products, frozen pizza, meat and poultry products and packaged pasta dinners. Kraft is the largest
packaged food company in the United States, marketing such products as
processed meat and poultry products,
coffee, cheesefrozen bagels and cheese products, and
salad dressings.packaged pasta dinners. Its principal brands include Kraft,
Velveeta and Cracker Barrel
and Rondele cheese and cheese products, Miracle Whip salad
dressing, Philadelphia Brand cream cheese, Cheez Whiz cheese spread,sauce, Kraft and
Seven Seas pourable dressings, Parkay margarine, Kraft and Bull's-Eye barbecue sauces, Di
GiornoDiGiorno
pastas, sauces and cheeses, Light n' Lively, Knudsen and Breakstone's cultured
dairy products, Tombstone, Jack's and Jack'sDiGiorno frozen pizzas, Oscar Mayer
luncheon meats, hot dogs, bacon, ham and other meat products, Louis Rich
luncheon meats, poultry franks, turkey bacon and other poultry products,
Lunchables lunch combinations, Claussen pickles, Maxwell House, Yuban, Nabob,
Sanka
Brim and Maxim coffees, General Foods International Coffees, Jell-O desserts,
Post and Nabisco ready-to-eat cereals, Log Cabin syrups, Kool-Aid, Tang,
Crystal Light, Country Time and Capri Sun beverages, Entenmann's and
Freihofer's bakery products, including the Entenmann's fat free and cholesterol
free bakery line, Oroweat specialty breads, Minute rice, Stove Top
stuffing mix, Shake'nShake 'N Bake coatings, Good Seasons salad dressing mixes,
Lender's frozen
bagels and Cool Whip toppings.
Kraft's Food Ingredients Division manufactures certain private label products
as well as a variety of industrial food products for sale to other food
processors, which products include edible oils, shortenings, whey products,
nondairy creamers, confection products, cheese flavorings, seasonings and
cheese analogs.
Kraft Canada is responsible for manufacturing and marketing packaged grocery,
coffee and cheese products. Major brand names include Kraft, Miracle Whip,
Philadelphia Brand, Jell-O, Post, Kool-Aid, Baker's, Tang, Shake'n Bake, Cool
Whip, P'tit Quebec, Maxwell House, Nabob and Magic Moments.
International
Kraft Foods International is responsible for manufacturing and marketing a
wide variety of coffee, confectionery, cheese, packaged grocery and processed
meat products in Europe, the Middle East, Africa and the Asia/Pacific
region. Approximately 93% of Kraft FoodFoods International's sales are made in
Europe. International brands include a wide variety of the products sold by
Kraft in North America, as well as Milka, Tobler, Toblerone, Suchard, Sugus,
Freia, Marabou, Daim, Estrella, Callard & Bowser, Terry's Splendid and Cote d'Or
confections, Carte Noire, Gevalia, Grand'Mere, Kenco, HAG, Jacobs Cafe,
Jacobs Kronung, Jacques Vabre, Night & Day, Saimaza and SaimazaSplendid coffees, Negroni and Simmenthal meats,
Miracoli pasta dinners, Dairylea processprocessed cheese, Vegemite spread and
Hollywood chewing gum.
In Latin America, certain subsidiaries and affiliates of Philip Morris
International manufacture and market a wide variety of food products,
including Kibon ice cream, Q-Refres-Kovarious powdered soft drinks and a number of the
other products sold by Kraft.
8
Distribution, Competition and Raw Materials
Kraft's products in North America are generally sold to supermarket
chains, wholesalers, club stores, mass merchandisers, distributors,
individual stores and other retail food outlets. Products are distributed
through distribution centers, satellite warehouses, company-operated and
public cold storage facilities, depots and other facilities. Selling efforts
are assisted by national and regional advertising on television and radio and
in magazines and newspapers, as well as by sales promotions, product
displays, trade incentives, informative material offered to customers and
other promotional activities.
The products of Kraft
Food Ingredients are sold to food processors, foodservice operators and
distributors and retail food stores.
Products of Kraft Foods International are sold primarily through sales
offices and agents abroad. European regional distribution is coordinated from its headquarters offices
located in Zurich, Switzerland
8
Switzerland; Vienna, Austria; and through facilities located throughout Europe.Cheltenham, England. The
Asia/Pacific area operations are headquartered in Hong Kong. Kraft Foods
International's operations outside of the United States and Canada are
directed from the Kraft Foods Internationalits headquarters in Rye Brook, New York. Advertising is
tailored by product and country to reach targeted audiences.
Kraft is subject to highly competitive conditions in virtually all aspects of its
business. Competitors include large national and international companies and
numerous local and regional companies. Its food products also compete with
generic products and private label products of food retailers, wholesalers
and cooperatives. Kraft competes primarily on the basis of product quality,
service, marketing, advertising and price.
Kraft is a major purchaser of milk, cheese, green coffee beans, poultry,
meat cuts, wheat, cocoa, rice, eggs, shortening,hazelnuts, vegetable oil, aspartame, flour, fruits and berries, and
sugar corn syrup, herbs and spices and tomato products.other sweeteners. Kraft continuously monitors worldwide supply and
cost trends of these commodities to enable it to take appropriate action to
obtain ingredients needed for production.
Kraft purchases all of its milk requirements and a substantial portion of
its cheddar cheese requirements from independent sources, principally from
cooperatives and individual producers. The prices for United States milk and
other dairy product purchases are substantially influenced by the floor prices established by the
milk price support program administered by the USDA. The prices paid for cheese
in the United States are based upon or substantially influenced by weekly
quotations on the National Cheese Exchange in Green Bay, Wisconsin.government
programs as well as market supply and demand.
The most significant cost item in coffee products is green coffee beans,
which are purchased on world markets. Green coffee bean prices are affected
by the quality and availability of supply, trade agreements among producing
and consuming nations, the unilateral policies of the producing nations,
changes in the value of the United States dollar in relation to certain other
currencies and consumer demand for coffee products.
The purchase price of poultry and meat cuts is the major factor in the
cost of Kraft's processed meat products. Poultry and meat prices are cyclical
and are affected by market supply and demand. Meats for Oscar Mayer processed
products are provided primarily by full lotfull-lot quantity purchases.
Kraft is also a major user of packaging materials purchased from many
suppliers.
The prices paid for raw materials used in food products generally reflect
external factors among whichsuch as weather conditions, and commodity market activities are significant.and
the effects of governmental agricultural programs. Although the prices of the
principal raw materials required by Kraft can be expected to fluctuate as a
result of government actions and/or market forces (which would directly
affect the cost of products and value of inventories), Kraft believes such
raw materials generally to be in
adequate supply andgenerally available from numerous sources.sources and in adequate
supply.
Regulation
Almost all of Kraft's United States food products (and packaging materials
therefor) are subject to regulations administered by the FDA or, with respect
to products containing meat and poultry, the USDA. Among other things, the FDA
enforcesthese
agencies enforce statutory prohibitions against misbranded and adulterated
foods, establishesestablish ingredients and/or manufacturing procedures for certain
standard foods, establishesestablish standards of identity for food, determinesdetermine the
safety of food substances and establishes labellingestablish labeling standards and nutrition
labeling requirements for food products. FDA regulations may, in certain
instances, affect the ability of Kraft's United States operating units to
develop and market new products and to utilize technological innovations in
the processing of existing products.
The Nutrition
Labelling and Education Act of 1991 (the "NLEA") mandates nutrition labelling
on a majority of the food products packaged for sale in the United States. In
January 1993, the FDA adopted rules and regulations under the NLEA, including
rules requiring extensive re-labelling of virtually all of Kraft's products.
Similar rules and regulations were adopted by the USDA to cover meat and
poultry
9
products. All such regulations were effective in August 1994. Compliance with
the new requirements did not have a material adverse impact on Kraft's results
of operations.
In addition, various states regulate the business of Kraft's United States
operating units by licensing dairy plants, enforcing federal and state
standards of identity for food, grading food products, inspecting plants,
regulating
9
certain trade practices in connection with the sale of dairy products and
imposing their own labellinglabeling requirements on food products.
The prices paid for grade-A raw milk inMany of the food commodities on which Kraft's United States businesses
rely are controlled in
most areas by Federal Milk Marketing Orders or state regulatory agencies. Such
orderssubject to governmental agricultural programs. These programs have
substantial effects on prices and agencies establish basic minimum prices, with adjustments based upon
usagesupplies and geographic location. In some areas, prices for raw milk also include
additional premiums charged by suppliers. In addition, the USDA sets a support
price, which serves as a floor for the price at which the Commodity Credit
Corporation (the "CCC"), an arm of the USDA, will purchase cheese, butter and
milk powder. From timeare subject to time, Kraft (as well as other cheese producers) sells
excess cheese production to the CCC.Congressional
review.
Almost all of the activities of Kraft Foods International and Kraft Canadathe Company's food operations outside of
the United States are subject to the same kinds of regulation as Kraft's
United States businesses. Each of the operations and locations of these units
is subject to local and national and, in some cases, international (such as
the European Community)Union) regulatory provisions. The rules and regulations relate
to labelling,labeling, packaging, food content, pricing, marketing and advertising and
related areas.
BEERBeer
Products
Miller's brands include Miller Beer, Miller Lite, andMiller Lite Ice, which together form the
Lite franchise; Miller
Genuine Draft, MGD Light, IcehouseRed Dog and Red DogIcehouse in the premium segment; Lowenbrau, brewed and sold in the United States under a
license agreement with Lowenbrau Munchen AG; the
Miller High Life family in the near-premium segment, which includesincluding Miller High
Life, Miller High Life Light and Miller High Life Ice; Miller Reserve Amber AleLowenbrau, brewed and
Miller Reserve Velvet
Stoutsold in the specialtyUnited States under license from Lowenbrau Munchen AG in the
above-premium segment; Meister Brau, Milwaukee's Best and Magnum Malt Liquor
in the below-premium segment; and Sharp's non-alcohol brew; andbrew. Competing in the
specialty segment are the Leinenkugel, brands from the Jacob Leinenkugel Brewing Co.Celis and Shipyard brands. New products
introduced in 1995 include Miller Genuine Red, Leinenkugel's Honey Weiss and
Autumn Gold, Southpaw Light and Big Sky, a near-premium beer sold primarily in
Wisconsin. Miller also owns and operates Molson Breweries U.S.A. Inc., the
second largest beer importer in the United States, with more than 20 brands
from six countries, including the Molson brands from Molson Breweries of Canada, Asahi and
Foster's Lager. New Molson Breweries U.S.A. products introduced in 1995 were
Foster's Special Bitter and Molson Red Jack Ale. Shipment volume for Miller,
including imports, exports and non-alcohol brew, increased 2.8%decreased 0.5% in 1995,
compared with 1994, compared to 1993.in line with the industry. The increasedecrease resulted principallyprimarily
from performance by
Miller's major icereduced shipments of below-premium brands, -- Lite Ice, Icehouse and Molson Ice -- as well as Lite Ice, Molson
Ice and Miller Genuine Draft, partially offset by volume increases due to
sales of Red Dog which was launched nationwideduring its first full year in the fourth quarter.marketplace and improved
sales of Miller Lite. Miller's premium and above-premium beer shipments
increased by 7.6%, although shipments of Miller Lite1.3% in 1995. Premium and Miller
Genuine Draft declined. Shipments of Miller's budgetabove-premium brands also were down,
reflecting a shift to premium brands. Premium brands now accountaccounted for
over 80%81.8% of Miller's shipment volume.volume in 1995, up from 80.4% in 1994.
The following table sets forth, based on shipments, the industry's sales
of beer and brewed non-alcohol beverages, as estimated by Miller, Miller's
unit sales and its estimated share of industry sales:
YEARS ENDED MILLER'S SHARE
DECEMBERYears Ended Miller's
December 31 INDUSTRY MILLER OF INDUSTRY
----------- -------------Industry Miller Share of Industry
- ------------ --------------
(IN THOUSANDS OF BARRELS)-------- ------ -----------------
(in thousands of barrels) (%)
1994............................. 199,0831995 ................ 198,554 45,006 22.7
1994 ................ 199,572 45,243 22.7
1993.............................1993 ................ 198,019 44,024 22.2
1992............................. 197,255 42,221 21.4
Internationally, Miller has formed a number of new alliances with brewers
and beverage companies in Japan, Brazil, China and Great Britain.
Distribution, Competition and Raw Materials
Beer products are distributed primarily through independent beer
wholesalers. The United States malt beverage industry is highly competitive,
with the principal methods of competition being product quality,
10
price,
distribution, marketing and advertising. Miller engages in a wide variety of
advertising and sales promotion activities. Barley, hops, corn and water
represent the principal ingredients used in manufacturing Miller's beer
products and are generally available in the market. The production process,
which includes fermentation and aging periods, is conducted throughout the
year, and at any one time Miller has on hand only a small quantity of
finished products. Containers
10
(bottles, cans and kegs) for beer products are purchased from various
suppliers. Miller expects cost increases for aluminum and other packaging and
brewing materials as supply agreements expire during 1996.
Regulation
The Alcoholic Beverage Labeling Act of 1988 requires all alcoholic
beverages manufactured for sale in the United States to include the following
warning statement on containers: GOVERNMENT"GOVERNMENT WARNING:
(1) According to the Surgeon General, women should not drink alcoholic
beverages during pregnancy because of the risk of birth defects; (2)
Consumption of alcoholic beverages impairs your ability to drive a car or
operate machinery and may cause health problems." The statute empowers the
Bureau of Alcohol, Tobacco and Firearms (the "BATF") to promulgate regulations to prescriberegulate the size and format of the
warning. The
BATF has published a notice in the Federal Register seeking information which
will enable the BATF to report to Congress as to whether the wording of the
warning statement should be amended. In addition, various legislative and
regulatory proposals to prohibit or restrict the advertising and marketing of
alcoholic beverages are being considered. Such warning statement requirements
and any restrictions on advertising and marketing, if enacted, could have an
adverse impact on Miller's sales, but it is not possible to predict their long-
term effects or whether such additional restrictions will be enacted.
The federal excise tax is 32 cents per package of six 12-ounce containers.
Excise taxes, sales taxes and other taxes affecting beer are also levied by
various states, counties and municipalities. In the opinion of Miller,
increases in excise taxes have had, and could continue to have, an adverse
effect on sales.
FINANCIAL SERVICES AND REAL ESTATEshipments.
Financial Services and Real Estate
Philip Morris Capital Corporation ("PMCC") invests in leveraged and single-
investordirect
finance leases, and other tax-oriented financing transactions and third-party
financial instruments, and also engages in various financing activities for
customers and suppliers of the Company's other subsidiaries. Total assets
decreasedincreased to $5.6 billion at year-end 1995, compared with $5.2 billion at
year-end 1994, as compared to $5.7 billion at year-
end 1993, reflecting among other things the salenet investment of the majority ($719 million)
of its marketable securities portfolioan additional $490 million in
1994, with $475 million of the
proceeds therefrom being paid as a dividend to the Company.finance assets.
Mission Viejo Company, ("Mission Viejo"), a wholly-owned subsidiary of PMCC, is engaged
principally in land planning, development and sales activities in Southern
California and in the Denver, Colorado, area.
OTHER MATTERSOther Matters
Customers
None of the Company's business segments is dependent upon a single
customer or a few customers, the loss of which would have a material adverse
effect on the Company's results of operations.
Employees
At December 31, 1994,1995, the Company employed approximately 165,000151,000 people
worldwide. Kraft Foodservice, sold in February 1995, had approximately 9,000
employees at December 31, 1994.
Trademarks
Trademarks are of material importance to all three of the Company's
consumer products businesses and are protected by registration or otherwise
in the United States and most other markets where the related products are
sold.
11
Environmental Regulation
The Company and its subsidiaries are subject to various federal, state and
local laws and regulations and involved in proceedings thereunder concerning the discharge of materials into the
environment, or otherwise related to environmental protection, including the
Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery
Act and the Comprehensive Environmental Response, Compensation and Liability
Act (commonly known as "Superfund"). In 1994,1995, subsidiaries (or former
subsidiaries) of the Company were partiesinvolved in approximately 185 matters
subjecting them to approximately 184 proceedings involving potential liabilityremediation costs under Superfund and
for other environmental project clean-up costs.or otherwise.
The Company and its subsidiaries expect to continue to make capital and other
expenditures in connection with environmental laws and regulations. ComplianceAlthough
it is not possible to predict precise levels of environmental related
expenditures, compliance with such laws and regulations, including the
payment of any monetary sanctions resulting from
governmental proceedings,remediation costs and the making of such expenditures, have
not had and are not expected to have a material adverse effect on the
Company's results of operations, capital expenditures or competitivefinancial position.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES11
Share Repurchase Program
In October 1994, the Company commenced a program to spend up to $6 billion
to repurchase shares of its Common Stock in open market transactions over
three years. The Company is currently repurchasing shares at an annualized
rate of $2.6 billion.
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the
Company's filings with the Securities and Exchange Commission and in its
reports to stockholders. In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company; any such statement is qualified by reference to the
following cautionary statements.
The tobacco industry continues to be subject worldwide to health concerns
relating to the use of tobacco products and exposure to ETS, legislation,
including tax increases, governmental regulation, privately imposed smoking
restrictions, governmental and grand jury investigations and litigation. Each of
the Company's operating subsidiaries is subject to intense competition, changes
in consumer preferences, the effects of changing prices for its raw materials
and local economic conditions. The performance of each of Philip Morris
International and Kraft Foods International is affected by foreign economies and
currency movements. Developments in any of these areas, which are more fully
described elsewhere in Part I hereof and in Management's Discussion and Analysis
of Financial Condition and Results of Operations on pages 19-25 of the Company's
1995 Annual Report, each of which is incorporated into this section by
reference, could cause the Company's results to differ materially from results
that have been or may be projected by or on behalf of the Company. The Company
cautions that the foregoing list of important factors is not exclusive. The
Company does not undertake to update any forward-looking statement that may be
made from time to time by or on behalf of the Company.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
The amounts of operating revenues, operating profit and identifiable
assets attributable to each of the Company's geographic regionssegments and the
amount of export sales from the United States for each of the last three
fiscal years are set forth in noteNote 11 to the Company's consolidated financial
statements, incorporated herein by reference to the Company's annual report to stockholders
for the year ended December 31, 1994.1995 Annual
Report.
Kraft, Miller and subsidiaries of Philip Morris International export
coffee products, grocery products, cheese, processed meats, beer, tobacco and
tobacco
relatedtobacco-related products. In 1994,1995, the value of all exports from the United
States by these subsidiaries amounted to approximately $5.4$5.9 billion.
ITEMItem 2. DESCRIPTION OF PROPERTY.
TOBACCO PRODUCTS
Philip Morris U.S.A.Description of Property.
Tobacco Products
PM Inc. owns nine9 tobacco manufacturing and processing facilities -- sixfacilities--6 in the
Richmond, Virginia, area, two2 in Louisville, Kentucky, and one1 in Cabarrus
County, North Carolina. Philip Morris U.S.A.PM Inc. owns or leases other premises and facilities,
including an operations center, a research and development facility and
various administrative facilities in Richmond and an engineering center in
York County,Newport News, Virginia. Subsidiaries and affiliates of Philip Morris
International own, lease or leasehave an interest in cigarette or component
manufacturing facilities in 2728 countries outside the United States.
FOOD PRODUCTSFood Products
The Company's subsidiaries have 9260 manufacturing and processing
facilities, 582217 distribution centers and depots and 156178 various other
facilities in the United States, as well as 126117 foreign manufacturing and
processing facilities in 3134 countries, and various distribution and other
facilities outside the United States. All significant plants and properties
used for production of food products are owned, although the majority of the
domestic distribution centers and depots are leased.
BEER12
Beer
Miller currently owns and operates seven8 breweries, located in Milwaukee,
Wisconsin;Wisconsin (2); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia;
Irwindale, California; Trenton, Ohio; and Chippewa Falls, Wisconsin. Miller
owns
four
distributorshipsa majority interest in the Celis Brewery in Austin, Texas, and the
Shipyard Brewery in Portland, Maine. Miller also owns a beer distributorship in
Oklahoma, a hops processing facility in Wisconsin, and owns or leases
warehouses in several locations.
During
1994, Miller closed its Fulton, New York brewery and sold two distributorships,
its glass-making plant and its can and bottle carrier facility and, in January
1995, sold its malting facility.
GENERALGeneral
The plants and properties owned and operated by the Company's subsidiaries
are maintained in good condition and are believed to be suitable and adequate
for present needs. In the fourth quarter of 1993, the 12
Company provided for
the costs of restructuring its worldwide operations. The charge related
primarily to the downsizing or closure of approximately 40 manufacturing and
other facilities.facilities, of which 26 were downsized or closed during 1994 and 1995.
Writedowns of such facilities included in the restructuring charge were $429
million, of which $141 million, $211 million and $77 million related to
tobacco, food and beer facilities, respectively. During 1994,The 1993 restructuring and
its impact on the Company downsized or closed 21 manufacturing or other
facilities.
ITEMCompany's financial statements are more fully described in
the MD&A, incorporated herein by reference to the Company's 1995 Annual
Report.
Item 3. LEGAL PROCEEDINGS.Legal Proceedings.
Reference is made to "Tobacco Products -- Litigation Involving the Tobacco
Industry"Products--Smoking and Health Litigation"
under Item 1 and to noteNote 15 to the Company's consolidated financial
statements, incorporated herein by reference to the Company's annual report to
stockholders for the year ended December 31, 1994 for a description of certain
legal proceedings relating to smoking and health, to the above-referenced note
151995 Annual
Report ("Note 15"), for a description of certain pending purported shareholderlegal proceedings.
Certain litigation developments since the date of Note 15 are summarized
below.
In October 1994, the trial court in the Engle case described in Note 15
granted plaintiffs' motion for class actionscertification. Defendants appealed the
class certification decision and order to "Environmental Regulation" under Item 1the Florida Third District Court of
Appeal. On January 31, 1996, the Court of Appeal affirmed the trial court's
order, with the modification that the subject class be restricted to Florida
citizens and residents rather than United States citizens and residents. On
February 15, 1996, defendants filed with the Florida Third District Court of
Appeal a motion for rehearing and a motion for rehearing en banc. In both
motions, defendants sought, in the alternative, an order remanding the case to
the trial court for a descriptiondetermination of certain
proceedings relatingwhether certification of such a class
meets the manageability and superiority requirements of the Florida Rules of
Civil Procedure. Defendants also filed a motion for certification of the case
to environmental compliance.the Florida Supreme Court. On March 4, 1996, plaintiffs notified the trial
court that they believe that the case is ready to be set for trial. On March
13, 1996, defendants filed a joint opposition to the notice of trial.
On March 1, 1996, the trial court in the State of Florida case described in
Note 15 describes an action filedpartially lifted the stay for the limited purpose of permitting motions
to dismiss to be filed. Oral argument of the motions to dismiss is scheduled
for May 28, 1996.
In February 1995, the court in the United States District Court for the
Eastern District of Louisiana,Castano case described in March 1994, in which plaintiffs made certain
allegations against the leading United States cigarette manufacturers and
others, including the Company, and sought certification of a class action. On
February 17, 1995, the courtNote 15
conditionally certified the class for certain issues, including fraud, breach
of warranty, intentional tort, negligence, strict liability, consumer
protection and punitive damages. However, the court declined to certify a
class on the issues of injury in fact, causation, reliance, compensatory
damages, the availability of certain affirmative defenses and on plaintiffs'
claim for medical monitoring. Defendants, including the Company will seek an appealand PM Inc.,
appealed the decision to the United States Court of Appeals for the Fifth
Circuit. Another matterOral argument has been scheduled for April 2, 1996.
On March 18, 1996, in the Lacey case described in noteNote 15, involves a statute enacted by the Florida
legislature in May 1994,court denied
plaintiff's motion to remand the constitutionality ofcase to the Alabama state court. Also on March
18, 1996, the court denied defendants' motion to dismiss, which is being challenged by
Philip Morris U.S.A. and others in an actionhad been filed
in Florida State Court in
JuneMay 1994.
On February 19,16, 1996, in the Moore case described in Note 15, the Governor
of Mississippi filed a Petition for Writ of Mandamus and Prohibition and for
Declaratory Judgment with the Mississippi Supreme Court requesting, among
other things, that the court issue a Writ of Mandamus and Prohibition
requiring the Attorney General to cease and desist from actions for recovery
of Medicaid funds until employed and/or directed to do so by the
13
Governor. On February 20, 1996, PM Inc. and the other defendants in the
Moore case filed a Petition for Writ of Prohibition and/or Mandamus with the
Mississippi Supreme Court requesting that the court instruct the trial judge to
dismiss those portions of the Attorney General's lawsuit that seek recovery of
the Medicaid funds.
In October 1995, Philip Morris U.S.A. and one otherthe court in the McGraw case described in Note 15 granted
defendants' motion to prohibit prosecution of this case pursuant to a
contingent fee arrangement with private counsel, ruling that the Attorney
General lacked the authority to enter into such an agreement. On January 23,
1996, plaintiff filed a motion for leave to file an amended complaint to join
the Public Employees Insurance Agency Financial Board as a party petitionedplaintiff.
In May 1995, the trial court dismissed eight of the ten counts of the
complaint for lack of standing. In October 1995, the court issued a final
order entering judgment on behalf of defendants. On February 15, 1996,
the Attorney General filed a Petition for Appeal with the Supreme Court of
FloridaAppeals of West Virginia from the October 1995 order, requesting that the
court reverse the trial court's ruling that the Attorney General does not
have the authority to prohibit two purportedpursue the common-law and declaratory judgment counts
of the complaint. Oral argument has been scheduled for May 30, 1996.
On February 6, 1996, in the Morales case described in Note 15, plaintiffs,
including PM Inc., amended their complaint to include a request for a
declaration that the Attorney General has no authority to enter into contingent
fee agreements with private attorneys. On February 23, 1996, plaintiffs,
including PM Inc., filed a motion for partial summary judgment on counts I and
II of their amended complaint (which request, respectively, a declaration that
the Attorney General has no authority under Texas law to seek reimbursement of
Medicaid expenditures from plaintiffs outside of the assignment/subrogation
remedy provided by statute, and a declaration that the assignment/subrogation
remedy is the exclusive remedy for recovery of Medicaid expenditures from third
parties).
On February 1, 1996, plaintiff in the Commonwealth of Massachusetts
case described in Note 15 served a motion to remand the action to the state
agencies from filing and maintaining ancourt in which it was originally filed. The motion to remand was orally
argued on February 26, 1996.
On February 16, 1996, in the action against the tobacco industry
underGovernor of the statute. On February 21, 1995, an action against the tobacco industry
was filed under the statute. Philip Morris U.S.A. and the other petitioner are
awaiting a decision on their February 19, 1995 petition.
Another matterState of
Maryland described in noteNote 15, concerns an actionthe plaintiffs, including PM Inc., filed bya
motion for summary judgment on the grounds that any contingent fee contract
between the Attorney General of MississippiMaryland and private attorneys to be appointed
assistant counsel for the State and compensated in May 1994such a manner is invalid
under Maryland law. On February 23, 1996, defendants filed a motion to dismiss
or, in Mississippi State Courtthe alternative, for summary judgment, arguing that plaintiffs have no
standing to assert the challenges they make in the complaint and that the
Attorney General has the power under Maryland law to retain contingency fee
counsel.
On March 13, 1996, an action was filed in Louisiana state court against the
leading United States cigarette manufacturers and others, including the
Company, by the Attorney General of Louisiana seeking the reimbursement of Medicaid
and other expenditures which
plaintiffs claim wereclaimed to have been made to treat eligible citizens of
the State of Louisiana for diseases allegedly caused by cigarette smoking.
Ieyoub, et al. v. The American Tobacco Company, et al., 14th Judicial District
Court, Parish of Calcasieu, Louisiana, Case No. 96-1209. Plaintiff asserts
various claims under Louisiana law and seeks an injunction prohibiting the sale
of cigarettes to minors, an unspecified amount of compensatory damages for past
and future health care expenditures by the State, an unspecified amount of
punitive damages, attorneys' fees, and prejudgment and legal interest. The
Company has not yet received service of the complaint.
On March 18, 1996, plaintiff in the Netherland case described in Note 15
filed a motion to treat smoking-related injuries. In
October 1994,amend the defendants, including Philip Morris U.S.A., moved for
judgment oncomplaint. The proposed amendment would add a
manufacturer of packaging materials as a defendant and would seek to expand the
pleadings. On February 20, 1995, defendants' motion was deniedproposed class from individuals in the State of Louisiana to all persons in the
United States who were allegedly injured by cigarettes subject to the court. Further, plaintiffs'product
recall announced by PM Inc. in May 1995. PM Inc. has filed a motion to strike
all class allegations.
On March 5, 1996, plaintiffs in the Tijerina case described in Note 15
filed an amendment to the complaint which limits the proposed class to all
people who have purchased and smoked within the State of Texas certain filtered
products manufactured by PM Inc.
In August 1995, the trial court in the Lawrence case described in Note 15
granted plaintiffs' motion for class certification and, in December 1995, the
court denied defendants' motion to amend the court's class certification
14
order to permit the Company to take an interlocutory appeal from that order
to the United States Court of defendants'
affirmativeAppeals for the Second Circuit. On February 8,
1996, the Company filed a Petition for Writ of Mandamus with the United States
Court of Appeals for the Second Circuit requesting the Court of Appeals to
direct the trial court to withdraw its order granting class certification.
The Company and each of its subsidiaries named as a defendant believes,
and each has been so advised by counsel handling the respective cases, that
it has a number of valid defenses was granted. Defendantsto all litigation pending against it. All
such cases are, considering severaland will continue to be, vigorously defended. It is not
possible appellate alternatives.to predict the outcome of this litigation. Litigation is subject to
many uncertainties, and it is possible that some of these actions could be
decided unfavorably. An unfavorable outcome of a pending smoking and health
case could encourage the commencement of additional similar litigation. There
have also been a number of adverse legislative, regulatory, political and
other developments concerning cigarette smoking and the tobacco industry.
These developments generally receive widespread media attention. The Company
is not able to evaluate the effect of these developing matters on pending
litigation and the possible commencement of additional litigation.
Management is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of all pending
litigation. It is possible that the Company's results of operations or cash
flows in a particular quarterly or annual period or its financial position
could be materially affected by an ultimate unfavorable outcome of certain
pending litigation. Management believes, however, that the ultimate outcome of
all pending litigation should not have a material adverse effect on the
Company's financial position.
ITEMItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.Submission of Matters to a Vote of Security Holders.
None.
----------------
13
EXECUTIVE OFFICERS OF THE COMPANY-------------
Executive Officers of the Company
The following are the executive officers of the Company as of March 1,
1995:1996:
NAME OFFICE AGEName Office Age
---- ------ -------
Geoffrey C. Bible.......Bible.......... Chairman of the Board and Chief Executive Officer 5758
Murray H. Bring.........Bring............ Executive Vice President, External Affairs and General Counsel 6061
Bruce S. Brown............. Vice President, Taxes 56
Louis C. Camilleri......... President and Chief Executive Officer of Kraft Foods International 41
Katherine P. Clark......... Vice President and Controller 47
Dinyar S. Devitre.......... Senior Vice President, Corporate Planning 48
Lawrence A. Gates.......... Senior Vice President, Human Resources and Administration 58
Marc S. Goldberg........... Senior Vice President, Worldwide Operations and Technology 52
G. Penn Holsenbeck......... Vice President, Associate General Counsel and Secretary 49
James M. Kilts..........Kilts............. Executive Vice President, Worldwide Foods 47Food 48
George R. Lewis............ Vice President and Treasurer 54
John N. MacDonough......... Chairman and Chief Executive Officer of Miller 52
James J. Morgan............ President and Chief Executive Officer of PM Inc. 53
Robert S. Morrison......... Chairman and Chief Executive Officer of Kraft 53
Steven C. Parrish.......... Senior Vice President, Corporate Affairs 45
Hans G. Storr...........Storr.............. Executive Vice President and Chief Financial Officer; Chairman 64
and Chief Executive Officer of PMCC
63
Lawrence A. Gates....... Senior Vice President, Human Resources and Administration 57
Marc S. Goldberg........ Senior Vice President, Planning and Worldwide Tobacco
Operations 51
Bruce S. Brown.......... Vice President, Taxes 55
Katherine P. Clark...... Vice President and Controller 46
G. Penn Holsenbeck...... Vice President, Associate General Counsel and Secretary 48
George R. Lewis......... Vice President and Treasurer 53
William I. Campbell..... Chairman of Philip Morris U.S.A. 50
John N. MacDonough...... Chairman and Chief Executive Officer of Miller 51
James J. Morgan......... President and Chief Executive Officer of Philip Morris
U.S.A. 52
William H. Webb.........Webb............ President and Chief Executive Officer of Philip Morris International 5556
All of the above-mentioned officers, with the exception of Messrs.
Holsenbeck and MacDonough, have been employed by the Company in various
capacities during the past five years. Mr. Holsenbeck was elected to his
current
15
position with the Company in January 1995. Previously, Mr. Holsenbeck held
various positions with Bethlehem Steel Corporation, including Secretary and
Deputy General Counsel from 1992 to January 1995, Assistant General Counsel
from 1985 to 1992, and Assistant Secretary from 1983 to 1992. Mr. MacDonough
was Vice President,
Brand Management of Anheuser-Busch, Inc. from 1989 to 1990, Executive Vice President, Marketing, of Anheuser-Busch International, Inc.,
from 1991 until September 1992, when he became President and Chief Operating
Officer of Miller. He assumed his current position in SeptemberAugust 1993.
14
PART II
ITEMItem 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.Market for Registrants' Common Equity and Related Stockholder Matters.
The information called for by this Item is hereby incorporated by
reference to the paragraphsparagraph captioned "Quarterly Financial Data (Unaudited)"
and "Short-
Term Borrowings and Borrowing Arrangements" on pages 45 and 34, respectively,page 46 of the Company's annual report to stockholders for the year ended December 31,
19941995 Annual Report and made a part hereof.
Note 7 to the Company's consolidated financial statements, which are
incorporated by reference to pages 28-46 of the Company's annual report to
stockholders for the year ended December 31, 1994 and made a part hereof,
contains a discussion of the Company's common stock purchase rights. Each share
of the Company's outstanding common stock has one related purchase right. The
Company's Board of Directors voted on March 1, 1995 to redeem these purchase
rights on April 10, 1995 by payment of the redemption price of $.01 per right
to holders of record of the Company's common stock on March 15, 1995.
ITEMItem 6. SELECTED FINANCIAL DATA.Selected Financial Data.
The information called for by this Item is hereby incorporated by
reference to the information appearing under the caption "Selected Financial
Data" on page 26 of the Company's annual report to stockholders for the year ended
December 31, 19941995 Annual Report and made a part hereof.
ITEMItem 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information called for by this Item is hereby incorporated by
reference to the paragraphs captioned "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 19-25 of the
Company's annual
report to stockholders for the year ended December 31, 19941995 Annual Report and made a part hereof.
ITEMItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.Financial Statements and Supplementary Data.
The information called for by this Item is hereby incorporated by
reference to the Company's annual report to stockholders for the year ended December 31,
19941995 Annual Report as set forth under the caption
"Quarterly Financial Data (Unaudited)" on page 4546 and in the Index to
Consolidated Financial Statements and Schedules (see Item 14) and made a part
hereof.
ITEMItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
ITEMItem 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEMDirectors and Executive Officers of the Registrant.
Item 11. EXECUTIVE COMPENSATION.
ITEMExecutive Compensation.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEMSecurity Ownership of Certain Beneficial Owners and Management.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.Certain Relationships and Related Transactions.
Except for the information relating to the executive officers of the
Company set forth in Part I of this Report, the information called for by
Items 10, 11, 12 and 13 is hereby incorporated by reference to the Company's
definitive proxy statement for use in connection with its annual meeting of
stockholders to be held on April 27, 1995, to be filed with the Securities and Exchange Commission25, 1996, and made a part hereof.
1516
PART IV
ITEMItem 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORMExhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Index to Consolidated Financial Statements and Schedules
REFERENCE
-----------------------------
FORMReference
----------------------------
Form 10-K ANNUAL REPORT
ANNUAL REPORT TO STOCKHOLDERS
PAGE PAGE
------------- ---------------1995 Annual
Annual Report Report
Page Page
------------ ------------
Data incorporated by reference to the Company's annual report to stockholders for
the year ended December 31, 1994:1995
Annual Report:
Consolidated Balance Sheets at December 31, 1995 and
1994 and 1993................................................ -- 28-29
Consolidated Statements of Earnings for the years ended
December 31, 1995, 1994 and 1993 and
1992........................................................... -- 30
Consolidated Statements of Stockholders' Eq-
uityEquity for the
years ended December 31, 1995, 1994 and 1993 and 1992...................................... -- 32
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993 and
1992..................................................... -- 30-31
Notes to Consolidated Financial Statements..Statements ............. -- 33-4533-46
Report of Independent Accountants...........Accountants....................... -- 4647
Data submitted herewith:
Report of Independent Accountants...........Accountants....................... S-1 --
Financial Statement Schedules:
VIII -- ValuationSchedule--Valuation and
Qualifying Accounts...Accounts ................................. S-2 --
Schedules other than those listed above have been omitted either because
such schedules are not required or are not applicable.
(b) Reports on Form 8-K: No Current Reports on Form 8-K were filed during
the last quarter of the period for which this Report is filed. Subsequent to
the last quarter of the period for which this Report is filed, the Company
filed its Current Report on Form 8-K dated January 26, 1995.February 1, 1996.
(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.3-10.2510.3-10.26 are management contracts, compensatory plans or arrangements):
1.1. Form of Underwriting Agreement, including form of terms agreement. (1)
1.2. Form of First Amendment to Selling Agency Agreement. (1)(2)
3.1. Restated Articles of Incorporation of the Company. (2)
3.2. By-Laws, as amended, of the Company. (3)
4.1. Plan of Exchange and Articles of Incorporation. (4)
4.8. Indenture dated as of August 1, 1990 between the Company and Chemical Bank, Trustee. (5)
4.9. First Supplemental Indenture dated as of February 1, 1991 to Indenture dat-
eddated as of August 1, 1990
between the Company and Chemical Bank, Trustee. (6)
4.10. Second Supplemental Indenture dated as of January 21, 1992 to Indenture dated as of August 1, 1990
between the Company and Chemical Bank, Trustee. (7)
4.11. 5-Year Loan and Guaranty Agreement dated as of December 17, 1993October 26, 1995 among the Company, the Banks named
therein and Citibank, N.A., as Agent.
(1)
4.12. 364-Day Loan and Guaranty Agreement, dated as of December 16, 1994, among
the Company, the Banks named therein and Citibank, N.A., as Agent.
4.13. Rights Agreement, dated as of October 25, 1989, between the Company and
First Chicago Trust Company of New York.
4.14. Notice of Redemption of Common Share Purchase Rights, dated March 13, 1995.
10.3. Financial Counseling Program of Philip Morris IncorporatedPM Inc. and the Company. (8)
10.4. Philip Morris Benefit Equalization Plan, as amended. (8)
17
10.5. Amendments, as of October 25, 1989, to the Philip Morris Benefit Equaliza-
tion Plan, as amended.
16
Equalization Plan, as amended. (9)
10.6. Automobile Policy of Philip Morris IncorporatedPM Inc. and the Company. (8)
10.8. Pension Plan for Directors of the Company, effective July 1, 1989, as
amended. (2)
10.9. 1982 Stock Option Plan, as amended. (8)
10.10. The Philip Morris 1987 Long Term Incentive Plan, as amended. (9)(10)
10.12. Form of Executive Master Trust between the Company, Chemical Bank and Handy
Associates. (9)
10.13. Agreement, dated October 12, 1987, between the Company and Murray H. Bring, as
amended. (1)(2)
10.14. Agreement, dated November 1, 1989, between the Company and Murray H. Bring. (9)
10.15. Agreement, dated March 8, 1989, between the Company and James M. Kilts. 10.17. Deferred Incentive Payment Agreement between the Company and Michael A.
Miles, dated March 8, 1989.
10.18. Amendment, dated November 1, 1989, to the Deferred Incentive Payment Agree-
ment between the Company and Michael A. Miles, dated March 8, 1989.
10.19. Agreement, dated November 1, 1989, between the Company and Michael A.
Miles.(9)
10.20. Form of Employment Agreement between the Company and its executive offi-
cers.officers. (9)
10.22. Supplemental Management Employees' Retirement Plan of the Company, as amended. (9)(10)
10.23. The Philip Morris 1992 Incentive Compensation and Stock Option Plan. (10)(11)
10.24. 1992 Compensation Plan for Non-Employee Directors, as amended.
(11)
10.25. Settlement Agreement and Release, dated asUnit Plan for Incumbent Non-Employee Directors, effective January 1, 1996.
10.26. Form of June 17, 1994, between the
Company and Michael A. Miles. (12)Employee Grantor Trust Enrollment Agreement.
12. Statements re computation of ratios. (13)(1)
13. Pages 19-4619-47 of the Company's annual report to stockholders for the year
ended December 31, 1994,1995 Annual Report, but only to the extent set forth in Items 1, 5, 6,
7, 8 and 14 hereof. With the exception of the aforementioned information incorporated by reference
in this Annual Report on Form 10-K, the Company's annual report to stockholders for the year ended December 31, 19941995 Annual Report is not to be deemed "filed" as
part of this Report.
21. Subsidiaries of the Company.
23. Consent of independent accountants.
24. Powers of attorney.
- ------------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
February 1, 1996.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989.
(3) Incorporated by reference to the Company's Quarterly ReportRegistration Statement on
Form 10-Q
for the quarter ended September 30, 1994.S-8 (No. 33-59109) dated May 4, 1995.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-14 (No. 2-96149) dated March 1, 1985.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-36450) dated August 22, 1990.
(6) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-39059) dated February 21, 1991.
(7) Incorporated by reference to the Company's Registration Statement on
Form S-3 (No. 33-45210) dated January 22, 1992.
(8) Incorporated by reference to the Company's Registration Statement on
Form 8-B (No. 1-8940) dated July 1, 1985.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990.
(10)(11) Incorporated by reference to the Company's Proxy Statement in connection
with its annual meeting of stockholders held on April 23, 1992, filed on
March 12, 1992.
(11) Incorporated by reference18
SIGNATURES
Pursuant to the Company's Annual Reportrequirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on Form 10-K forits behalf by the year ended December 31, 1992.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994.
(13) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 26, 1995.
17
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Philip Morris Companies Inc.
/s/ Geoffrey C. Bibleundersigned, thereunto duly authorized.
PHILIP MORRIS COMPANIES INC.
Date: March 10, 199527, 1996 By:_________________________________ /s/ GEOFFREY C. BIBLE
-------------------------------------
(Geoffrey C. Bible,
Chairman of the Board)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
SIGNATURE TITLE DATE
/s/ Geoffrey C. Bible
____________________________________ Director, Chairman March 10, 1995Pursuant to the requirements of the BoardSecurities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and (Geoffrey C. Bible) Chief Executive
Officer
/s/ Hans G. Storr
____________________________________ Director, March 10, 1995
Executive Vice
(Hans G. Storr) Presidentin the capacities and Chief Financial
Officer
/s/ Katherine P. Clark
____________________________________ Vice President and March 10, 1995
Controller
(Katherine P. Clark)
*Elizabeth E. Bailey, Murray H.
Bring, Harold Brown, William H.
Donaldson, Paul W. Douglas, Jane
Evans, Robert E. R. Huntley, Hamish
Maxwell, Rupert Murdoch, John D.
Nichols, Richard D. Parsons, Roger
S. Penske, John S. Reed, Stephen M.
Wolf, Directors
/s/ Hans G. Storr March 10, 1995
*By_________________________________on the date indicated:
Signature Title Date
--------- ----- ----
/s/ GEOFFREY C. BIBLE Director, Chairman of the March 27, 1996
- --------------------------------------------- Board and Chief
(Geoffrey C. Bible) Executive Officer
/s/ HANS G. STORR Director, Executive Vice March 27, 1996
- --------------------------------------------- President and Chief
(Hans G. Storr) Financial Officer
/s/ KATHERINE P. CLARK Vice President and March 27, 1996
- --------------------------------------------- Controller
(Katherine P. Clark)
*ELIZABETH E. BAILEY, MURRAY H. BRING, HAROLD
BROWN, WILLIAM H. DONALDSON, JANE
EVANS, ROBERT E. R. HUNTLEY, RUPERT
MURDOCH, JOHN D. NICHOLS, RICHARD D.
PARSONS, ROGER S. PENSKE, JOHN S.
REED, STEPHEN M. WOLF, Directors
*By: /s/ HANS G. STORR March 27, 1996
----------------------------------------
(Hans G. Storr
Attorney-in-fact)
18
19
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on our audits of the consolidated financial statements of
Philip Morris Companies Inc., which includes an explanatory paragraph related to
litigation pending against the Company, has been incorporated by reference in this Form
10-K from the 19941995 annual report to stockholders of Philip Morris Companies
Inc. and appears on page 4647 therein. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index in Item 14(a) on page 1617 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
January 23, 199529, 1996
S-1
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBERFor the Years Ended December 31, 1995, 1994 and 1993
AND 1992
(IN MILLIONS)(in millions)
COL.Col. A COL.Col. B COL.Col. C COL.Col. D COL.Col. E
------ ---------- --------------------- ---------- ----------
ADDITIONS
---------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD-------- ----------------------- ------- ---------
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ---------- ---------------------- -------- ---------- ----------
(a) (b)
1994:
Consumer Products:1995:
CONSUMER PRODUCTS:
Allowance for dis-
counts...............discounts ............................... $ 15 $551 $ -- $554 $ 12
Allowance for doubtful accounts ....................... 168 35 (12) 28 163
Allowance for returned goods .......................... 4 40 -- 41 3
---- ---- ----- ---- ----
$187 $626 $(12) $623 $178
==== ==== ===== ==== ====
FINANCIAL SERVICES AND REAL ESTATE:
Provision for losses .................................. $104 $ -- $ -- $ 3 $101
==== ==== ===== === ====
1994:
CONSUMER PRODUCTS:
Allowance for discounts.................................. $ 18 $538 $ -- $541 $ 15
Allowance for doubtful accounts.............accounts.......................... 153 38 8 31 168
Allowance for returned goods................goods............................. 4 100 -- 100 4
---- ---- --------- ---- ----
$175 $676 $ 8 $672 $187
==== ==== ===== ==== ====
====
Financial Services and
Real Estate:FINANCIAL SERVICES AND REAL ESTATE:
Provision for losses..losses..................................... $ 94 $ 10 $ -- $ -- $104
==== ==== ========= ==== ====
1993:
Consumer Products:CONSUMER PRODUCTS:
Allowance for dis-
counts...............discounts .................................. $ 23 $572 $ -- $577 $ 18
Allowance for doubtful accounts.............accounts........................... 157 35 2 41 153
Allowance for returned goods................goods ............................. 7 134 -- 137 4
---- ---- --------- ---- ----
$187 $741 $ 2 $755 $175
==== ==== ===== ==== ====
====
Financial Services and
Real Estate:FINANCIAL SERVICES AND REAL ESTATE:
Provision for losses..losses .................................... $ 94 $ -- $ -- $ -- $ 94
==== ==== ==== ==== ====
1992:
Consumer Products:
Allowance for dis-
counts............... $ 23 $585 $ -- $585 $ 23
Allowance for doubtful
accounts............. 133 40 26 42 157
Allowance for returned
goods................ 6 55 -- 54 7
---- ---- ---- ---- ----
$162 $680 $ 26 $681 $187
==== ==== ==== ==== ====
Financial Services and
Real Estate:
Provision for losses.. $ 81 $ 13 $ -- $ -- $ 94
==== ==== ========= ==== ====
- -------------------
Notes:
(a) Related to divestitures, acquisitions and currency translations.translation.
(b) Represents charges for which allowances were created.
S-2