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                          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 ------------------- ---------------- Common Stock, $1 par value New York Stock Exchange ----------------
-------------- 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 --- --- 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. [_] ----------------X --- -------------- 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. ---------------- 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). - ----------------- * 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* - ------------ -------- ------- ------------------ (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 - -------- * 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. - --------- * 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