-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, XAITlPD7MWBwYet0/a6CleBcua1u7FxJCIHyHjcpC2gvBmZkig5cUZvnG9ToqKJu bCI/h6eX5NFv7+8WA1/NRw== 0000950130-94-001222.txt : 19940816 0000950130-94-001222.hdr.sgml : 19940816 ACCESSION NUMBER: 0000950130-94-001222 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILIP MORRIS COMPANIES INC CENTRAL INDEX KEY: 0000764180 STANDARD INDUSTRIAL CLASSIFICATION: 2111 IRS NUMBER: 133260245 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08940 FILM NUMBER: 94544286 BUSINESS ADDRESS: STREET 1: 120 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 212-880-38 10-Q 1 QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-8940 Philip Morris Companies Inc. ________________________________________________________________________________ (Exact name of registrant as specified in its charter) Virginia 13-3260245 ________________________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 120 Park Avenue, New York, New York 10017 ________________________________________________________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 880-5000 ______________________________ ________________________________________________________________________________ Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ________ ________ At July 29, 1994, there were 866,024,953 shares outstanding of the registrant's common stock, par value $1 per share. PHILIP MORRIS COMPANIES INC. TABLE OF CONTENTS
Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited). Condensed Consolidated Balance Sheets as at June 30, 1994 and December 31, 1993 3 - 4 Condensed Consolidated Statements of Earnings for the Six Months Ended June 30, 1994 and 1993 5 Three Months Ended June 30, 1994 and 1993 6 Condensed Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 1993 and the Six Months Ended June 30, 1994 7 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1994 and 1993 8 - 9 Notes to Condensed Consolidated Financial Statements 10 - 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14 - 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings. 24 Item 4. Submission of Matters to a Vote of Security Holders. 24 Item 5. Other Information. 25 Item 6. Exhibits and Reports on Form 8-K. 25 Signature 26
-2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Balance Sheets (in millions of dollars) (Unaudited)
June 30, December 31, 1994 1993 -------- ------------ ASSETS CONSUMER PRODUCTS Cash and cash equivalents $ 255 $ 182 Receivables, net 4,929 3,982 Inventories: Leaf tobacco 2,688 3,030 Other raw materials 1,910 1,695 Finished product 2,771 2,633 ------- ------- 7,369 7,358 Other current assets 1,350 1,286 ------- ------- Total current assets 13,903 12,808 Property, plant and equipment, at cost 17,704 16,930 Less accumulated depreciation 6,993 6,467 ------- ------- 10,711 10,463 Goodwill and other intangible assets (less accumulated amortization of $3,053 and $2,727) 19,927 19,746 Other assets 2,598 2,529 ------- ------- Total consumer products assets 47,139 45,546 FINANCIAL SERVICES AND REAL ESTATE Finance assets, net 4,280 4,869 Real estate held for development and sale 418 489 Other assets 304 301 ------- ------- Total financial services and real estate assets 5,002 5,659 ------- ------- TOTAL ASSETS $52,141 $51,205 ======= =======
See notes to condensed consolidated financial statements. Continued -3- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Balance Sheets (continued) (in millions of dollars) (Unaudited)
June 30, December 31, 1994 1993 --------- ------------- LIABILITIES CONSUMER PRODUCTS Short-term borrowings $ 157 $ 268 Current portion of long-term debt 1,036 1,738 Accounts payable 2,641 3,137 Accrued taxes, except income taxes 1,269 860 Accrued marketing 2,108 1,619 Other accrued liabilities 3,292 3,492 Income taxes 1,614 1,853 Dividends payable 602 572 ------- ------- Total current liabilities 12,719 13,539 Long-term debt 14,993 14,358 Deferred income taxes 455 361 Accrued postretirement health care costs 2,079 2,031 Other liabilities 4,839 4,622 ------- ------- Total consumer products liabilities 35,085 34,911 FINANCIAL SERVICES AND REAL ESTATE Short-term borrowings 838 929 Long-term debt 697 863 Deferred income taxes 2,790 2,706 Other liabilities 139 169 ------- ------- Total financial services and real estate liabilities 4,464 4,667 ------- ------- Total liabilities 39,549 39,578 Contingencies (Note 2) STOCKHOLDERS' EQUITY Common stock, par value $1.00 per share (935,320,439 shares issued) 935 935 Earnings reinvested in the business 16,635 15,718 Currency translation adjustments (250) (711) ------- ------- 17,320 15,942 Less cost of treasury stock (67,368,432 and 58,229,749 shares) 4,728 4,315 ------- ------- Total stockholders' equity 12,592 11,627 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $52,141 $51,205 ======= =======
See notes to condensed consolidated financial statements. -4- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (in millions of dollars, except per share data) (Unaudited)
For the Six Months Ended June 30, ------------------------ 1994 1993 ------- ------- Operating revenues $31,914 $30,978 Cost of sales 13,850 13,509 Excise taxes on products 5,655 5,257 ------- ------- Gross profit 12,409 12,212 Marketing, administration and research costs 7,299 7,354 Amortization of goodwill 286 281 ------- ------- Operating income 4,824 4,577 Interest and other debt expense, net 631 725 ------- ------- Earnings before income taxes and cumulative effect of accounting change 4,193 3,852 Provision for income taxes 1,790 1,590 ------- ------- Earnings before cumulative effect of accounting change 2,403 2,262 Cumulative effect of change in method of accounting for postemployment benefits (net of income tax benefit of $297 million) (477) ------- ------- Net earnings $ 2,403 $ 1,785 ======= ======= Weighted average number of shares 873 880 ======= ======= Per share data: Earnings before cumulative effect of accounting change $ 2.75 $ 2.57 Cumulative effect of accounting change (.54) ------- ------- Net earnings $ 2.75 $ 2.03 ======= ======= Dividends declared $ 1.38 $ 1.30 ======= =======
See notes to condensed consolidated financial statements. -5- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Earnings (in millions of dollars, except per share data) (Unaudited)
For the Three Months Ended June 30, -------------------------- 1994 1993 ------- ------- Operating revenues $16,414 $15,789 Cost of sales 7,052 6,879 Excise taxes on products 2,882 2,633 ------- ------- Gross profit 6,480 6,277 Marketing, administration and research costs 3,873 4,012 Amortization of goodwill 145 146 ------- ------- Operating income 2,462 2,119 Interest and other debt expense, net 312 343 ------- ------- Earnings before income taxes 2,150 1,776 Provision for income taxes 918 728 ------- ------- Net earnings $ 1,232 $ 1,048 ======= ======= Weighted average number of shares 870 876 ======= ======= Per share data: Net earnings $ 1.42 $ 1.19 ======= ======= Dividends declared $ .69 $ .65 ======= =======
See notes to condensed consolidated financial statements. -6- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 1993 and the Six Months Ended June 30, 1994 (in millions of dollars, except per share data) (Unaudited)
Earnings Total Reinvested Currency Cost of Stock- Common in the Translation Treasury holders' Stock Business Adjustments Stock Equity ------ ---------- ----------- -------- -------- Balances, January 1, 1993 $ 935 $14,867 $ (34) $(3,205) $12,563 Net earnings 3,091 3,091 Exercise of stock options and issuance of other stock awards (51) 108 57 Cash dividends declared $2.60 per share (2,280) (2,280) Currency translation adjustments (677) (677) Stock purchased (1,218) (1,218) Net unrealized appreciation on securities 91 91 ------ ------- ----- ------- ------- Balances, December 31, 1993 935 15,718 (711) (4,315) 11,627 Net earnings 2,403 2,403 Exercise of stock options and issuance of other stock awards (208) 226 18 Cash dividends declared $1.38 per share (1,205) (1,205) Currency translation adjustments 461 461 Stock purchased (639) (639) Decrease in unrealized appreciation on securities (73) (73) ------ ------- ----- ------- ------- Balances, June 30, 1994 $ 935 $16,635 $(250) $(4,728) $12,592 ====== ======= ===== ======= =======
See notes to condensed consolidated financial statements. -7- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (in millions of dollars) (Unaudited)
For the Six Months Ended June 30, ------------------------ 1994 1993 ------ ------- CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net earnings - Consumer products $2,331 $ 1,723 - Financial services and real estate 72 62 ------ ------- Net earnings 2,403 1,785 Adjustments to reconcile net earnings to operating cash flows: CONSUMER PRODUCTS Cumulative effect of accounting change 774 Depreciation and amortization 816 821 Deferred income tax provision (benefit) 77 (245) Gain on sale of business (3) Cash effects of changes, net of the effects from acquired and divested companies: Receivables, net (847) (449) Inventories 193 9 Accounts payable (541) 5 Income taxes (242) (11) Other working capital items 304 (197) Other 173 98 FINANCIAL SERVICES AND REAL ESTATE Deferred income tax provision 130 180 (Increase)decrease in real estate receivables (48) 38 Decrease (increase) in real estate held for development and sale 69 (30) Other (52) (6) ------ ------- Net cash provided by operating activities before interest payment on zero coupon bonds 2,435 2,769 Interest payment on zero coupon bonds - financial services and real estate (156) ------ ------- Net cash provided by operating activities 2,279 2,769 ------ ------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES CONSUMER PRODUCTS Capital expenditures (607) (772) Purchases of businesses, net of acquired cash (81) (2,485) Proceeds from sales of businesses 61 51 Other 21 (149) FINANCIAL SERVICES AND REAL ESTATE Investments in finance assets (192) (468) Proceeds from finance assets 754 455 ------ ------- Net cash used in investing activities $ (44) $(3,368) ------ -------
See notes to condensed consolidated financial statements. Continued -8- Philip Morris Companies Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (continued) (in millions of dollars) (Unaudited)
For the Six Months Ended June 30, -------------------------- 1994 1993 ------- ------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES CONSUMER PRODUCTS Net issuance of short-term borrowings $ 631 $ 2,585 Long-term debt proceeds 46 975 Long-term debt repaid (988) (1,300) FINANCIAL SERVICES AND REAL ESTATE Net (repayment) issuance of short-term borrowings (91) 40 Long-term debt repaid (44) (55) Purchase of treasury stock (554) (1,218) Dividends paid (1,175) (1,151) Issuance of shares 14 24 Other (14) ------- ------- Net cash used in financing activities (2,175) (100) Effect of exchange rate changes on cash and cash equivalents 13 (36) ------- ------- Increase (decrease) in cash and cash equivalents 73 (735) Cash and cash equivalents at beginning of period 182 1,021 ------- ------- Cash and cash equivalents at end of period $ 255 $ 286 ======= =======
See notes to condensed consolidated financial statements. -9- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Accounting Policies: _____________________________ The interim condensed consolidated financial statements of Philip Morris Companies Inc. (the "Company") are unaudited. It is the opinion of the Company's management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Operating revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year. See Management's Discussion and Analysis on page 14. These statements should be read in conjunction with the consolidated financial statements and related notes which are incorporated by reference to the Company's annual report to stockholders for the year ended December 31, 1993. Balance sheet accounts are segregated by two broad types of business. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services and real estate assets and liabilities are unclassified, in accordance with respective industry practices. Note 2. Contingencies: _______________________ There is litigation pending against the leading United States cigarette manufacturers alleging injury resulting from cigarette smoking or exposure to cigarette smoking. In this litigation, plaintiffs seek compensatory and, in some cases, punitive damages. The Company and Philip Morris Incorporated ("PM Inc."), a wholly-owned subsidiary of the Company, are defendants in some of these cases. In certain of these cases, individuals seek recovery for personal injuries allegedly caused by cigarette smoking. Among the defenses raised by defendants to certain of this litigation is preemption by the Federal Cigarette Labeling and Advertising Act, as amended (the "Act"). On June 24, 1992, the United States Supreme Court held that the Act, as enacted in 1965, does not preempt common law damage claims but that the Act, as amended in 1969, preempts claims arising after 1969 against cigarette manufacturers "based on failure to warn and the neutralization of federally mandated warnings to the extent that those claims rely on omissions or inclusions in advertising or promotions." The Court also held that the 1969 Act does not preempt claims based on express warranty, fraudulent misrepresentation or conspiracy. The Court also held that claims for fraudulent concealment were preempted except "insofar as those claims relied on a duty to disclose...facts through channels of communication other than advertising or promotion." (The Court did not consider whether such common law damage claims were valid under state law.) The Court's decision was announced by a plurality opinion. The effect of the decision on pending and future cases will be the subject of further proceedings in the lower federal and state courts. Additional similar litigation could be encouraged if legislative proposals to eliminate the federal preemption defense, pending in Congress since 1991, were enacted. It is not possible to predict whether any such legislation will be enacted. Certain developments in smoking and health litigation during 1994 are summarized below. Continued -10- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) (Unaudited) In March 1994, a Florida state appellate court reversed a lower court ruling and reinstated plaintiffs' class action allegations in a purported class action against the leading United States cigarette manufacturers, in which certain flight attendants, claiming to represent a class of 60,000 individuals, alleged personal injury caused by exposure to environmental tobacco smoke ("ETS") aboard aircraft. The appellate court ordered the trial court to hold further hearings on the class action allegations. The defendants have filed a request for review of this ruling by the full panel of appellate court judges. In May 1994, an action was filed in a Florida state court against the leading United States tobacco manufacturers and others, including the Company, by plaintiffs alleging injury and purporting to represent a class of all United States citizens and residents who claim to be addicted, or who claim to be the legal survivors of persons who were addicted, to tobacco products. Plaintiffs cited the Florida appellate reversal discussed above in support of their allegations of class action status. The Company was recently voluntarily dismissed from this action, which otherwise continues against the tobacco manufacturers, including PM Inc. In May 1994, the State of Florida enacted a statute which purports to abolish affirmative defenses in actions brought by the state seeking reimbursement of Medicaid costs. The statute purports in such actions to adopt a market share liability theory, to permit the introduction of statistical evidence to prove causation, and to allow the state not to identify the individual Medicaid recipients who received the benefits at issue in such action. In June 1994, PM Inc. and others filed suit in Florida state court challenging the constitutionality of the statute. In March 1994, an action was filed in the United States District Court for the Eastern District of Louisiana against the leading United States cigarette manufacturers and others, including the Company, seeking certification of a class action on behalf of all United States residents who allege that they are addicted, or are the legal survivors of persons who were addicted, to tobacco products. Plaintiffs allege that the cigarette manufacturers manipulated the levels of nicotine in their tobacco products to make such products addictive. In April 1994, a motion for intervention was filed by plaintiffs who have never smoked but claim injury, on behalf of a purported class, from their exposure to ETS resulting from the alleged addiction of smokers to tobacco products. This motion was denied in June 1994. In March 1994, two cases were filed in the United States District Court for the Southern District of California against the leading United States cigarette manufacturers and others, including the Company, on behalf of a purported class of persons claiming to be addicted to cigarettes and who have been prescribed treatment through the nicotine transdermal system (known as the "nicotine patch"). Plaintiffs assert a violation of the Racketeer Influenced Corrupt Organizations Act and claim unspecified actual and treble damages. In April 1994, the two cases, which are virtually identical, were combined in a single amended complaint and plaintiffs' counsel have agreed to dismiss the separate second-filed case. In July 1994, defendants filed a motion to dismiss the complaint on the grounds that the complaint fails to state a claim. Also in July 1994, plaintiffs served a motion asking the court to certify a class of "all persons in the United States who have been diagnosed and are suffering from nicotine addiction due to cigarette smoking and have been prescribed and paid for a nicotine transdermal system to assist them in trying to break their addiction to nicotine by stopping smoking or will be so diagnosed in the future." Recently, the Company was dismissed from this action by stipulation of the parties. The action continues against the tobacco manufacturers, including PM Inc. Continued -11- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) (Unaudited) In June 1994, a case was filed in the United States District Court for the Southern District of California against the leading United States cigarette manufacturers and others, including the Company, on behalf of a purported class of persons claiming to be injured as a result of an alleged addiction to cigarettes or by the alleged exposure to "second-hand" smoke. Plaintiff asserts causes of action for fraud and deceit, negligent misrepresentation, violation of consumer protection statutes, breach of express warranty, breach of implied warranty, intentional infliction of emotional distress, negligence, strict liability, and nuisance, and also seeks injunctive and declaratory relief. In March 1994, an action was filed in an Alabama state court against the three leading United States cigarette manufacturers, including PM Inc. Plaintiff, claiming to represent all smokers who have smoked or are smoking cigarettes manufactured and sold by defendants in the state of Alabama, seeks compensatory and punitive damages not to exceed $48,500 per each class member as well as injunctive relief arising from defendants' alleged failure to disclose additives used in their cigarettes. In April 1994, defendants removed the case to the United States District Court for the Northern District of Alabama. The plaintiff subsequently filed a motion to remand to an Alabama state court. The motion to remand has not been ruled upon. In May 1994, an action was filed in the United States District Court for the Eastern District of Louisiana against the leading United States cigarette manufacturers and others, including PM Inc., by plaintiffs alleging injury and purporting to represent a class of African American or Black American residents or domiciliaries of the United States who claim that they are addicted to tobacco products or that they were not warned of the alleged special and unique health risks posed to African Americans by tobacco products or that they were not warned of the ingredients of tobacco products. The plaintiffs voluntarily dismissed this case in June 1994. In May 1994, an action was filed in Mississippi state court against the leading United States cigarette manufacturers and others, including the Company, by the Attorney General of Mississippi seeking reimbursement of Medicaid and other expenditures by the State of Mississippi claimed to have been made to treat smoking-related diseases. Plaintiff also seeks an injunction barring defendants from selling or encouraging the sale of cigarettes to minors. In June 1994, defendants removed the case to the United States District Court for the Southern District of Mississippi. In that same month, plaintiff moved to remand the case back to state court. The motion to remand is now pending. The Commonwealth of Massachusetts has recently enacted legislation specifically authorizing lawsuits similar to that described in the immediately preceding paragraph. In April 1993, the Company and several of its officers were named as defendants in the first of a number of purported shareholder class actions which have been consolidated in the United States District Court for the Southern District of New York. These lawsuits allege that the Company violated federal securities laws by making false and misleading statements concerning the effects of discount cigarettes on PM Inc.'s premium tobacco business prior to April 2, 1993, the date upon which PM Inc. announced revisions in its marketing and pricing strategies for its premium and discount brands. Continued -12- Philip Morris Companies Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) (Unaudited) In April 1994, the Company, PM Inc. and certain officers and directors were named as defendants in complaints filed as purported class actions in the United States District Courts in New York, one in the Eastern District and two in the Southern District. In one of these cases, plaintiffs allege that defendants violated the federal securities laws by maintaining artificially high levels of profitability through an inventory management practice pursuant to which defendants allegedly shipped more inventory to customers than was necessary to satisfy market demand. In the remaining two cases, plaintiffs assert that defendants violated federal securities laws with statements and omissions regarding the allegedly addictive qualities of cigarettes. In each case, plaintiffs claim to have been misled by defendants' knowing and intentional failure to disclose material information. The Company and PM Inc. believe, and have been so advised by counsel handling the respective cases, that each has a number of valid defenses to all pending litigation. All cases are, and will continue to be, vigorously defended. 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. Recently, there have been a number of restrictive regulatory, adverse political and other developments concerning cigarette smoking and the tobacco industry, including the commencement of the purported class actions referred to above. 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. The Company is contingently liable for payment of (Pounds)610 million notes maturing on October 15, 1994, sold with recourse in 1989. In March 1994, the Company and PM Inc. filed an action against American Broadcasting Companies, Inc. and others alleging injury caused by false and defamatory statements made by defendants on various nationally televised news programs. Among the statements giving rise to the action is defendants' claim that tobacco companies, including PM Inc., artificially "spike" and "fortify" their cigarettes sold in the United States with additional nicotine. The Company and PM Inc. seek compensatory and punitive damages totaling $10 billion. However, litigation is subject to many uncertainties and the Company and PM Inc. are unable to predict the outcome of this matter. -13- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. ________________________________________________________________________ Operating Results - -----------------
For the Six Months Ended June 30, --------------------------------- Operating Revenues Operating Income ------------------ ---------------- (in millions) 1994 1993 1994 1993 ------- ------- ------ ------ Tobacco $14,143 $13,414 $3,106 $2,955 Food 15,289 15,246 1,829 1,788 Beer 2,232 2,144 257 232 Financial services and real estate 250 174 112 93 Amortization of goodwill (286) (281) Unallocated corporate expenses (194) (210) ------- ------- ------ ------ Total $31,914 $30,978 $4,824 $4,577 ======= ======= ====== ====== For the Three Months Ended June 30, ----------------------------------- Operating Revenues Operating Income ------------------ ---------------- (in millions) 1994 1993 1994 1993 ------- ------- ------ ------ Tobacco $ 7,189 $ 6,718 $1,546 $1,263 Food 7,870 7,820 949 927 Beer 1,202 1,170 154 139 Financial services and real estate 153 81 58 45 Amortization of goodwill (145) (146) Unallocated corporate expenses (100) (109) ------- ------- ------ ------ Total $16,414 $15,789 $2,462 $2,119 ======= ======= ====== ======
Operating revenues of $31.9 billion for the first six months of 1994 increased $936 million (3.0%) and operating income increased $247 million (5.4%) over the comparable 1993 period. Operating revenues of $16.4 billion for the second quarter of 1994 increased $625 million (4.0%) and operating income increased $343 million (16.2%) over the comparable 1993 period. In the second quarter of 1994, operating income in all consumer product business segments, other than international food, increased over the comparable 1993 period. -14- Currency movement reduced operating revenues and operating income during the second quarter of 1994 by $206 million and $75 million, respectively, as compared to the second quarter of 1993. However, in the latter part of June 1994, the strengthening of European currencies resulted in $461 million favorable movement in the Company's cumulative translation adjustment. While the Company cannot predict the direction or degree of currency fluctuation, reported third quarter operating revenues and operating income could benefit from a continued strengthening of European currencies. The effective tax rate for the first six months of 1994 was 42.7% as compared to 41.3% in the comparable 1993 period. The increase is due primarily to the higher federal income tax rate, which became effective during the third quarter of 1993. Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits." The cumulative effect at January 1, 1993 of adopting SFAS No. 112 reduced 1993 net earnings by $477 million ($.54 per share), net of $297 million of income tax benefits. Adoption of SFAS No. 112 did not materially reduce the first six months of 1993 earnings before cumulative effect of accounting change. Operating Results by Business Segment _____________________________________ Tobacco - -------
For the Six Months Ended June 30, --------------------------------- Operating Revenues Operating Income ------------------ ---------------- (in millions) 1994 1993 1994 1993 ------- ------- ------ ------ Domestic tobacco $ 5,421 $ 5,267 $1,627 $1,704 International tobacco 8,722 8,147 1,479 1,251 ------- ------- ------ ------ Total $14,143 $13,414 $3,106 $2,955 ======= ======= ====== ======
For several years, the tobacco industry has faced a number of issues which have affected volume, operating revenues and operating income. In the first six months of 1994 and subsequently, the industry, including PM Inc., witnessed the proliferation of many of these concerns and the emergence of new issues. These included proposed federal regulatory controls, actual and proposed excise tax increases, governmental and private restrictions on smoking, new and proposed restrictions on tobacco manufacturing, marketing, advertising and sales, increased assertions of adverse health effects associated with both smoking and exposure to tobacco smoke (and legislation or other governmental action seeking to assess the industry with liability therefor)and the diminishing social acceptance of smoking. See Note 2 to Condensed Consolidated Financial Statements. -15- Currently, the federal excise tax on cigarettes is $12 per thousand ($.24 per pack). In the first six months of this year, the legislative health care debate produced numerous proposals for increasing the federal excise tax on tobacco, ranging from increases of $1.25 per pack down to $.45 per pack. Legislation currently awaiting action in the Senate and in the House of Representatives contains provisions which are identical and which, if enacted, would result in an increase of $.45 per pack, to be phased in over a five year period commencing August 1, 1995. It is anticipated that higher excise taxes, if implemented, would result in volume declines for PM Inc. and the cigarette industry and might cause shifts between the premium and discount segments. Legislation or other governmental action is proposed periodically that not only would increase excise taxes but also would curtail further the advertisement and use of tobacco products. During the first half of 1994, members of Congress and the Administration proposed measures which, if adopted, would ban or severely restrict smoking in workplaces and in buildings permitting public access, require substantial additional health warning and product content information on cigarette packages and in advertising, eliminate the tax deductibility of a portion of the cost of tobacco advertising and authorize the United States Food and Drug Administration to regulate tobacco as an addictive drug. It is not possible to determine what, if any, governmental legislation or regulations will be adopted relating to cigarettes or to smoking. However, any or all of the foregoing, if implemented, could have an adverse impact on PM Inc.'s volume, operating revenues and operating income, the amounts of which cannot be determined. DOMESTIC TOBACCO. During the first six months of 1994, domestic cigarette industry volume (based on shipments) continued to shift from the discount segment to the premium segment. The premium and discount segments accounted for approximately 67% and 33%, respectively, of the domestic cigarette industry in the first six months of 1994, compared with 60% and 40%, respectively, in the comparable period of 1993. Actions taken by PM Inc. in 1993 in response to the highly price sensitive market environment are discussed below. PM Inc.'s domestic volume (based on shipments) was 107.5 billion units for the first six months of 1994, an increase of 17.3% over the comparable 1993 period, reflecting the success of PM Inc.'s new pricing strategy and its marketing and promotional programs. This compared with an industry increase of 9.8%. PM Inc.'s market share for the first six months of 1994 was 44.4%, an increase of 2.8 share points from the comparable 1993 period. In the premium segment, volume in PM Inc.'s brands increased 33.6% in the first six months of 1994, compared with a 22.6% increase for the industry, resulting in a market share gain of 4.3 share points to 53.0%. The Marlboro family's volume was up 18.9 billion units (39.7%) for a 27.4% share of the total industry, as compared with a 21.6% share in the first six months of 1993. In the discount segment, PM Inc.'s shipments decreased 21.4% to 21.3 billion units in the first six months of 1994, compared with an industry decrease of 9.6%, resulting in a decrease of 4.1 share points in this segment to 26.8%. (See below for a discussion of volume changes in the second quarter of 1994.) Since the implementation of the strategy announced on April 2, 1993 and subsequent actions taken by PM Inc. (see below), Nielsen retail sales data indicate share gains for PM Inc. and Marlboro, growing from their low point of 41.6% and 22.0%, respectively, in March 1993 to 46.7% and 28.9%, respectively, in June 1994. Additionally, retail share of PM Inc.'s other premium brands, as a group, climbed to 8.9% in June 1994, up from 8.3% in August 1993, when PM Inc. lowered their wholesale list prices. (March 1993 retail market shares have been restated to reflect PM Inc.'s change to a more representative Nielsen survey of retail outlets. Previously reported retail market shares for PM Inc. and Marlboro in March 1993 were 41.7% and 22.1%, respectively.) -16- During the first six months of 1994, the Company's domestic tobacco operating revenues increased 2.9% due primarily to volume increases ($898 million) and favorable product mix ($452 million), partially offset by price decreases ($1.2 billion). Operating income for the first six months of 1994 decreased 4.5% from the comparable 1993 period, due primarily to price decreases ($1.2 billion), partially offset by volume increases ($593 million), favorable product mix, and lower marketing, administration and research costs ($79 million). During the second quarter of 1993, PM Inc. implemented an extensive promotional program to reduce the average retail price of Marlboro cigarettes. This action, which represented a major shift in its domestic tobacco pricing strategy, was intended to restore lost market share and improve long-term profitability. The market share results of the Marlboro brand price promotion exceeded expectations. Accordingly, during the third quarter of 1993, PM Inc. announced certain actions designed to continue its share recovery strategy. Specifically, PM Inc. created a two category pricing structure for its tobacco brands, premium and discount. In the premium segment, PM Inc. converted its Marlboro retail price promotion into an equivalent wholesale list price reduction that applied to all its other premium brands as well. In the discount segment, PM Inc. raised the net list price of its deep discount products. Its other discount brands are being offered at the same net list price. These strategies effectively narrowed the price gap between PM Inc.'s premium cigarette brands and competitors' discount products. The strategy has thus far proved successful, with PM Inc. recording share and volume gains for Marlboro and its other premium brands since lowering prices. As part of the U.S. federal budget passed in August 1993, Congress has required, effective January 1, 1994, that domestic cigarette manufacturers use at least 75% American-grown tobacco, which is more expensive than imported tobacco, in their products. Due to the high content of American-grown tobacco already used in PM Inc.'s products and in those exported by PM International, this new requirement has not had, and is not expected to have, a material adverse impact on tobacco results of operations. INTERNATIONAL TOBACCO. Operating revenues increased 7.1% due to favorable volume/mix ($361 million), higher foreign excise taxes ($190 million) and price increases ($126 million), partially offset by currency movement ($102 million). Total international unit volume increased 33 billion units (14.2%) to 264 billion units. Volume gains were recorded in Germany, France, Spain, Central and Eastern Europe, the Middle East, Japan, Korea, Argentina and Brazil. In Italy, volume continued to grow, excluding the effect of an inventory replenishment in early 1993 following a union strike. Volume declined in Turkey reflecting difficult economic conditions. The Company's market share trends remain positive in its major international markets with record shares achieved in Germany, Italy, France, Belgium, Holland, Finland, Japan, Korea, Hong Kong, Singapore, Argentina and Brazil. International volume continued to grow for the Company's U.S. heritage brands, such as Marlboro, Chesterfield, L&M, Virginia Slims, Parliament and Philip Morris. Operating income increased 18.2% due primarily to volume/mix increases ($209 million) and price increases and lower costs (aggregating $163 million), partially offset by higher marketing expenses ($79 million) and currency movement ($54 million). -17-
For the Three Months ended June 30, ----------------------------------- Operating Revenues Operating Income ------------------ ---------------- (in millions) 1994 1993 1994 1993 ------ ------ ------ ------ Domestic tobacco $2,924 $2,724 $ 858 $ 686 International tobacco 4,265 3,994 688 577 ------ ------ ------ ------ Total $7,189 $6,718 $1,546 $1,263 ====== ====== ====== ======
DOMESTIC TOBACCO. During the second quarter of 1994, domestic cigarette industry volume (based on shipments) continued to shift from the discount segment to the premium segment. The premium and discount segments accounted for approximately 68% and 32%, respectively, of the domestic cigarette industry in the second quarter of 1994, compared with 59% and 41%, respectively, in the comparable period of 1993. PM Inc.'s domestic volume (based on shipments) was 57.9 billion units for the second quarter of 1994, an increase of 21.9%, compared with an industry increase of 11.1%. PM Inc.'s volume increase reflects the success of PM Inc.'s new pricing strategy and its marketing and promotional programs. However, the increase was inflated by a reduction in wholesale inventories in the second quarter of 1993, which lowered shipments, as well as by a small increase in trade inventories this year as wholesalers accelerated their purchases in anticipation of a possible rise in the federal excise tax. PM Inc.'s market share was 45.6%, up 4.0 share points from the comparable 1993 period. In the premium segment, volume in PM Inc.'s brands increased 42.4% in the quarter, compared with a 27.3% increase for the industry, resulting in a market share gain of 5.7 share points to 54.4%. The Marlboro family's volume was up 11.6 billion units (46.6%) for a 28.8% share of the total industry, as compared with a 21.9% share in the second quarter of 1993. In the discount segment, PM Inc.'s shipments decreased 24.5% to 11.0 billion units, compared with an industry decrease of 12.5%, resulting in a loss of 4.3 share points in this segment to 27.0%. PM Inc.'s domestic tobacco operating revenues increased 7.3% due primarily to volume increases ($589 million) and favorable product mix ($282 million), partially offset by price decreases ($679 million). Operating income increased 25.1% from the comparable 1993 period, due primarily to volume increases ($389 million), favorable product mix, and lower marketing administration and research costs ($176 million), partially offset by price decreases ($674 million). -18- INTERNATIONAL TOBACCO. Operating revenues increased 6.8% due primarily to favorable volume/mix ($184 million), higher foreign excise taxes ($117 million) and price increases ($44 million), partially offset by currency movement ($43 million). Total international unit volume increased 18 billion units (16.3%) to 128 billion units. Volume gains were recorded in Germany, Italy, France, Spain, Central and Eastern Europe, the Middle East, Japan, Korea, Argentina and Brazil. Volume declined in Turkey reflecting difficult economic conditions. The Company's market share trends remain positive in its major international markets, with record shares achieved in Germany, Italy, France, Belgium, Holland, Finland, Japan, Korea, Hong Kong, Singapore, Argentina and Brazil. International volume continued to grow for the Company's U.S. heritage brands, such as Marlboro, Chesterfield, L&M, Virginia Slims, Parliament and Philip Morris. Operating income increased 19.2% due primarily to volume/mix increases ($151 million) and price increases and lower costs (aggregating $67 million), partially offset by higher marketing expenses ($53 million) and currency movement ($41 million). Food - ----
For the Six Months Ended June 30, --------------------------------- Operating Revenues Operating Income ------------------ ---------------- (in millions) 1994 1993 1994 1993 ------- ------- ------ ------ North American food $10,659 $10,626 $1,342 $1,283 International food 4,630 4,620 487 505 ------- ------- ------ ------ Total $15,289 $15,246 $1,829 $1,788 ======= ======= ====== ======
NORTH AMERICAN FOOD. During the first six months of 1994, operating revenues increased slightly due to volume increases ($312 million) and price increases ($186 million), partially offset by the impact of dispositions, net of acquisitions ($413 million) and currency movement ($52 million). In the fourth quarter of 1993, the Company sold its frozen desserts and frozen vegetable businesses. Volume rose from increases in cheese, coffee, processed meats, bakery, cereals, desserts, beverages, frozen pizza, frozen meals, foodservice and Canadian operations. Volume declined in dinners and enhancers (rice products, stuffing mixes and syrups) and commodity oil products. Operating income increased 4.6% over the comparable 1993 period, due primarily to volume increases ($122 million) and price increases net of cost increases ($12 million), partially offset by higher marketing, administration and research costs ($85 million). In May 1994, new labeling requirements for food products, issued by the U.S. Food and Drug Administration, became effective. Compliance with the new requirements has not had, and is not expected to have, a material adverse impact on domestic food results of operations. -19- INTERNATIONAL FOOD. Operating revenues for the first six months of 1994 increased slightly due primarily to acquisitions ($271 million) and price increases, partially offset by currency movement ($322 million). Volume grew in confectionery driven by new product launches and in coffee due primarily to higher sales in anticipation of recently announced price increases. Grocery and cheese volumes were down due to intense price competition in several European markets. Operating income decreased 3.6% from the comparable 1993 period, due primarily to currency movement ($55 million), partially offset by acquisitions ($24 million) and price increases.
For the Three Months Ended June 30, ----------------------------------- Operating Revenues Operating Income ------------------ ---------------- (in millions) 1994 1993 1994 1993 ------ ------ ----- ----- North American food $5,468 $5,369 $ 704 $ 662 International food 2,402 2,451 245 265 ------ ------ ----- ----- Total $7,870 $7,820 $ 949 $ 927 ====== ====== ===== =====
NORTH AMERICAN FOOD. During the second quarter of 1994, operating revenues increased 1.8% due primarily to price increases ($103 million) and volume increases ($254 million), partially offset by the impact of dispositions, net of acquisitions ($224 million) and currency movement ($35 million). Volume increased in cheese; in cereals, processed meats and bakery due primarily to new product introductions and line extensions; in beverages as a result of price repositioning in 1993; in pourable dressings and frozen pizza due to category growth; and in coffee due primarily to higher sales in advance of recently announced price increases, driven by recent increases in commodity costs. Volume also grew in foodservice and Canadian operations, but declined in dinners and enhancers (rice products, stuffing mixes and syrups) and commodity oil products. Operating income increased 6.3% over the comparable 1993 period, due primarily to volume increases ($112 million) and price increases net of cost increases ($16 million), partially offset by higher marketing, administration and research costs ($83 million) and currency movement ($6 million). INTERNATIONAL FOOD. Operating revenues for the second quarter of 1994 decreased 2.0% due primarily to currency movement ($128 million), partially offset by the impact of acquisitions ($27 million) and price increases. Volume grew in confectionery driven by new product launches and in coffee due primarily to higher sales in anticipation of recently announced price increases. Grocery and cheese volumes were down due to intense price competition in several European markets. Operating income decreased 7.5% from the comparable 1993 period, due primarily to currency movement ($28 million), partially offset by price increases. -20- Beer ____ SIX MONTHS ENDED JUNE 30 Operating revenues for the first six months of 1994 increased $88 million (4.1%) from the comparable 1993 period. This increase was due to volume increases ($11 million), the acquisition of Molson Breweries U.S.A. Inc. in the second quarter of 1993 ($71 million) and price/mix favorabilities ($39 million), partially offset by the disposition of distributorships ($34 million). Unit volume (based on shipments) increased 3.0% in the first six months of 1994 reflecting strong growth in premium brands (7.8%), partially offset by a decrease in budget brands. Premium brand growth was led by ice-brewed product introductions. Miller Lite volume declined, but volume for the Lite brand family grew due to the introduction of Lite Ice. Operating income increased $25 million (10.8%) over the comparable 1993 period, due primarily to higher volume ($5 million) and price/mix favorabilities ($21 million). Periodically, legislation is proposed which would increase excise taxes and curtail the advertisement of beer. If implemented, such legislation could result in volume, operating revenues and operating income declines. QUARTER ENDED JUNE 30 Operating revenues for the second quarter of 1994 increased $32 million (2.7%) from the comparable 1993 period. This increase was due primarily to price/mix increases ($39 million) and volume increases ($14 million), partially offset by the disposition of distributorships. Unit volume (based on shipments) increased 1.2% reflecting the strong performance of the Company's premium brand portfolio, which had volume increases of 5.7% for the quarter. Premium growth was led by better-than-expected sales of Miller's new ice-brewed products. Partially offsetting this increase was a volume decline for the Company's budget brands. Miller Lite volume declined, but volume for the Lite brand family grew due to the success of Lite Ice. Volume increased in Molson brands. Operating income increased $15 million (10.8%) from the comparable 1993 period, due primarily to price/mix increases ($23 million) and volume increases ($6 million), partially offset by higher marketing expenses ($15 million). Financial Services and Real Estate __________________________________ SIX MONTHS ENDED JUNE 30 For the first six months of 1994, operating revenues from financial services and real estate operations increased 43.7% and operating income increased 20.4% from the comparable 1993 period driven by increased residential land sales in Southern California and Colorado. Operating income from financial services increased 6.3% over the comparable 1993 period, due primarily to gains from sales of marketable securities, partially offset by lower levels of finance asset investments. QUARTER ENDED JUNE 30 During the second quarter of 1993, operating revenues and operating income from financial services and real estate operations increased 88.9% and 28.9%, respectively, from the second quarter of 1993 driven by increased residential land sales in Southern California and Colorado. Operating income from financial services was flat, reflecting gains on sales of equity securities, offset by lower levels of finance asset investments. -21- Cash Provided and Used ______________________ Net Cash Provided by Operating Activities _________________________________________ Cash provided by operating activities was $2.3 billion for the first six months of 1994, compared with $2.8 billion in the 1993 period. The decrease was due primarily to more cash used for working capital items in 1994 and payment of accreted interest on matured zero coupon bonds, partially offset by higher earnings. Free cash flow is a measure of excess cash generated by a company and is available for debt repayment, share repurchase and acquisitions. The Company defines free cash flow as cash provided by operating activities less capital expenditures, dividends paid to stockholders and net investments in finance assets. For the first six months of 1994, consolidated free cash flow totaled $1.1 billion, as compared to $833 million in the comparable 1993 period. The increase was due primarily to lower net investments in finance assets and higher earnings, partially offset by more cash used for working capital items in 1994 and payment of accreted interest on matured zero coupon bonds. Net Cash Used in Investing Activities _____________________________________ Cash used in investing activities for the first six months of 1994 was $44 million, compared with $3.4 billion for the comparable 1993 period. The decrease reflects a $2.4 billion decrease in cash used for acquisitions, net of dispositions, as well as a $575 million increase in net proceeds from finance assets. Capital expenditures were $607 million in the first six months of 1994, of which 59% related to food operations and 31% related to tobacco operations. During the first half of 1993, the Company acquired Freia Marabou a.s, Scandinavia's leading confectionery company, at a cost of approximately $1.3 billion, a North American ready-to-eat cereal business at a cost of $454 million and Terry's Group in the United Kingdom for $295 million. In addition, the Company acquired a 20% equity interest in Molson Breweries in Canada and 100% of Molson Breweries U.S.A., at a cost of $295 million. The Company also increased its investment in tobacco operations in Central and Eastern Europe. Net Cash Used in Financing Activities _____________________________________ During the first six months of 1994, the Company's net cash used in financing activities was $2.2 billion, compared with $100 million during the first six months of 1993. The change reflects a $446 million net repayment of debt in 1994 compared with a $2.2 billion net issuance of debt in the 1993 period, as well as $554 million of common stock purchases in 1994 compared with $1.2 billion in the 1993 period. Cash used in financing activities for the first six months of 1994 was due primarily to the purchase of common stock ($554 million), cash dividends paid ($1.2 billion) and net repayment of consumer products' long- term debt ($942 million), partially offset by net issuance of consumer products' short-term borrowings ($631 million). The Company may continue to refinance long-term and short-term debt from time to time. The nature and amount of the Company's long-term and short-term debt and the proportionate amount of each can be expected to vary as a result of future business requirements, market conditions and other factors. -22- At June 30, 1994, the Company's ratio of consumer products debt to total equity was 1.29, down from 1.41 at December 31, 1993. The change reflects an increase in stockholders' equity which was due primarily to net earnings in the first half of 1994 and favorable movement in the currency translation adjustment ($461 million), partially offset by dividends declared and purchases of common stock. Dividends paid in the first six months of 1994 increased 2.1% over the comparable period of 1993, reflecting a 6.2% increase in the annual dividend rate to $2.76 per share from $2.60 per share, partially offset by a lower number of outstanding shares of stock. During the first six months of 1994, the Company repurchased 12.4 million shares of its common stock at an aggregate cost of $639 million; 7.7 million shares were repurchased in the second quarter of 1994. These purchases were made in accordance with the Company's November 1991 announcement of its intention to spend up to $2 billion to repurchase common stock in open market transactions; in May 1992, the Board of Directors authorized an additional $3 billion for such purchases. Through June 30, 1994, cumulative purchases under the program totaled 64.3 million shares at a cost of $4.5 billion. On February 23, 1994, the Board of Directors extended through December 30, 1994, the existing authority to repurchase the Company's shares, which was scheduled to expire in May 1994. Contingencies _____________ See Note 2 to the Condensed Consolidated Financial Statements. -23- Part II - OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to Note 2. Contingencies. Item 4. Submission of Matters to a Vote of Security Holders. The annual meeting of stockholders was held in Richmond, Virginia on April 21, 1994. 717,306,701 shares of Common Stock, 81.8% of outstanding shares, were represented in person or by proxy. The following eighteen directors were elected to a one-year term expiring in 1995:
Number of Shares ----------------------------------------- For Withheld ----------- ---------- Elizabeth E. Bailey 710,549,911 6,756,790 Murray H. Bring 710,786,425 6,520,276 Harold Brown 710,458,314 6,848,387 William H. Donaldson 710,737,939 6,568,762 Paul W. Douglas 710,513,783 6,792,918 Jane Evans 710,409,078 6,897,623 Robert E. R. Huntley 710,639,777 6,666,924 Hamish Maxwell 698,108,179 19,198,522 Michael A. Miles 710,027,915 7,278,786 Rupert Murdoch 705,405,515 11,901,186 William Murray 710,731,533 6,575,168 John D. Nichols 710,588,422 6,718,279 Richard D. Parsons 708,394,678 8,912,023 Roger S. Penske 710,584,832 6,721,869 John S. Reed 710,577,610 6,729,091 John M. Richman 710,585,266 6,721,435 Hans G. Storr 713,820,610 3,486,091 Stephen M. Wolf 713,442,873 3,863,828
The selection of Coopers & Lybrand as auditors was approved: 707,117,746 shares, 99.2% of those voting, voted in favor; 5,941,489 shares, 0.8%, voted against and 4,247,466 shares abstained. Four stockholder proposals were defeated: Proposal One: That the Board of Directors direct management to cease trading on the National Cheese Exchange: 14,987,537 shares, 2.7% of the shares voting on the proposal, voted in favor; 532,267,042 shares, 97.3%, voted against and 170,052,122 shares abstained; Proposal Two: That the Company refrain from efforts to oppose legislation geared to restrict smoking in public places, etc.: 27,231,505 shares, 5.2% of the shares voting on the proposal, voted in favor; 498,642,705 shares, 94.8%, voted against and 191,432,491 shares abstained; Proposal Three: That the Company establish a Committee of the Board to review how tobacco farmers can be helped in efforts at conversion from dependency on tobacco farming: 22,152,586 shares, 4.2% of the shares voting on the proposal, voted in favor; 505,125,155 shares, 95.8%, voted against and 190,028,960 shares abstained; and Proposal Four: That the Board of Directors redeem the shareholder rights issued in 1989: 235,776,977 shares, 42.8% of the shares voting on the proposal, voted in favor; 315,202,823, 57.2%, voted against and 166,326,901 shares abstained. -24- Item 5. Other Information. On June 19, 1994, Michael A. Miles resigned as Chairman of the Board and Chief Executive Officer. William Murray was named Chairman of the Board and Geoffrey C. Bible was named Chief Executive Officer. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10 Settlement Agreement and Release, dated as of June 17, 1994 between the Company and Michael A. Miles. 12 Statement regarding computation of ratios of earnings to fixed charges. (b) Reports on Form 8-K. During the quarter for which this report is filed, the Registrant filed a Current Report on Form 8-K, dated May 25, 1994, reporting a decision of the Board of Directors with respect to the Company's food and tobacco businesses. ___________ -25- Signature Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHILIP MORRIS COMPANIES INC. BY /s/ HANS G. STORR Hans G. Storr, Executive Vice President and Chief Financial Officer DATE August 15, 1994 -26- EX-10 2 SETTLEMENT AGREEMENT AND RELEASE EXHIBIT 10 SETTLEMENT AGREEMENT AND RELEASE -------------------------------- AGREEMENT, made and entered into as of June 17, 1994 by and between Philip Morris Companies Inc., a corporation organized under the laws of Virginia ("PM"), and Michael A. Miles (the "Executive"). W I T N E S S E T H : - - - - - - - - - - WHEREAS, the Executive has been employed as Chairman of the Board and Chief Executive Officer of PM; WHEREAS, PM and the Executive desire to arrange for the termination of the Executive's employment; and WHEREAS, PM on behalf of itself and its subsidiaries and affiliates (collectively, the "Company") desires to enter into a settlement agreement and release (this "Agreement"), setting forth the Executive's entitlements as well as his obligations; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, and for other good and valuable consideration, the parties hereto agree as follows: 1. Resignations and Termination of Employment. ------------------------------------------ The Executive shall resign as Chairman of the Board and Chief Executive Officer of PM and from all other positions held with the Company and from any corporate 2 committee or board of directors of the Company as of the date requested by the Board of Directors of PM, but in no event later than July 31, 1994. In any event, the Executive shall continue to be employed by the Company through July 31, 1994 and the Company shall pay base salary to the Executive through such date. In addition, the Company shall reimburse the Executive for any reasonable out-of-pocket business expenses incurred by him on or before July 31, 1994 in connection with his employment, upon submission by him of appropriate documentation for such expenses in accordance with the Company's customary practices and policies. 2. Payments to the Executive. ------------------------- (a) On or before July 31, 1994, the Company shall pay the Executive the following amounts, in each case in a lump sum in cash: (i) $2,000,000 representing two years' salary; (ii) $900,000 representing his annual incentive award for 1994 based on a corporate rating of 120 and a personal performance rating of 4; (iii) $1,622,500 representing a pro rata amount (as if employed through the end of 1994) of his 1993-1995 long-term performance award based on target amount; 3 (iv) $260,000 representing two years' deferred profit sharing based on 13 percent of salary; (v) $83,400 representing one month's vacation for 1994; (vi) an amount equal to the excess of (a) the actuarial equivalent of the benefit (utilizing actuarial assumptions (the "Actuarial Assumptions") no less favorable to the Executive than those in effect under the Philip Morris Benefit Equalization Plan and Philip Morris Supplemental Management Employees' Retirement Plan (together, the "SERP") as of the date hereof) under the Philip Morris Salaried Employees' Retirement Plan (the "Retirement Plan") and the SERP which the Executive would receive if the Executive's employment continued for all purposes for sixty (60) months after the date of his termination of employment, assuming for this purpose that all accrued benefits are fully vested and assuming that the Executive's final average compensation for purposes of determining his benefits is $1,700,000, over (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), under 4 the Retirement Plan as of the date of termination of his employment utilizing the Actuarial Assumptions; (vii) an amount equal to the Executive's Deferred Profit-Sharing account balance, credited with contributions and earnings through July 31, 1994, in the Philip Morris Benefit Equalization Plan; (viii) an amount equal to the excess of (a) the actuarial equivalent of the benefit (utilizing actuarial assumptions (the "Kraft Actuarial Assumptions") no less favorable to the Executive than those in effect under the Kraft, Inc. Retirement Plan as of the date hereof except that for the purposes of the Kraft Actuarial Assumptions the discount rate shall be the discount rate provided in the SERP referred to in clause (vi) above) under the Kraft, Inc. Retirement Plan and the Kraft, Inc. Supplemental Retirement Plan, which the Executive would receive if he were age 60 on the date of termination of his employment, assuming for this purpose that all accrued benefits are fully vested and assuming that the Executive's final average compensation for the purposes of determining his benefits is 5 $1,700,000, over (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the Kraft, Inc. Retirement Plan as of the date of termination of his employment utilizing the Kraft Actuarial Assumptions; and (ix) an amount equal to the Executive's non-qualified account balance, credited with contributions and earnings through July 31, 1994, in the Kraft General Foods Thrift Plan. (b) If the Executive dies prior to payment of any of the amounts set forth in Section 2(a), the Executive's estate or his designated beneficiary will be paid such amount promptly. For purposes of this Agreement, "promptly" shall mean within 20 days following the relevant event or date. (c) The Executive shall have no duty to seek other employment or to become self-employed and there shall be no offset against amounts due the Executive or obligation to repay any such amounts on account of any remuneration attributable to any subsequent employment or self-employment. 3. Restricted Stock and Stock Options. ---------------------------------- The termination of the Executive's employment pursuant to this Agreement shall be deemed to constitute an approved and consented to early retirement under the Philip Morris 1992 Incentive Compensation and Stock Option Plan (the 6 "1992 Plan") and all other applicable plans. As a result, all shares of restricted stock held by the Executive shall vest as of the date of such termination and all stock options held by the Executive shall continue to become exercisable as provided therein and shall continue to be exercisable (i) in the case of options granted under the Philip Morris 1987 Long Term Incentive Plan, until July 31, 1997 and (ii) in the case of options granted under the 1992 Plan, for the balance of their original terms. 4. Other Employee Benefits. ----------------------- (a) Qualified Retirement Benefits. The Executive's rights under ----------------------------- the qualified retirement plans, including both pension and thrift plans, of PM and Kraft General Foods, Inc. ("Kraft") shall be determined in accordance with the terms and provisions of those plans. (b) Welfare Benefits. Effective July 31, 1994, the Executive ---------------- shall be deemed to have retired pursuant to the terms of the Philip Morris Salaried Employees' Retirement Plan as an approved and consented to early retirement and the Executive (and his eligible dependents) shall be entitled to retiree health, dental and life insurance coverage on the same terms as other salaried employees similarly situated. Notwithstanding the foregoing, the Executive shall be entitled to retiree health, dental and life insurance coverage no less favorable than the benefits described in the letter agreement between PM and the 7 Executive dated March 8, 1989 and the letter to the Executive from Kraft dated July 11, 1991, attached to and made a part of this Agreement as Exhibits A and B, respectively, assuming that the 60 months of additional credited service referred to in Section 2(a)(vi) shall be deemed applicable for this purpose. During the period the Executive continues to be employed by the Company, he shall continue to participate in all the welfare benefit plans and programs in which he presently participates. 5. Reimbursement of Expenses; Perquisites. -------------------------------------- (a) The Company shall pay the Executive $100,000 no later than July 31, 1994, as a car allowance of $50,000 per year for two years. (b) The Executive shall be promptly reimbursed for the expenses of financial counseling for the years 1994 through 1996 by an advisor of his choice in an amount up to $15,000 for each calendar year. In the event any financial counseling expenses have been paid or reimbursed for 1994 prior to July 31, 1994, they shall be offset against the maximum 1994 allowance of $15,000. (c) In connection with the Executive's obligation to furnish cooperation pursuant to Section 9, Kraft shall either (i) provide the Executive with an office in Kraft's headquarters in Northfield, Illinois comparable to his present office, together with suitable office furniture, equipment and supplies, and a secretary with skills 8 comparable to those of his current secretary, for the period August 1, 1994 through July 31, 1996 or, alternatively at Kraft's option, (ii) provide the Executive with such an office, furniture, equipment and supplies and secretary at a location in the Chicago, Illinois area selected by the Executive. For this purpose, there shall be a monthly budget for leasehold and operating expenses of at least $4,500 and for a secretary of at least $8,300 and a capital budget for furniture and equipment of at least $75,000. The budgeted amounts shall be made available as requested by the Executive. (d) In connection with the Executive's relocation of his household and family from their present location to the Chicago, Illinois area, the Executive shall be treated on the same basis as a transferred executive under the Company's Executive Relocation Assistance policy as in effect on the date hereof. In any event, the Company shall promptly reimburse the Executive for the reasonable expenses he incurs in such relocation, including, without limitation, all expenses associated with selling his New York City residence. In addition, in the event that the Executive in his discretion determines to sell his New York City residence at 19 East 72nd Street, he shall use his reasonable best efforts to obtain the then fair market value and if the gross sales price is less than $4,100,000, the Company shall, promptly following written notice from the Executive setting 9 forth such gross sales price, pay the Executive an amount equal to the difference between $4,100,000 and such gross sales price. (e) The Company shall promptly reimburse the Executive for membership fees and dues incurred by him at one country club for a period of two years following the termination of the Executive's employment. (f) The Company shall promptly reimburse the Executive for legal fees and other expenses reasonably incurred by him in connection with this Agreement. 6. Confidentiality. --------------- The Executive shall not disclose to anyone any confidential information of the Company, except (i) in the course of carrying out his duties under this Agreement, (ii) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information and (iii) when such information becomes generally known to the public through no fault of the Executive. For the purpose of this Section 6, (a) "confidential information" shall mean all trade secrets or proprietary information concerning the business of the Company relating to its products, product development, customers, suppliers, finances, and business plans and strategies and (b) information "generally known to 10 the public" shall include information known or available generally within the trades or industries of the Company. 7. Announcement. ------------ The announcement of the Executive's termination shall be substantially in the form attached to this Agreement as Exhibit C and the Executive and the Company agree not to make any statements inconsistent with such announcement. 8. Releases. -------- (a) The Executive voluntarily and knowingly releases the Company and its officers, directors, employees and agents from any and all claims, actions and causes of action he has or may have arising on or before the date of this Agreement, whether known or unknown, including, without limitation, those arising under the Age Discrimination in Employment Act of 1967, as amended, and other federal, state or local human and civil rights or labor laws, relating to his employment by, or termination of employment with the Company, except that the Executive does not release (a) his right to have the Company perform its obligations under this Agreement, including, without limitation, his right to indemnification pursuant to Section 10 or to any compensation or benefit pursuant to any plan or program that is part of the subject matter of this Agreement, including, without limitation, any qualified retirement plan, or (b) any right he may have to obtain contribution in the event of the entry of 11 judgment against him as a result of any act or failure to act for which both the Executive and the Company are jointly responsible. (b) The Company voluntarily and knowingly releases the Executive from any and all claims, actions and causes of action it has or may have arising on or before the date of this Agreement, whether known or unknown, except that the Company does not release its right to have the Executive perform his obligations under this Agreement. 9. Cooperation in Litigation. ------------------------- The Executive shall cooperate and generally make himself available to give testimony and assistance in connection with any litigation or arbitration proceeding or investigation involving the Company and arising out of activities of the Company for which he has had responsibility. The Company shall reimburse the Executive for, or advance to the Executive, all reasonable out-of- pocket travel and other expenses incurred by the Executive in connection with the Executive's testimony, cooperation and assistance under this Section 9, including reasonable fees and disbursements for independent counsel for the Executive, if the Executive reasonably determines that the litigation, arbitration, proceeding or investigation is of a nature which requires that he have independent representation. Such expenses shall be reimbursed or advanced promptly after the Executive's submission to the Company of statements in such 12 reasonable detail as the Company may require. The Executive shall not be obligated to make more than 20 days in any calendar year available for the purpose of furnishing cooperation pursuant to this Section 9. In any event, any request for such cooperation shall take into account (i) the significance of the matters at issue in the litigation, arbitration, proceeding or investigation and (ii) the Executive's other personal and business commitments. The Executive shall be entitled to a fee of $2,500 per day (or a pro rata fee for a portion of a day) for furnishing such cooperation, such fee to be paid promptly following the Executive's submission of a statement therefor. 10. Indemnification. --------------- (a) The Company agrees that if the Executive is presently a party, is made a party or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director, officer or employee of the Company or is or was a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is the Executive's alleged action in an official capacity while serving as such director, officer, employee or agent, the Executive shall be indemnified and held harmless by the Company to the 13 fullest extent legally permitted or authorized by the Company's articles of incorporation or bylaws or resolutions of the Company's Board of Directors or, if greater, by the laws of the State of Virginia, against all cost, expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive in connection therewith, and such indemnification shall continue as to the Executive after he has ceased to be a director, officer, employee or agent of the Company or other entity and shall inure to the benefit of the Executive's heirs, executors and administrators. The Company shall advance to the Executive all reasonable costs and expenses incurred by him in connection with a proceeding within 20 days after receipt by the Company of a written request for such advance. Such request shall include an undertaking by the Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses. (b) Neither the failure of the Company (including its board of directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of any proceeding concerning payment of amounts claimed by the Executive under Section 10(a) that indemnification of the Executive is proper because he has met the applicable standard of conduct, nor a determination by the 14 Company (including its board of directors, independent legal counsel or stockholders) that the Executive has not met such applicable standard of conduct, shall create a presumption that the Executive has not met the applicable standard of conduct. (c) The Company agrees to continue and maintain directors' and officers' liability insurance covering the Executive no less favorable than the coverage the Company provides for its directors and officers. 11. Additional Payments. ------------------- In the event that the aggregate of all payments or benefits made or provided to the Executive under this Agreement and under all other plans and programs of the Company (the "Aggregate Payment") is determined to constitute a Parachute Payment, as such term is defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), the Company shall pay to the Executive, prior to the time any excise tax imposed by Section 4999 of the Code ("Excise Tax") is payable with respect to such Aggregate Payment, an additional amount which, after the imposition of all income and excise taxes thereon, including any interest and penalties, is equal to the Excise Tax on the Aggregate Payment. 15 12. Opportunity for Review by Counsel and Period to Revoke Agreement. ---------------------------------------------------------------- The Executive acknowledges that he has been advised to consult with an attorney before executing this Agreement and that he has been provided with a period of 21 days to consider this Agreement. Until the close of business on June 25, 1994, the Executive may revoke this Agreement by notice to the Company pursuant to Section 14. This Agreement shall not become effective until June 25, 1994. 13. Rights Relating to Employment and Termination. --------------------------------------------- This Agreement integrates and embodies all understandings and agreements among the Executive and the Company in connection with the Executive's employment and termination of employment with the Company. Except as provided in this Agreement or in the plans and programs that are part of the subject matter of this Agreement, the Executive shall not be entitled to any payments or other benefits on account of the termination of his employment with the Company. 14. Notice. ------ Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered personally or when sent by registered or certified mail, postage prepaid, return receipt requested, duly addressed to the party concerned at the 16 address indicated below or to such changed address as such party may subsequently give notice of: If to the Company: Philip Morris Companies Inc. 120 Park Avenue New York, NY 10017 Attention: Corporate Secretary If to the Executive: Michael A. Miles c/o Philip Morris Companies Inc. 120 Park Avenue New York, NY 10017 15. Resolution of Disputes. ---------------------- Any disputes arising under or in connection with this Agreement shall be resolved by arbitration, to be held in Chicago, Illinois in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Costs of the arbitration, including, without limitation, reasonable attorneys' fees of both parties, shall be borne by the Company. Pending the resolution of any arbitration or court proceeding, the Company shall continue payment of all amounts due the Executive under this Agreement and all benefits to which the Executive is entitled at the time the dispute arises. 16. Amendment or Waiver. ------------------- No provision in this Agreement may be amended unless such amendment is agreed to in writing, signed by the 17 Executive and by an authorized officer of the Company. No waiver by either party hereto of any breach by the other party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar provision or condition at the same or any prior or subsequent time. Any waiver must be in writing and signed by the Executive or an authorized officer of the Company, as the case may be. 17. Severability. ------------ In the event that any provision of this Agreement shall be held to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 18. Beneficiaries/References. ------------------------ The Executive shall be entitled, to the extent permitted under any applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following the Executive's death by giving the Company written notice thereof. In the event of the Executive's death or a judicial determination of his incompetence, reference in this Agreement to the Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. 18 19. Headings. -------- The headings of sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning of construction of any provision of this Agreement. 20. Counterparts. ------------ This Agreement may be executed in one or more counterparts. 21. Binding Agreement; Assignment. ----------------------------- This Agreement is binding upon the parties hereto and their respective successors, heirs and assigns. No rights or obligations under this Agreement may be assigned or transferred by the Executive except that the Executive's rights to compensation and benefits hereunder shall, in the event of death, pass to his estate, or to his designated beneficiary, and may be transferred by will or operation of law. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the continuing entity, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in 19 this Agreement, either contractually or as a matter of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. Notwithstanding the foregoing, in the event of a spin-off, split-up or other similar restructuring of the Company involving the transfer of a substantial amount of the Company's assets to an entity that, following the completion of such transaction, is not controlled directly or indirectly by the Company, the Company shall, prior to the completion of such transaction, cause such entity to unconditionally guarantee the Company's liabilities and obligations under this Agreement. 22. Survivorship. ------------ The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations. IN WITNESS WHEREOF, the Executive and the Company 20 have caused this Agreement to be executed as of the day and year first above written. Philip Morris Companies Inc. By: /s/ John S. Reed ---------------------- /s/ Michael A. Miles -------------------------- Michael A. Miles Exhibit A --------- March 8, 1989 Mr. Michael A. Miles 1350 Lake Road Lake Forest, IL 60045 Dear Mike: On behalf of Philip Morris Companies Inc., I would like to thank you for your efforts in connection with the integration of the management of our food operations. Your continued participation in this integration is essential to enable us to build an effective food operations management team that will assure future growth and continued success. The purpose of this letter is to confirm our recent understandings regarding your Deferred Incentive Payment. In recognition of your importance to management of the food operations, we have agreed that you will be paid a Deferred Incentive Payment designed to provide you with a special incentive to remain with us during the integration of Kraft and General Foods. Your Deferred Incentive Payment award will be computed and paid to you at the time and in the form described in Appendix A. If your employment terminates for any reason (including death), you will be entitled, subject to the following provisions, to the amount of any Deferred Incentive Payment, including any interest, dividends and appreciation thereon, and also entitled to any unpaid compensation. Generally, any payment to which you are entitled on termination of employment will be paid to you within 30 days of your date of termination. However, if you retire or otherwise voluntarily terminate employment prior to February 15, 1991, your Deferred Incentive Payment will be paid in accordance with Appendix A. If your employment is terminated prior to February 15, 1991, for any reason you will not be entitled to other payments under any severance plan or policy. Although our discussions have focused on your employment during the next two years, we recognize the need to provide a level of continuing financial assurance after the expiration of the two-year business integration period. In the event your employment is involuntarily terminated without cause after February 15, 1991, you will receive an amount equal to the greater of (1) the sum of your annual base salary at the rate in effect at payment (excluding amounts attributable to the Deferred Incentive Payment) which you received for the most recent calendar year for which the computation of such award has been made at the time of your termination of employment, or (2) the amount to which you would be entitled under the terms of the normal severance plans or policies of Philip Morris Companies Inc. or its subsidiaries then applicable to you. Whenever your employment terminates, you and your family will be covered by lifetime medical, dental and life insurance benefits on terms at least as favorable as those currently available to other peer executives retiring from service with Kraft, Inc., but not less favorable than those available to you and your family, in the aggregate, under the medical, dental and life insurance plans of Kraft, Inc. as of December 1, 1988 (for this purpose the Kraft, Inc. life insurance plan for active employees shall be applicable until age 65 and thereafter the Kraft, Inc. life insurance plan for retired employees shall be applicable). If you are reemployed and are eligible to receive any medical or dental benefits under your new employer's plan, the medical and dental plans of Philip Morris Companies Inc. or its subsidiaries will only provide secondary coverage to you and your family during such applicable period of eligibility under the new employer's plans. This letter is intended to summarize our previous understanding relating to your employment with Philip Morris Companies Inc. and its subsidiaries. It replaces any prior employment agreements you had with Kraft or Philip Morris Companies Inc. or its subsidiaries, and any such agreements are to be of no effect. However, nothing in this letter precludes you from participating in any compensation plan, benefit plan or other executive benefit which is generally available to similarly situated executives of Kraft Inc. or its successors and which has not been expressly addressed by this letter. Nothing in this letter replaces or otherwise changes the obligations of Philip Morris Companies Inc. under its indemnification agreement with you dated December 16, 1988. The payments referred to in this letter are obligations of your employer. Philip Morris Companies Inc. will cause your employer to comply with the terms of this letter and to assume its obligations and will also serve as a guarantor with respect to the payments. In the event of any merger, reorganization or similar event, Philip Morris Companies Inc. will cause any successor entity to assume the obligations evidenced by this letter. In addition, if payment of any of the amounts provided for in Appendix A subjects you to federal excise tax, on those amounts or any other amounts you have received, you will receive additional 2 payments sufficient to place you in the position that would have existed had no such excise tax been payable. If this letter accurately describes the matters set forth above, please sign the enclosed copy of this letter and Appendix A which should be returned to us, and will then constitute our entire agreement on this subject. Sincerely, PHILIP MORRIS COMPANIES INC. By /s/ Richard L. Snyder ---------------------------- Richard L. Snyder Senior Vice President, Human Resources and Administration Agreed to this 10 day of ---- March , 1989 - --------------------- By /s/ Michael A. Miles ------------------------ Michael A. Miles President & COO, Kraft General Foods - 3 - APPENDIX A DEFERRED INCENTIVE PAYMENT -------------------------- On the terms and conditions set forth in the attached letter agreement and this Appendix, your employer and Philip Morris Companies Inc. promise to make the Deferred Incentive Payment as follows: (a) A "shadow stock account" will be credited as of February 15, 1989, with 27,257 shadow shares. Each shadow share will have a value equal ------ to that of one share of the common stock of Philip Morris Companies Inc. (b) When dividends are paid on the common stock, additional shadow shares will be credited to the account in an amount determined by multiplying the number of shadow shares by the dividend per share paid on the common stock and dividing this product by the closing price of the common stock on the New York Stock Exchange on the date the dividend is paid. (c) The number and value of shadow shares will be appropriately adjusted in the event of any stock dividend, stock split, subdivision or combination of shares, reclassification or conversion of stock in the event of a merger or consolidation, or similar event with respect to the common stock so that the aggregate value of shadow shares credited will be at least as great immediately after as immediately before any such event. In the event of any dissolution or liquidation of Philip Morris Companies Inc., or if trading in the common stock on the New York Stock Exchange ceases for five or more consecutive days during which such Exchange is open for trading, then regardless of any other provision of this Appendix you will receive an immediate cash payment of an amount equal to the value of the shadow stock account computed on the basis of the average closing prices for the common stock on the New York Stock Exchange on the last five days on which such stock was traded. (d) The number of shadow shares shall also be adjusted in the following circumstances: (i) In the event on or before February 15, 1991, you die, become disabled for six consecutive months, have your employment involuntarily terminated, or take normal or employer approved early retirement, the number of shadow shares credited to your shadow stock account will be increased by the amount, if any, necessary to bring the aggregate value of the shadow shares credited, determined as of the date of any such event, to the amount determined by crediting $2,725,623 with interest from ---------- December 6, 1988 to the date of such event at a rate equal to (A) the annual rate on 12 months obligations of the United States Treasury on February 15, 1989 for the portion of the period prior to February 15, 1990, and (B) the annual rate on such obligations on February 15, 1990 (applied to the balance of both principal and interest on that date) for any portion of the period on or after February 15, 1990. (ii) If you continue your employment with Philip Morris Companies Inc. or any of its subsidiaries until February 15, 1991, the number of shadow shares credited to your shadow stock account shall be increased in the amount, if any, necessary to bring the aggregate value of the shadow shares credited to your account on February 15, 1991 to the amount determined by crediting the dollar amount specified in (i) above with interest at the rates and in the manner described therein to February 15, 1991. For purposes of this Appendix, other than for purposes of the last sentence of paragraph (c), the value of each shadow share will be the closing price of a share of the common stock on the most recent New York Stock Exchange trading day preceding the date of the determination of value. (e) The amount of the Deferred Incentive Payment payable to you will be determined by multiplying the number of shadow shares credited to you on the most recent New York Stock Exchange trading day preceding payment by the closing price of the common stock on such day. Such amount shall be paid to you in cash, or at the discretion of Philip Morris Companies Inc. in shares of common stock equal in number to your shadow shares, at the time you select by initialing one of the following alternative payment schedules: The Deferred Incentive Payment will be paid within 30 days after the earliest to occur of your death, disability for six consecutive months, or other termination of employment; except in the event of your voluntary termination of employment for reasons other than normal or employer approved early retirement, the Deferred Incentive Payment will be paid no earlier than February 15, 1991. OR The Deferred Incentive Payment will be paid within 30 days after the earliest to occur of your death, disability for six consecutive months, other termination of employment, or February -------- 16, 1991; except in the event of your voluntary termination of -------- employment for reasons other than normal or employer approved early retirement, the Deferred Incentive Payment will be paid no earlier than February 15, 1991. Your entitlement to the Deferred Incentive Payment does not constitute an interest in specific assets of your employer or Philip Morris Companies Inc. Your status with respect to such payment shall be that of an unsecured general creditor. The Deferred Incentive Payment may not be assigned or otherwise transferred by you (other than by your will or by operation of law in the event of your death) prior to the date you actually receive such payment or payments. PHILIP MORRIS COMPANIES INC. By /s/ Richard L. Snyder ---------------------------- Richard L. Snyder Senior Vice President, Human Resources and Administration Agreed to this 10 day of ---- March , 1989 - ----------------------- By /s/ Michael A. Miles ------------------------- Michael A. Miles President & COO, Kraft General Foods Exhibit B --------- July 11, 1991 Mr. Michael A. Miles 1350 Lake Road Lake Forest, IL 60045 RE: Retirement, Thrift, Medical, Dental & Death Benefit Coverages Dear Mike: This will confirm our understanding of your coverages while employed at Philip Morris and upon subsequent termination of employment or retirement under the Retirement, Thrift, Medical, Dental & Death Benefit provisions of your Deferred Incentive Payment Agreement, dated March 27, 1989, as amended effective November 1, 1989 (the "DIPA"). RETIREMENT BENEFITS - ------------------- . Retirement Benefits ------------------- - Payments due you for enhanced participation, under the terms of the Kraft Retirement Plan, if any, were paid under the terms and conditions of the (under non-qualified arrangements), DIPA. - While at Philip Morris, your Credited Service under The Kraft General Foods Retirement Plan, is frozen but you will continue to receive compensation credit for purposes of the Final Average Pay Calculation under such Plan. . Thrift ------ - While at Philip Morris your Kraft General Foods Thrift Plan account will continue to receive gains and losses and you can make quarterly investment elections. - 2 - WELFARE PLANS - ------------- . Medical ------- - Upon your termination of employment or retirement, coverage will be for life for you, your spouse, and eligible dependents under the terms of the Kraft Medical Plan in effect on 12/1/88, or, if more favorable, under the terms of the Philip Morris Retiree Medical Plan, if any. - The coverage will be non-contributory but you will have imputed income on the cost of the coverage. - The Kraft Medical Plan will be integrated with Medicare when you attain eligibility for Medicare coverage (generally age 65). - While at Philip Morris, you will be covered by the active employees Philip Morris Medical Plan. . Dental ------ - Upon your termination of employment or retirement, coverage will be for life for you, your spouse, and eligible dependents, under the terms of the Kraft Dental Plan in effect on December 1, 1988, or, if more favorable, under the terms of the Philip Morris Retiree Dental Plan, if any. - The Kraft Dental Plan coverage will be non-contributory but you will have imputed income on the cost of the coverage. - While at Philip Morris you will be covered by the active employees Philip Morris Dental Plan. . Life Insurance -------------- - Upon your termination of employment or retirement, you will be covered for $1,000,000 of Life Insurance until July 1, 2004, or, if more favorable at your election, under the terms of the Philip Morris Retiree Life Plan, if any. - 3 - - After June 30, 2004, your Kraft General Foods Life Insurance will be reduced as shown on the attached Death Benefit Outline. - The Kraft General Foods coverage will be non-contributory but you will have imputed income on the cost of the coverage. - During your active employment at Philip Morris in New York, the $1,000,000 will be offset by amounts payable under the active employees Philip Morris Life Plan. . Executive Death Benefit ----------------------- - You will have a non-insured death benefit of $715,000 for your entire lifetime; see attached Death Benefit Outline. If you have any questions concerning these coverages, please let me know. Respectfully, J.D. Wert JDW/dlp Attachment cc: D. Dressel J. Tucker T. Sompolski P. Johnson DEATH BENEFIT OUTLINE MICHAEL A. MILES ---------------- DOB 06 - 22 - 39 ------------ DOH 11 - 01 - 82 ------------
LIFE PLANS TIME ---------------- EXECUTIVE TOTAL PERIOD BASIC(1) SUPP. DEATH(2) AMOUNT - ------------------------- --------- ----- --------- ---------- UP TO 07/01/2004 1,000,000 $-0- $715,000 $1,715,000 07/01/2004 TO 6/30/2005 500,000 -0- 715,000 1,215,000 07/01/2005 TO 6/30/2006 250,000 -0- 715,000 965,000 07/01/2006 TO 6/30/2007 125,000 -0- 715,000 840,000 07/01/2007 & THEREAFTER 5,000 -0- 715,000 720,000
(1) Offset by any PM Life Benefit while actively employed (2) Non-insured and payable upon death not offset Exhibit C --------- FOR IMMEDIATE RELEASE - --------------------- NEW YORK, June XX, 1994 -- The Board of Directors of Philip Morris Companies today accepted with regret the resignation of Chairman and Chief Executive Officer, Michael A. Miles. The Board elected Mr. X Chairman and Chief Executive Officer to succeed Mr. Miles. In submitting his resignation, Mr. Miles said, "Philip Morris Companies Inc. is a great organization, and I have been proud to be part of it. I leave with full confidence that the difficult decisions made over the past two years will be proven right by our results in 1994 and beyond. Now, however, with the resurgence of our U.S. tobacco business, and the continued strong growth in international tobacco, it makes sense to again have a career tobacco executive in the top job." The resignation was accepted on behalf of the Board by the Chairman of the Board's Compensation Committee, John Reed, Chairman of Citicorp. Speaking for the Board, Mr. Reed said, "The decision was Mr. Miles'. Mike has done much for Philip Morris since he joined the Philip Morris family of companies in 1988. With the full support of the Board, he 2 has skillfully led the company through a very challenging period of time." Mr. Reed continued, "We are fortunate to be able to turn to Mr. X who has long demonstrated his skills in guiding our tobacco and food businesses around the world for over XX years." Mr. X, who was elected to the Board and appointed Vice Chairman for Worldwide Tobacco last month, commented, "It is an honor to be selected to guide this great company that I first joined in XXXX. I am grateful to be able to step in when we are positioned so effectively around the world in all three lines of our business: tobacco, food and beer. While there are significant challenges ahead for us, I see great opportunities to grow all of our worldwide businesses." These changes will take effect immediately. # # # EX-12 3 STATEMENT RE COMPUTATION OF RATIOS OF EARNINGS EXHIBIT 12 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges (Dollars in millions) ___________________
Years Ended December 31, ------------------------------------------------ 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- Earnings before income taxes and cumulative effect of accounting change $6,196 $ 8,608 $6,971 $6,311 $5,058 Add (Deduct): Equity in net earnings of less than 50% owned affiliates (164) (107) (95) (90) (62) Dividends from less than 50% owned affiliates 151 125 72 71 34 Fixed charges 1,716 1,736 1,899 1,941 1,971 Interest capitalized, net of amortization (13) (3) (11) - (8) ------ ------- ------ ------ ------ Earnings available for fixed charges $7,886 $10,359 $8,836 $8,233 $6,993 ====== ======= ====== ====== ====== Fixed charges: Interest incurred: Consumer products $1,502 $ 1,525 $1,711 $1,754 $1,810 Financial services and real estate 87 95 83 93 91 ------ ------- ------ ------ ------ 1,589 1,620 1,794 1,847 1,901 Portion of rent expense deemed to represent interest factor 127 116 105 94 70 ------ ------- ------ ------ ------ Fixed charges $1,716 $ 1,736 $1,899 $1,941 $1,971 ====== ======= ====== ====== ====== Ratio of earnings to fixed charges 4.6 6.0 4.7 4.2 3.5 ====== ======= ====== ====== ======
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges (Cont'd) (Dollars in millions) -------------------
Six Months Ended Three Months Ended June 30, 1994 June 30, 1994 ----------------- ------------------- Earnings before income taxes $4,193 $2,150 Add (Deduct): Equity in net earnings of less than 50% owned affiliates (122) (59) Dividends from less than 50% owned affiliates 135 64 Fixed charges 765 377 Interest amortization, net of capitalization 6 8 ------ ------ Earnings available for fixed charges $4,977 $2,540 ====== ====== Fixed charges: Interest incurred: Consumer products $ 661 $ 324 Financial services and real estate 40 21 ------ ------ 701 345 Portion of rent expense deemed to represent interest factor 64 32 ------ ------ Fixed charges $ 765 $ 377 ====== ====== Ratio of earnings to fixed charges 6.5 6.7 ====== ======
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