-----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, laJJCjrixtVULVhs8zBebrhZReQjlA3h/xU0xdcejA/ijOisEohjogzjGRksYkzC XLVn/FZFJlVQWrYZjUe6ww== 0000950130-95-000119.txt : 19950607 0000950130-95-000119.hdr.sgml : 19950607 ACCESSION NUMBER: 0000950130-95-000119 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950126 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19950126 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILIP MORRIS COMPANIES INC CENTRAL INDEX KEY: 0000764180 STANDARD INDUSTRIAL CLASSIFICATION: CIGARETTES [2111] IRS NUMBER: 133260245 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08940 FILM NUMBER: 95503218 BUSINESS ADDRESS: STREET 1: 120 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 212-880-3870 MAIL ADDRESS: STREET 1: 120 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10017 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) January 26, 1995 ---------------- PHILIP MORRIS COMPANIES INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 1-8940 13-3260245 - -------------------------------------------------------------------------------- (State or other (Commission (IRS Employer jurisdiction File Number) Identification No.) of incorporation) 120 Park Avenue, New York, New York 10017-5592 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 880-5000 -------------- - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) Item 5. Other Events. - ------ ------------ Filed as part of this Current Report on Form 8-K are the consolidated balance sheets of Philip Morris Companies Inc. and subsidiaries (the "Company") as of December 31, 1994 and 1993, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994 (the "Financial Statements"), the independent accountants' report thereon and the statement regarding computation of ratios of earnings to fixed charges. The Financial Statements and independent accountants' report will be incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 1994. Item 7. Financial Statements and Exhibits. - ------ --------------------------------- The Financial Statements, together with the independent accountants' report thereon, are included herein. (c) Exhibits 12. Statement regarding computation of ratios of earnings to fixed charges. 23. Consent of independent accountants. 27. Financial Data Schedule. 99. Financial Statements. 2 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 Executive Vice President and Chief Financial Officer DATE January 26, 1995 3 EXHIBIT INDEX Exhibit No. Page - ----------- ---- 12. Statement regarding computation of ratios of earnings to fixed charges. 23. Consent of independent accountants. 27. Financial Data Schedule. 99. Financial Statements. EX-12 2 STATEMENT RE COMPUTATION OF RATIOS EXHIBIT 12 PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES Computation of Ratios of Earnings to Fixed Charges (dollars in millions) ___________________
Years Ended December 31, ---------------------------------------------- 1994 1993 1992 1991 1990 ------ ------ ------- ------ ------ Earnings before income taxes and cumulative effect of accounting change $8,216 $6,196 $ 8,608 $6,971 $6,311 Add (Deduct): Equity in net earnings of less than 50% owned affiliates (184) (164) (107) (95) (90) Dividends from less than 50% owned affiliates 165 151 125 72 71 Fixed charges 1,537 1,716 1,736 1,899 1,941 Interest capitalized, net of amortization (1) (13) (3) (11) - ------ ------ ------- ------ ------ Earnings available for fixed charges $9,733 $7,886 $10,359 $8,836 $8,233 ====== ====== ======= ====== ====== Fixed charges: Interest incurred: Consumer products $1,317 $1,502 $ 1,525 $1,711 $1,754 Financial services and real estate 78 87 95 83 93 ------ ------ ------- ------ ------ 1,395 1,589 1,620 1,794 1,847 Portion of rent expense deemed to represent interest factor 142 127 116 105 94 ------ ------ ------- ------ ------ Fixed charges $1,537 $1,716 $ 1,736 $1,899 $1,941 ====== ====== ======= ====== ====== Ratio of earnings to fixed charges 6.3 4.6 6.0 4.7 4.2 ====== ====== ======= ====== ======
EX-23 3 CONSENT OF COOPERS & LYBRAND EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in Post-Effective Amendment No. 13 to the registration statement of Philip Morris Companies Inc. (the "Company") on Form S-14 (File No. 2-96149) and in the Company's registration statements on Form S-3 (File Nos. 33-21033 and 33-49195) and Form S-8 (File Nos. 33-1479, 33- 1480, 33-10218, 33-13210, 33-14561, 33-17870, 33-37115, 33-38781, 33-39162,33- 40110 and 33-48781), of our report, which includes an explanatory paragraph related to litigation pending against the Company, dated January 23,1995 (included herein), on our audits of the consolidated financial statements of the Company, which are included in this Current Report on Form 8-K dated January 26,1995, as indicated in item 7 herein. /s/ COOPERS & LYBRAND L.L.P. New York, New York January 23, 1995 EX-27 4 ART.5 FDS
5 This schedule contains summary financial information extracted from Pages 2-6 of the Company's consolidated financial statements for the year ended December 31, 1994 and is qualified in its entirety by reference to such financial statements. 1,000,000 12-MOS DEC-31-1994 DEC-31-1994 184 0 4,555 173 7,987 13,908 18,254 7,083 52,649 12,965 14,975 935 0 0 11,851 52,649 65,125 65,125 39,700 39,700 15,976 0 1,233 8,216 3,491 4,725 0 0 0 4,725 5.45 5.45
EX-99 5 FINANCIAL STATEMENTS Exhibit 99 PHILIP MORRIS COMPANIES INC. and SUBSIDIARIES Consolidated Financial Statements for the period ended December 31, 1994 REPORT OF INDEPENDENT ACCOUNTANTS _________________________________ To the Board of Directors and Stockholders of Philip Morris Companies Inc.: We have audited the accompanying consolidated balance sheets of Philip Morris Companies Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Philip Morris Companies Inc. and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 15 to the consolidated financial statements, there is litigation pending against the Company. The ultimate outcome of the litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements. As discussed in Note 13 to the consolidated financial statements, the Company adopted in 1993 the method of accounting for postemployment benefits prescribed by Statement of Financial Accounting Standards No. 112. /S/ Coopers & Lybrand L.L.P. New York, New York January 23, 1995 PHILIP MORRIS COMPANIES INC. and Subsidiaries CONSOLIDATED BALANCE SHEETS, at December 31, (in millions of dollars, except per share data) ------------
ASSETS 1994 1993 ---- ---- CONSUMER PRODUCTS Cash and cash equivalents $ 184 $ 182 Receivables, net 4,382 3,982 Inventories: Leaf tobacco 3,029 3,030 Other raw materials 1,943 1,695 Finished product 3,015 2,633 ------- ------- 7,987 7,358 Other current assets 1,355 1,286 ------- ------- Total current assets 13,908 12,808 Property, plant and equipment, at cost: Land and land improvements 743 709 Buildings and building equipment 4,834 4,600 Machinery and equipment 11,248 10,494 Construction in progress 1,429 1,127 ------- ------- 18,254 16,930 Less accumulated depreciation 7,083 6,467 ------- ------- 11,171 10,463 Goodwill and other intangible assets (less accumulated amortization of $3,342 and $2,727) 19,744 19,746 Other assets 2,633 2,529 ------- ------- TOTAL CONSUMER PRODUCTS ASSETS 47,456 45,546 FINANCIAL SERVICES AND REAL ESTATE Finance assets, net 4,519 4,869 Real estate held for development and sale 401 489 Other assets 273 301 ------- ------- TOTAL FINANCIAL SERVICES AND REAL ESTATE ASSETS 5,193 5,659 ------- ------- TOTAL ASSETS $52,649 $51,205 ======= =======
LIABILITIES 1994 1993 ---- ---- CONSUMER PRODUCTS Short-term borrowings $ 181 $ 268 Current portion of long-term debt 712 1,738 Accounts payable 3,789 3,137 Accrued liabilities: Marketing 2,086 1,619 Taxes, except income taxes 948 860 Employment costs 926 874 Other 2,290 2,618 Income taxes 1,325 1,853 Dividends payable 708 572 ------- ------- Total current liabilities 12,965 13,539 Long-term debt 14,085 14,358 Deferred income taxes 385 361 Accrued postretirement health care costs 2,164 2,031 Other liabilities 5,609 4,622 ------- ------- TOTAL CONSUMER PRODUCTS LIABILITIES 35,208 34,911 FINANCIAL SERVICES AND REAL ESTATE Short-term borrowings 604 929 Long-term debt 890 863 Deferred income taxes 3,010 2,706 Other liabilities 151 169 ------- ------- TOTAL FINANCIAL SERVICES AND REAL ESTATE LIABILITIES 4,655 4,667 ------- ------- Total liabilities 39,863 39,578 Contingencies (Note 15) STOCKHOLDERS' EQUITY Common stock, par value $1.00 per share (935,320,439 shares issued) 935 935 Earnings reinvested in the business 17,489 15,718 Currency translation adjustments (47) (711) ------- ------- 18,377 15,942 Less cost of treasury stock (82,461,374 and 58,229,749 shares) 5,591 4,315 ------- ------- Total stockholders' equity 12,786 11,627 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $52,649 $51,205 ======= =======
See notes to consolidated financial statements. 2 CONSOLIDATED STATEMENTS of EARNINGS for the years ended December 31, (in millions of dollars, except per share data) ------------
1994 1993 1992 ------- ------- -------- Operating revenues $65,125 $60,901 $59,131 Cost of sales 28,351 26,771 26,082 Excise taxes on products 11,349 10,280 9,036 ------- ------- ------- Gross profit 25,425 23,850 24,013 Marketing, administration and research costs 15,372 15,694 13,433 Amortization of goodwill 604 569 521 ------- ------- ------- Operating income 9,449 7,587 10,059 Interest and other debt expense, net 1,233 1,391 1,451 ------- ------- ------- Earnings before income taxes and cumulative effect of accounting change 8,216 6,196 8,608 Provision for income taxes 3,491 2,628 3,669 ------- ------- ------- Earnings before cumulative effect of accounting change 4,725 3,568 4,939 Cumulative effect of change in method of accounting for postemployment benefits (Note 13) (477) ------- ------- ------- Net earnings $ 4,725 $ 3,091 $ 4,939 ======= ======= ======= Per share data: Earnings before cumulative effect of accounting change $ 5.45 $4.06 $5.45 Cumulative effect of accounting change (.54) ------- ------- ------- Net earnings $ 5.45 $3.52 $5.45 ======= ======= =======
See notes to consolidated financial statements. 3 CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY (in millions of dollars, except per share data) ------------
Earnings Currency Cost of Total Reinvested in Translation Treasury Stockholders' Common Stock the Business Adjustments Stock Equity ------------ ------------- ------------ --------- -------------- Balances, January 1, 1992 $935 $12,038 $ 453 $ (914) $12,512 Net earnings 4,939 4,939 Exercise of stock options and issuance of other stock awards (5) 200 195 Cash dividends declared ($2.35 per share) (2,125) (2,125) Currency translation adjustments (487) (487) Stock purchased (2,509) (2,509) Stock issued in connection with an acquisition 20 18 38 ---- ------- ----- ------- ------- Balances, December 31, 1992 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 4,725 4,725 Exercise of stock options and issuance of other stock awards (217) 324 107 Cash dividends declared ($3.03 per share) (2,623) (2,623) Currency translation adjustments 664 664 Stock purchased (1,600) (1,600) Change in unrealized appreciation on securities (114) (114) ---- ------- ----- ------- ------- Balances, December 31, 1994 $935 $17,489 $ (47) $(5,591) $12,786 ==== ======= ===== ======= =======
See notes to consolidated financial statements. 4 CONSOLIDATED STATEMENTS of CASH FLOWS for the years ended December 31, (in millions of dollars) ------------
1994 1993 1992 -------- -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES Net earnings - CONSUMER PRODUCTS $ 4,591 $ 2,960 $ 4,799 - FINANCIAL SERVICES AND REAL ESTATE 134 131 140 ------- ------- ------- Net earnings 4,725 3,091 4,939 Adjustments to reconcile net earnings to operating cash flows: CONSUMER PRODUCTS Depreciation and amortization 1,722 1,619 1,542 Deferred income tax provision (benefit) 237 (430) 137 Losses (gains) on sales of businesses 19 (46) (162) Cumulative effect of accounting change 774 Restructuring charge 741 Cash effects of changes, net of the effects from acquired and divested companies: Receivables, net (239) 105 (57) Inventories (387) 396 (304) Accounts payable 582 700 (421) Income taxes 194 121 368 Other working capital items (288) (736) 30 Other 180 203 331 FINANCIAL SERVICES AND REAL ESTATE Deferred income tax provision 376 461 446 (Increase) decrease in real estate receivables (30) 34 68 Decrease (increase) in real estate held for development and sale 86 (2) (22) Other (82) (64) (13) ------- ------- ------- Net cash provided by operating activities before interest payment on zero coupon bonds 7,095 6,967 6,882 Interest payment on zero coupon bonds - financial services and real estate (156) ------- ------- ------ Net cash provided by operating activities 6,939 6,967 6,882 CASH USED IN INVESTING ACTIVITIES CONSUMER PRODUCTS Capital expenditures (1,726) (1,592) (1,573) Purchase of businesses, net of acquired cash (146) (3,161) (727) Proceeds from sales of businesses 300 553 255 Other 28 49 (98) FINANCIAL SERVICES AND REAL ESTATE Investments in finance assets (582) (597) (1,577) Proceeds from other finance assets 889 527 776 ------- ------- ------- Net cash used in investing activities (1,237) (4,221) (2,944) ------- ------- ------- Net cash provided by operating and investing activities $ 5,702 $ 2,746 $ 3,938 ------- ------- -------
See notes to consolidated financial statements. Continued 5 CONSOLIDATED STATEMENTS of CASH FLOWS (Continued) for the years ended December 31, (in millions of dollars) ------------
1994 1993 1992 -------- -------- -------- CASH USED IN FINANCING ACTIVITIES CONSUMER PRODUCTS Net issuance (repayment) of short-term borrowings $ 172 $ 1,220 $ (683) Long-term debt proceeds 97 1,027 3,832 Long-term debt repaid (1,817) (2,154) (2,130) FINANCIAL SERVICES AND REAL ESTATE Net (repayment) issuance of short-term borrowings (325) 171 (60) Long-term debt proceeds 185 585 Long-term debt repaid (44) (290) (208) Purchase of treasury stock (1,532) (1,218) (2,449) Dividends paid (2,487) (2,291) (2,028) Issuance of shares 54 39 115 Other (20) (34) ------- ------- ------- Net cash used in financing activities (5,717) (3,530) (3,026) ------- ------- ------- Effect of exchange rate changes on cash and cash equivalents 17 (55) (17) ------- ------- ------- Cash and cash equivalents: Increase (decrease) 2 (839) 895 Balance at beginning of year 182 1,021 126 ------- ------- ------- Balance at end of year $ 184 $ 182 $ 1,021 ======= ======= ======= Cash paid: Interest - Consumer products $ 1,340 $ 1,391 $ 1,362 ======= ======= ======= - Financial services and real estate $ 229 $ 81 $ 70 ======= ======= ======= Income taxes $ 2,449 $ 2,092 $ 2,717 ======= ======= =======
See notes to consolidated financial statements. 6 NOTES to CONSOLIDATED FINANCIAL STATEMENTS ---------- Note 1. Summary of Significant Accounting Policies: - ---------------------------------------------------- Basis of presentation: The consolidated financial statements include all significant subsidiaries. Balance sheet accounts are segregated by two broad types of business. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services and real estate assets and liabilities are unclassified, in accordance with respective industry practices. Cash and cash equivalents: Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. Inventories: Inventories are stated at the lower of cost or market. The last-in, first- out ("LIFO") method is used to cost substantially all domestic inventories. The cost of other inventories is determined by the average cost or first-in, first-out methods. It is a generally recognized industry practice to classify the total amount of leaf tobacco inventory as a current asset although part of such inventory, because of the duration of the aging process, ordinarily would not be utilized within one year. Advertising costs: Advertising costs are generally expensed as incurred. Depreciation and amortization: Depreciation is recorded by the straight-line method. Substantially all goodwill and other intangible assets are amortized by the straight-line method, principally over 40 years. Derivative financial instruments: Derivative financial instruments are used by the Company to manage its foreign currency and interest rate exposures. Realized and unrealized gains and losses on foreign currency swaps that are effective as hedges of net assets in foreign subsidiaries are offset against the foreign exchange gains or losses in a component of stockholders' equity. The interest differential to be paid or received under the currency and related interest rate swap agreements is recognized over the life of the related debt and is included in interest and other debt expense, net. Unrealized gains and losses on forward contracts that are effective as hedges of existing assets and liabilities are deferred as adjustments to the carrying amount of those accounts and are recognized in income as part of those carrying amounts. Continued 7 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Note 2. Acquisitions and Divestitures: - --------------------------------------- During the fourth quarter of 1994, the Company sold The All American Gourmet Company (frozen dinners business). The proceeds from this sale were $170 million. The effect of this disposition, and other smaller acquisitions and dispositions, were not material to the Company's 1994 results of operations. In addition, the Company entered into an agreement to sell the distribution business of Kraft Foodservice in 1995. During 1993, the Company acquired Freia Marabou a.s, a Scandinavian confectionery company, at a cost of $1.3 billion, a North American ready- to-eat cold cereal business at a cost of $448 million and The Terry's Group, a United Kingdom confectionery company 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 $320 million. The Company also increased its investment in tobacco and food operations in Central and Eastern Europe. The effects of these, and other smaller acquisitions, were not material to the Company's 1993 results of operations. During 1993, the Company sold its ice cream business, Birds Eye frozen vegetables business and beer can manufacturing plants. The proceeds from the sales of these businesses aggregated $498 million. During 1992, the Company purchased several businesses at a total cost of $765 million, consisting of cash of $727 million and $38 million in shares of the Company's common stock. The effects of these acquisitions were not material to the Company's 1992 results of operations. Note 3. Restructuring: - ----------------------- In the fourth quarter of 1993, the Company provided for the costs of restructuring its worldwide operations. The charge related primarily to the downsizing or closure of approximately 40 manufacturing and other facilities. This restructuring charge reduced 1993 earnings before income taxes, net earnings and earnings per share by $741 million, $457 million and $.52, respectively. Continued 8 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Note 4. Inventories: - --------------------- The cost of approximately 48% of inventories in 1994 and 54% of inventories in 1993 was determined using the LIFO method. The stated LIFO values of inventories were approximately $870 million and $1.0 billion lower than the current cost of inventories at December 31, 1994 and 1993, respectively. Note 5. Short-Term Borrowings and Borrowing Arrangements: - ---------------------------------------------------------- At December 31, the Company's short-term borrowings and related average interest rates consisted of the following:
1994 1993 ---------------------- ---------------------- (in millions) Average Average Amount Year-End Amount Year-End Outstanding Rate Outstanding Rate ----------- -------- ----------- -------- Consumer products: Bank loans $ 215 12.0% $ 276 9.3% Commercial paper 2,505 5.9% 2,288 3.4% Amount reclassified as long-term debt (2,539) (2,296) ------- ------- $ 181 $ 268 ======= ======= Financial services and real estate: Commercial paper $ 604 5.9% $ 929 3.3% ======= =======
The fair values of the Company's short-term borrowings at December 31, 1994 and 1993, based upon market rates, approximate the amounts disclosed above. The Company maintains credit facilities with a number of lending institutions, amounting to approximately $15.3 billion at December 31, 1994. Approximately $15.1 billion of these facilities were unused at December 31, 1994. These facilities are used primarily to support the Company's commercial paper borrowings and are available for acquisitions and other corporate purposes. The Company's credit facilities include revolving bank credit agreements totaling $12.0 billion. An agreement for $4.0 billion expires in December 1995, and an agreement for $8.0 billion expires in 1998 enabling the Company to refinance short-term debt on a long-term basis. Accordingly, short-term borrowings intended to be refinanced were reclassified as long- term debt. Continued 9 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Certain of these facilities limit payment of cash dividends and the purchase, redemption or retirement of common stock and/or require maintenance of a fixed charges coverage ratio. At December 31, 1994, approximately $4.1 billion of earnings reinvested in the business was free of such restrictions. Note 6. Long-Term Debt: - ------------------------ At December 31, the Company's long-term debt consisted of the following:
1994 1993 ---- ---- (in millions) Consumer products: Short-term borrowings, reclassified $2,539 $ 2,296 Notes, 4.75% to 9.8% (average effective rate 8.31%), due through 2004 9,760 11,441 Debentures, 6.0% to 8.5% (average effective rate 10.95%), $1.3 billion face amount, due through 2017 995 973 Foreign currency obligations: Swiss franc, 4.44% to 7.0% (average effective rate 6.31%), due through 2000 942 836 Deutsche mark, 2.75% to 6.0% (average effective rate 5.76%), due through 1997 182 176 Other 118 98 Other 261 276 ------- ------- 14,797 16,096 Less current portion of long-term debt (712) (1,738) ------- ------- $14,085 $14,358 ======= =======
Continued 10 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ----------
1994 1993 ---- ---- (in millions) Financial services and real estate: Eurodollar notes, 6.75% and 6.625% (average rate 6.7%), due 1997 and 1999 $400 $399 Zero coupon bonds, 13.3% effective rate, $200 million face amount, due 1994 190 Foreign currency obligations: Swiss franc, 4.75%, due 1996 123 107 ECU notes, 9.25% and 8.5%, due 1997 and 1998 367 167 ---- ---- $890 $863 ==== ====
Aggregate maturities of long-term debt, excluding short-term borrowings reclassified as long-term debt, are as follows:
Financial services and Consumer products real estate ----------------- ---------------------- (in millions) 1995 $ 712 $ - 1996 1,886 123 1997 1,847 383 1998 2,000 184 1999 1,530 200 2000-2004 3,898 2005-2009 164
The revolving credit facility under which the consumer products short-term debt was reclassified as long-term debt expires in 1998 and any amounts then outstanding mature. Based on market quotes, where available, or interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities, the aggregate fair value of consumer products and financial services and real estate long-term debt, including current portion of long- term debt, at December 31, 1994 and 1993 was $15.7 billion and $18.1 billion, respectively. Continued 11 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Note 7. Capital Stock: - ----------------------- Shares of authorized common stock are 4 billion; issued, treasury and outstanding were as follows:
Issued Treasury Outstanding ----------- ------------ ------------ Balances, January 1, 1992 935,320,439 (15,469,198) 919,851,241 Exercise of stock options and issuance of other stock awards 5,037,244 5,037,244 Purchased (32,622,855) (32,622,855) Shares issued in connection with an acquisition 491,555 491,555 ----------- ------------ ----------- Balances, December 31, 1992 935,320,439 (42,563,254) 892,757,185 Exercise of stock options and issuance of other stock awards 1,612,405 1,612,405 Purchased (17,278,900) (17,278,900) ----------- ------------ ----------- Balances, December 31, 1993 935,320,439 (58,229,749) 877,090,690 Exercise of stock options and issuance of other stock awards 4,569,731 4,569,731 Purchased (28,801,356) (28,801,356) ----------- ------------ ----------- Balances, December 31, 1994 935,320,439 (82,461,374) 852,859,065 =========== =========== ===========
At December 31, 1994, 48,836,507 shares of common stock were reserved for stock options and other stock awards under the Company's stock plans and 10,000,000 shares of Serial Preferred Stock, $1.00 par value, were authorized, none of which have been issued. Continued 12 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- In 1989, the Company distributed rights for each outstanding share of its common stock. The rights are not exercisable and trade automatically with the common stock until ten days after public announcement that any person has acquired 10% or more of the Company's common stock or ten business days after any person announces a tender offer for 10% or more of the Company's common stock. When exercisable, unless a person has acquired 10% or more of the Company's shares, each right entitles the holder to buy from the Company one share of common stock for the exercise price (currently $150). If the Company is thereafter involved in a business combination, the rights will entitle holders to buy shares of the acquiring company having a value of twice the exercise price. If any person acquires 10% or more of the Company's common stock, the rights will entitle holders (other than such person) to buy shares of the Company's common stock having a market value of twice the exercise price. Following the acquisition by any person of more than 10% but less than 50% of the Company's shares, the Company may exchange one share of common stock for each right (other than rights held by such person). The Company may redeem the rights for $.01 per right before any person acquires 10% or more of the Company's common stock. The rights expire on October 25, 1999 unless earlier redeemed or exchanged. At December 31, 1994, 984,156,946 shares of common stock were reserved for issuance upon exercise of the rights. Note 8. Stock Plans: - --------------------- Under the Philip Morris 1992 Incentive Compensation and Stock Option Plan, the Company may grant to eligible employees stock options, stock appreciation rights, restricted stock and annual incentive and long-term performance cash awards. Up to 37 million shares of common stock are authorized for grant, of which no more than 9 million shares may be awarded as restricted stock. Stock options are granted at an exercise price no less than fair value on the date of the grant. At December 31, 1994 and 1993, options under the 1992 plan and previous plans were exercisable for 27,253,547 shares and 21,723,491 shares, respectively. Shares available to be granted at December 31, 1994 and 1993 were 20,064,190 and 23,900,470, respectively. Continued 13 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Options activity was as follows for the years ended December 31,
1994 1993 1992 -------------- ------------- ------------ Balances, beginning of year 30,035,681 23,802,744 24,284,910 Granted 511,610 8,433,540 5,548,270 Exercised (2,394,089) (1,821,944) (5,872,571) Cancelled (388,045) (378,659) (157,865) -------------- ------------- ------------ Balances, end of year 27,765,157 30,035,681 23,802,744 ============== ============= ============ Range of exercise prices at year-end $10.66-$100.00 $8.67-$100.00 $7.26-$69.25 Price range of shares exercised during the year $8.67-$49.06 $7.26-$63.69 $6.43-$73.63 Weighted average grant price per share $69.73 $49.09 $75.63
From time to time, the Company grants shares of restricted stock to eligible employees, giving them in most instances all of the rights of stockholders, except that they may not sell, assign, pledge or otherwise encumber such shares. During 1994, the Company granted 2,636,940 shares of restricted stock to eligible U.S. based employees and also issued to eligible non-U.S. employees rights to receive 1,034,320 like shares. Such shares and rights are subject to forfeiture if certain employment conditions are not met. No shares of restricted stock or rights were granted in 1993 or 1992. At December 31, 1994, restrictions lapse as follows: 1995-41,000 shares; 1996- 304,600 shares; 1997-3,267,430 shares; 1998-50,000 shares and 2000 and thereafter-184,000 shares. The fair value of the 1994 shares and rights at the date of grant ($186 million) is being amortized to expense ratably over the restriction period. At December 31, 1994 the unamortized balance of $154 million is recorded as a reduction of earnings reinvested in the business. Note 9. Earnings per Share: - ---------------------------- Earnings per common share have been calculated on the weighted average number of shares of common stock outstanding for each year, which was 867,288,869, 878,120,884 and 906,177,803 for 1994, 1993 and 1992, respectively. Continued 14 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Note 10. Pretax Earnings and Provision for Income Taxes: - --------------------------------------------------------- The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109 effective January 1, 1993. SFAS No. 109 is a modification of SFAS No. 96, which had been the accounting standard previously followed by the Company. The effect of adoption of SFAS No. 109 was immaterial to the Company's 1993 financial position and results of operations. Pretax earnings and provision for income taxes consisted of the following:
1994 1993 1992 ------ ------ ------ (in millions) Pretax earnings: United States $5,781 $4,078 $6,367 Outside United States 2,435 2,118 2,241 ------ ------ ------ Total pretax earnings $8,216 $6,196 $8,608 ====== ====== ====== Provision for income taxes: United States federal: Current $1,540 $1,199 $1,630 Deferred 458 278 514 ------ ------ ------ 1,998 1,477 2,144 State and local 419 311 464 ------ ------ ------ Total United States 2,417 1,788 2,608 ------ ------ ------ Outside United States: Current 919 830 992 Deferred 155 10 69 ------ ------ ------ Total outside United States 1,074 840 1,061 ------ ------ ------ Total provision for income taxes $3,491 $2,628 $3,669 ====== ====== ======
At December 31, 1994 applicable United States federal income taxes and foreign withholding taxes have not been provided on approximately $5.1 billion of accumulated earnings of foreign subsidiaries that are expected to be permanently reinvested abroad. If these amounts were not considered permanently reinvested, additional deferred income taxes of approximately $287 million would have been provided. Continued 15 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- The effective income tax rate on pretax earnings differed from the U.S. federal statutory rate for the following reasons:
1994 1993 1992 ----- ----- ----- Provision computed at U.S. federal statutory rate 35.0% 35.0% 34.0% Increases resulting from: State and local income taxes, net of federal tax benefit 3.3 3.3 3.6 Rate differences - foreign operations 1.0 0.6 1.9 Goodwill amortization 2.4 3.0 2.0 Other 0.8 0.5 1.1 ---- ---- ---- Provision for income taxes 42.5% 42.4% 42.6% ==== ==== ====
The tax effects of temporary differences which gave rise to consumer products deferred income tax assets and liabilities consisted of the following:
December 31, 1994 1993 -------- -------- (in millions) Deferred income tax assets: Accrued postretirement and postemployment benefits $ 925 $ 995 Accrued liabilities 542 464 Restructuring reserves 315 472 Other 754 445 ------- ------- Gross deferred income tax assets 2,536 2,376 Valuation allowance (108) (62) ------- ------- Total deferred income tax assets 2,428 2,314 ------- ------- Deferred income tax liabilities: Property, plant and equipment (1,691) (1,573) Prepaid pension costs (223) (203) ------- ------- Total deferred income tax liabilities (1,914) (1,776) ------- ------- Net deferred income tax assets $ 514 $ 538 ======= =======
Financial services and real estate deferred income tax liabilities are primarily attributable to temporary differences from investments in finance leases. Continued 16 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Note 11. Segment Reporting: - ---------------------------- Tobacco, food, beer, and financial services and real estate are the major segments of the Company's operations. The Company's consolidated operations outside the United States, which are principally in the tobacco and food businesses, are organized into geographic regions by segment, with Europe the most significant. Intersegment transactions are not reported separately since they are not material. For purposes of segment reporting, operating profit is operating income exclusive of certain unallocated corporate expenses. See Note 2 regarding acquisitions and divestitures and Note 3 regarding restructuring. The 1993 restructuring resulted in a reduction of tobacco, food and beer operating profit of $245 million, $357 million and $139 million, respectively. Substantially all goodwill amortization is attributable to the food segment. Identifiable assets are those assets applicable to the respective industry segments. Reportable segment data were as follows: Continued 17 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Data by Segment for the years ended December 31, ------------------------------------------------
1994 1993 1992 ------- ------- ------- (in millions) Operating revenues: Tobacco $28,671 $25,973 $25,677 Food 31,669 30,372 29,048 Beer 4,297 4,154 3,976 Financial services and real estate 488 402 430 ------- ------- ------- Total operating revenues $65,125 $60,901 $59,131 ======= ======= ======= Operating profit: Tobacco $ 6,162 $ 4,910 $ 7,193 Food 3,108 2,608 2,769 Beer 413 215 258 Financial services and real estate 208 249 219 ------- ------- ------- Total operating profit 9,891 7,982 10,439 Unallocated corporate expenses 442 395 380 ------- ------- ------- Operating income $ 9,449 $ 7,587 $10,059 ======= ======= ======= Identifiable assets: Tobacco $ 9,926 $ 9,523 $ 9,479 Food 34,822 33,253 32,672 Beer 1,706 1,706 1,545 Financial services and real estate 5,193 5,659 5,297 ------- ------- ------- 51,647 50,141 48,993 Other assets 1,002 1,064 1,021 ------- ------- ------- Total assets $52,649 $51,205 $50,014 ======= ======= ======= Depreciation expense: Tobacco $ 360 $ 342 $ 291 Food 539 538 507 Beer 108 140 141 Financial services and real estate 2 Capital additions: Tobacco $ 529 $ 527 $ 460 Food 1,072 944 947 Beer 121 92 134
Continued 18 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Data by Geographic Region for the years ended December 31, ----------------------------------------------------------
1994 1993 1992 ------- ------- ------- (in millions) Operating revenues: United States - domestic $35,936 $34,282 $35,304 - export 4,942 4,105 3,797 Europe 19,888 18,304 17,388 Other 4,359 4,210 2,642 ------- ------- ------- Total operating revenues $65,125 $60,901 $59,131 ======= ======= ======= Operating profit: United States $ 7,306 $ 5,695 $ 8,146 Europe 1,914 1,689 1,764 Other 671 598 529 ------- ------- ------- Total operating profit 9,891 7,982 10,439 Unallocated corporate expenses 442 395 380 ------- ------- ------- Operating income $ 9,449 $ 7,587 $10,059 ======= ======= ======= Identifiable assets: United States $33,622 $34,522 $35,187 Europe 14,845 12,766 12,195 Other 3,180 2,853 1,611 ------- ------- ------- 51,647 50,141 48,993 Other assets 1,002 1,064 1,021 ------- ------- ------- Total assets $52,649 $51,205 $50,014 ======= ======= =======
Continued 19 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Note 12. Pension Plans: - ------------------------ The Company and its subsidiaries sponsor noncontributory defined benefit pension plans covering substantially all U.S. employees. The plans provide retirement benefits for salaried employees based generally on years of service and compensation during the last years of employment. Retirement benefits for hourly employees generally are a flat dollar amount for each year of service. The Company funds these plans in amounts consistent with the funding requirements of federal law and regulations. Pension coverage for employees of the Company's non-U.S. subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. The plans provide pension benefits that are based primarily on years of service and employees' salaries near retirement. The Company provides for obligations under such plans by depositing funds with trustees or purchasing insurance policies. The Company records liabilities for unfunded foreign plans. U.S. Plans ---------- Net pension (income) cost consisted of the following:
1994 1993 1992 ------ ------ ------ (in millions) Service cost - benefits earned during the year $ 130 $ 151 $ 163 Interest cost on projected benefit obligation 342 362 359 Loss (return) on assets - actual 94 (796) (345) - deferred (loss) gain (605) 314 (119) Amortization of net gain upon adoption of SFAS No. 87 (28) (28) (28) Other cost (income) 49 (47) 16 ----- ----- ----- Net pension (income) cost $ (18) $ (44) $ 46 ===== ===== =====
During 1994, 1993 and 1992, the Company sold businesses and instituted early retirement and workforce reduction programs affecting participants in its pension plans. Such programs resulted in additional pension expense of $49 million and $16 million in 1994 and 1992, respectively, and curtailment gains of $47 million in 1993. Continued 20 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- The funded status of U.S. plans at December 31 was as follows:
1994 1993 ------ ------ (in millions) Actuarial present value of accumulated benefit obligation - vested $3,491 $3,702 - nonvested 270 349 ------ ------ 3,761 4,051 Benefits attributable to projected salaries 549 588 ------ ------ Projected benefit obligation 4,310 4,639 Plan assets at fair value 5,735 6,099 ------ ------ Excess of assets over projected benefit obligation 1,425 1,460 Unamortized net gain upon adoption of SFAS No. 87 (169) (197) Unrecognized prior service cost 140 149 Unrecognized net gain from experience differences (802) (882) ------ ------ Prepaid pension cost $ 594 $ 530 ====== ======
The projected benefit obligation at December 31, 1994, 1993 and 1992 was determined using an assumed discount rate of 8.5%, 7.5% and 8.0%, respectively, and assumed compensation increases of 5.0% at December 31, 1994, 4% at December 31, 1993 and 6% and 7% at December 31, 1992. The assumed long-term rate of return on plan assets was 9% at December 31, 1994, 1993 and 1992. Plan assets consist principally of common stock and fixed income securities. The Company and certain of its subsidiaries sponsor deferred profit-sharing plans covering certain salaried, nonunion and union employees. Contributions and costs are determined generally as a percentage of pretax earnings, as defined by the plans. Certain other subsidiaries of the Company also maintain defined contribution plans. Amounts charged to expense for defined contribution plans totaled $191 million, $214 million and $229 million in 1994, 1993 and 1992, respectively. Continued 21 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Non-U.S. Plans - -------------- Net pension cost consisted of the following:
1994 1993 1992 ------ ------ ------ (in millions) Service cost - benefits earned during the year $ 72 $ 63 $ 59 Interest cost on projected benefit obligation 136 138 133 Loss (return) on assets - actual 4 (153) (78) - deferred (loss) gain (113) 55 (21) Amortization of net gain upon adoption of SFAS No. 87 (1) (1) (1) ------ ----- ----- Net pension cost $ 98 $ 102 $ 92 ====== ===== ===== The funded status of the non-U.S. plans at December 31 was as follows: Assets Exceed Accumulated Benefits Accumulated Benefits Exceed Assets -------------------- -------------------- 1994 1993 1994 1993 ------ ------ ---- ----- (in millions) Actuarial present value of accumulated benefit obligation - vested $1,046 $ 947 $ 606 $ 520 - nonvested 76 94 63 54 ------ ------ ----- ----- 1,122 1,041 669 574 Benefits attributable to projected salaries 316 254 115 109 ------ ------ ----- ---- Projected benefit obligation 1,438 1,295 784 683 Plan assets at fair value 1,532 1,408 51 44 ------ ------ ----- ---- Plan assets in excess of (less than) projected benefit obligation 94 113 (733) (639) Unamortized net (gain) loss upon adoption of SFAS No. 87 (13) (14) 6 6 Unrecognized net (gain) loss from experience differences (30) (12) 7 ------ ----- ----- ----- Prepaid (accrued) pension cost $ 81 $ 69 $(739) $(626) ====== ====== ===== =====
Continued 22 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- The assumptions used in 1994 and 1993 were as follows:
1994 1993 ------------- ------------- Discount rates 5.0% to 13.0% 5.0% to 12.0% Compensation increases 3.5% to 11.0% 3.5% to 11.0% Long-term rates of return on plan assets 5.5% to 12.0% 5.0% to 12.0%
Plan assets consist primarily of common stock and fixed income securities. Note 13. Postemployment Benefits: - ---------------------------------- Effective January 1, 1993, the Company adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This Statement requires the Company to accrue the costs of postemployment benefits, other than pensions and postretirement health care benefits, over the working lives of employees. The Company previously had expensed the cost of these benefits, which are principally severance and disability, when the related event occurred. The cumulative effect at January 1, 1993 of adopting SFAS No. 112, which was calculated on an undiscounted basis, 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 1993 earnings before cumulative effect of accounting change. Note 14. Postretirement Benefits Other Than Pensions: - ------------------------------------------------------ The Company accrues the estimated cost of retiree benefit payments, other than pensions, during employees' active service periods as prescribed by SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," for its U.S. retiree benefit plans. The Company will adopt SFAS No. 106 for its non-U.S. plans in 1995 and estimates that the effects of adoption will not be significant. The cost of postretirement health care benefits for the Company's non-U.S. subsidiaries is expensed as incurred and was not significant for the years ended 1994, 1993 and 1992. U.S. Plans ---------- The Company and its U.S. subsidiaries provide health care and other benefits to substantially all retired employees, their covered dependents and beneficiaries. Generally, employees who have attained age 55 and who have rendered at least 5 to 10 years of service are eligible for these benefits. Certain health care plans are contributory; other benefit plans are noncontributory. Continued 23 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Net postretirement health care cost consisted of the following:
1994 1993 1992 ----- ----- ----- (in millions) Service cost - benefits earned during the period $ 57 $ 59 $ 70 Interest cost on accumulated postretirement benefit obligation 165 159 168 Amortization of unrecognized net loss from experience differences 6 2 Amortization of unrecognized prior service cost (15) (16) (6) Other cost (income) 32 (59) ---- ---- ---- Net postretirement health care cost $245 $143 $234 ==== ==== ====
During 1994 and 1993, the Company sold businesses and instituted early retirement and workforce reduction programs affecting participants in its postretirement health care plans. Such programs resulted in additional expense of $32 million in 1994 and net curtailment and settlement gains of $59 million in 1993. The Company's postretirement health care plans currently are not funded. The status of the plans at December 31 was as follows:
1994 1993 ---- ---- (in millions) Actuarial present value of accumulated postretirement benefit obligation: Retirees $1,148 $1,279 Fully eligible active plan participants 127 182 Other active plan participants 792 644 ------ ------ 2,067 2,105 Unrecognized net gain (loss) from experience differences 14 (162) Unrecognized prior service cost 186 198 ------ ------ Accrued postretirement health care costs $2,267 $2,141 ====== ======
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 10.0% in 1993, 9.5% in 1994 and 9.0% in 1995, gradually declining to 6.0% by the year 2001 and remaining at that level thereafter. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 and net postretirement health care cost for the year then ended by approximately 14% and 13%, respectively. The accumulated postretirement benefit obligations at December 31, 1994, 1993 and 1992 were determined using assumed discount rates of 8.5%, 7.5% and 8.0%, respectively. Continued 24 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Note 15. 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. 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 filed a request for review of this ruling by the full panel of the appellate court. The request was denied. In October 1994, defendants asked the Florida Supreme Court to review the March appellate court decision. This request is pending. Concurrently, plaintiffs served notice of a hearing in the trial court for late November 1994 attempting to secure class certification. In December 1994, the court granted plaintiffs' motion for class certification. Defendants are appealing this decision. Continued 25 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- In May 1994, an action was filed in a Florida state court against the leading United States tobacco manufacturers and others by plaintiffs alleging injury and purporting to represent a class of certain smokers, certain former smokers and their heirs. Plaintiffs cited the Florida appellate reversal discussed above in support of their allegations of class action status. Subsequently, the Company was voluntarily dismissed from this action, which otherwise continues against the tobacco manufacturers, including PM Inc. In October 1994, the trial court granted plaintiffs' motion for class certification. The class, as certified, comprises "all United States citizens and residents and their survivors who have...suffered, presently suffer, or who have died from diseases and medical conditions caused by their addiction to cigarettes that contain nicotine." Defendants have appealed the class certification decision and order to the Florida Third District Court of Appeal. 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. Plaintiffs' motion for class certification was heard in December 1994. A decision is pending. Continued 26 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 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 asserted violations of the Racketeer Influenced Corrupt Organizations Act ("RICO") and claimed 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 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. Subsequently, the Company was dismissed from this action by stipulation of the parties; the action continued against the tobacco manufacturers, including PM Inc. In September 1994, the United States District Court granted defendants' motion to dismiss the complaint with prejudice. Plaintiffs have filed a notice of appeal, which they agreed to dismiss by stipulation of the parties dated January 13, 1995. 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. The complaint has not been served on the Company. 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. A motion to stay the proceeding pending a decision on remand was granted in September 1994. Continued 27 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 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. Plaintiff's motion was granted on August 17, 1994 and the case remanded to state Chancery Court. In September 1994, the plaintiff moved to strike defendants' challenges to the sufficiency of the complaint and the subject matter jurisdiction of the Chancery Court. Also in September 1994, defendants moved to transfer the case from the Chancery Court to the Circuit Court. In October 1994, defendants moved for judgment on the pleadings. All three motions are presently pending. In December 1994, the Governor of the State of Mississippi filed an amicus brief in support of defendants' motions. In August 1994, an action was filed in Minnesota state court against the leading United States cigarette manufacturers and others, including the Company, by the Attorney General of Minnesota and Blue Cross and Blue Shield of Minnesota seeking reimbursement of Medicaid and other expenditures by the plaintiffs claimed to have been made to treat smoking- related diseases. Plaintiffs assert causes of action of negligent performance of a voluntary undertaking, violation of Minnesota antitrust laws, violation of consumer protection statutes, restitution, and conspiracy. In November 1994, defendants moved to prohibit prosecution of the case based upon the contingent fee arrangement between the State of Minnesota and counsel for the state and one defendant moved to disqualify plaintiffs' counsel based upon their prior representation of the moving defendants. The court denied both motions but also denied plaintiffs' motion to disqualify defendants' local counsel based upon counsels' prior representation of various state agencies. A motion to dismiss one defendant for lack of personal jurisdiction is pending. In September 1994, an action was filed in West Virginia state court against the leading United States cigarette manufacturers and others, including the Company, by the Attorney General of West Virginia seeking reimbursement of Medicaid and other expenditures by the State of West Virginia claimed to have been made to treat smoking-related diseases. Plaintiff asserts causes of action for restitution, public nuisance, negligent performance of a voluntary undertaking, fraud, conspiracy and concert of action, aiding and abetting, violation of consumer protection statutes, and violation of the West Virginia Antitrust Act. Plaintiff also seeks an injunction barring defendants from selling or encouraging the sale of cigarettes to minors. In December 1994, defendants filed a motion to dismiss, claiming that the Attorney General did not have standing to assert certain counts in the complaint, and separate motions to dismiss the antitrust and fraud counts of the complaint. In addition, the non-manufacturing defendants, including the Company, have moved to dismiss based upon the absence of personal jurisdiction. Continued 28 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- The Commonwealth of Massachusetts has enacted legislation specifically authorizing lawsuits similar to that described in the preceding paragraphs. 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. In December 1994, defendants' motion to dismiss, heard by the court in November 1993, was granted and the case was dismissed. Plaintiffs are expected to appeal this decision. 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 the Eastern District, 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 December 1994, a motion to dismiss by defendants was denied. Defendants will proceed to file an answer and discovery may proceed. In the two cases in the Southern District as described above, and in an additional purported class action filed in September in the Southern District against the Company and certain of its directors, plaintiffs assert that defendants violated federal securities laws with statements and omissions regarding the allegedly addictive qualities of cigarettes. Defendants' motions to dismiss are pending in the latter cases. 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. Continued 29 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- 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. 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. Litigation is subject to many uncertainties and the Company and PM Inc. are unable to predict the outcome of this matter. Pretrial discovery continues. Note 16. Additional Information: - ---------------------------------
1994 1993 1992 ------- ------- ------- (in millions) Years ended December 31: Depreciation expense $1,027 $1,042 $ 963 ====== ====== ====== Rent expense $ 426 $ 380 $ 348 ====== ====== ====== Research and development expense $ 435 $ 421 $ 410 ====== ====== ====== Interest and other debt expense, net: Interest expense $1,288 $1,478 $1,513 Interest income (55) (87) (62) ------ ------ ------ $1,233 $1,391 $1,451 ====== ====== ====== Interest expense of financial services and real estate operations included in cost of sales $ 78 $ 87 $ 95 ====== ====== ======
Continued 30 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Note 17. Financial Services and Real Estate Operations: - -------------------------------------------------------- Philip Morris Capital Corporation ("PMCC") is a wholly-owned subsidiary of the Company. PMCC invests in leveraged and single-investor leases and other tax-oriented financing transactions and third party financial instruments and also engages in various financing activities for customers and suppliers of the Company's subsidiaries. Additionally, PMCC is engaged through its wholly-owned subsidiary, Mission Viejo Company, in land planning, development and sales. Pursuant to a support agreement, the Company has agreed to retain ownership of 100% of the voting stock of PMCC and make periodic payments to PMCC to the extent necessary to ensure that earnings available for fixed charges equal at least 1.25 times its fixed charges. No payments were required in 1994, 1993 or 1992. Condensed balance sheet data at December 31 follow:
1994 1993 ------ ------ (in millions) Assets Finance leases $6,048 $5,314 Other investments 542 1,440 ------ ------ 6,590 6,754 Less unearned income and allowances 2,067 1,861 ------ ------ Finance assets, net 4,523 4,893 Real estate held for development and sale 401 489 Goodwill, net of accumulated amortization 36 37 Other assets 276 284 ------ ------ Total assets $5,236 $5,703 ====== ====== Liabilities and stockholder's equity Short-term borrowings $ 604 $ 929 Long-term debt 890 863 Deferred income taxes 3,010 2,706 Other liabilities 151 169 Stockholder's equity 581 1,036 ------ ------ Total liabilities and stockholder's equity $5,236 $5,703 ====== ======
Continued 31 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- The amounts shown above include receivables and payables with the Company and its other subsidiaries as follows:
1994 1993 ---- ---- (in millions) Finance assets, net $ 4 $24 Other assets $39 $20
These amounts were eliminated in the Company's consolidated balance sheets. Finance leases consist of a portfolio of investments in transportation, power generation, manufacturing facilities and real estate. Rentals receivable for leveraged leases represent unpaid rentals less principal and interest on third-party nonrecourse debt. Effective December 31, 1993, PMCC adopted the method of accounting prescribed by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS No. 115, PMCC's investment securities, included in other investments, are classified as available for sale and are recorded at fair value, with unrealized gains and losses included as a component of stockholders' equity. Other investments also include real estate and commercial receivables, the total estimated fair values of which, at December 31, 1994 and 1993, approximated their carrying values. Fair values were estimated by discounting projected cash flows using the current rates for similar loans to borrowers with similar credit ratings and maturities. Continued 32 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Condensed income statement data follow for the years ended December 31,
1994 1993 1992 ----- ----- ----- (in millions) Revenues: Financial services $ 257 $ 276 $ 294 Real estate 236 134 146 ----- ----- ----- Total revenues 493 410 440 Expenses: Financial services 114 105 141 Real estate 190 90 93 ----- ----- ----- Total expenses 304 195 234 Equity in earnings of limited partnership investments 17 8 ----- ----- ----- Earnings before income taxes and cumulative adjustment 206 223 206 Cumulative pretax adjustment related to leveraged leases 23 ----- ----- ----- Earnings before income taxes 206 246 206 Provision for income taxes: Current year 72 75 66 Cumulative adjustment related to leveraged leases 40 ----- ----- ----- Total provision for income taxes 72 115 66 ----- ----- ----- Net earnings $ 134 $ 131 $ 140 ===== ===== =====
During 1993, PMCC's portfolio of leveraged leases was recalculated using a 35% federal income tax rate, retroactive to January 1, 1993. A cumulative adjustment was recorded that increased 1993 earnings before income taxes, increased the provision for income taxes and decreased net earnings by $23 million, $40 million and $17 million, respectively. Continued 33 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued --------- Note 18. Financial Instruments: - -------------------------------- Derivative financial instruments -------------------------------- The Company operates internationally, with manufacturing and sales facilities in various locations around the world. Derivative financial instruments are used by the Company for purposes other than trading, principally to reduce exposures to market risks resulting from fluctuations in interest rates and foreign exchange rates by creating offsetting exposures. The Company is not a party to leveraged derivatives. The Company has foreign currency and related interest rate swap agreements which were executed to reduce the Company's borrowing costs and serve as hedges of the Company's net assets in foreign subsidiaries, principally those denominated in Swiss francs. At December 31, 1994 and 1993, the notional principal amounts of these agreements were $1.6 billion and $1.4 billion, respectively. Aggregate maturities at December 31, 1994 were as follows (in millions): 1996-$350; 1997-$737; 1998-$185 and 1999-$350. The notional amount is the amount used for the calculation of interest payments which are exchanged over the life of the swap transaction and is equal to the amount of foreign currency or dollar principal exchanged at maturity. Forward exchange contracts are used by the Company to reduce the effect of fluctuating foreign currencies on short-term foreign currency denominated intercompany transactions. At December 31, 1994 and 1993, the Company had forward exchange contracts, with maturities of generally one month, of $1.6 billion and $1.1 billion, respectively. Credit exposure and credit risk ------------------------------- The Company is exposed to credit loss in the event of nonperformance by counterparties to the swap agreements. However, such exposure was not material at December 31, 1994, and the Company does not anticipate nonperformance. Further, the Company does not have a significant credit exposure to an individual counterparty. Fair value ---------- The aggregate fair value, based on market quotes, of the Company's total debt did not differ materially from its carrying value at December 31, 1994. The aggregate fair value of the Company's total debt at December 31, 1993 was $19.3 billion as compared to its carrying value of $18.2 billion. The estimated fair value of financial services and real estate other investments, including real estate and commercial receivables, approximated their carrying values at December 31, 1994 and 1993. The carrying values of the foreign currency and related interest rate swap agreements and of the forward contracts, which did not differ materially from their fair values, were not material. See Notes 5, 6 and 17 for additional disclosures of fair value for short-term borrowings, long-term debt and financial instruments within the financial services and real estate operations, respectively. Continued 34 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued ---------- Note 19. Quarterly Financial Data (Unaudited): - -------------------------------------------------------------
1994 Quarters ------------------------------------ 1st 2nd 3rd 4th -------- -------- ------- ------- (in millions, except per share data) Operating revenues $15,500 $16,414 $16,710 $16,501 ======= ======= ======= ======= Gross profit $ 5,929 $ 6,480 $ 6,579 $ 6,437 ======= ======= ======= ======= Net earnings $ 1,171 $ 1,232 $ 1,230 $ 1,092 ======= ======= ======= ======= Per share data: Net earnings $ 1.34 $ 1.42 $ 1.42 $ 1.27 ======= ======= ======= ======= Dividends declared $ .69 $ .69 $ .825 $ .825 ======= ======= ======= ======= Market price - high $ 61 $55-3/8 $62-3/8 $64-1/2 - low $49-5/8 $47-1/4 $51-3/4 $56-1/8
Continued 35 NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Concluded ----------
1993 Quarters ------------------------------------- 1st 2nd 3rd 4th -------- -------- ------- ------- (in millions, except per share data) Operating revenues $15,189 $15,789 $15,209 $14,714 ======= ======== ======= ======= Gross profit $ 5,935 $ 6,277 $ 5,926 $ 5,712 ======= ======== ======= ======= Earnings before cumulative effect of accounting change $ 1,214 $ 1,048 $ 967 $ 339 Cumulative effect of change in method of accounting (477) ------- -------- ------- ------- Net earnings $ 737 $ 1,048 $ 967 $ 339 ======= ======== ======= ======= Per share data: Earnings before cumulative effect of accounting change $ 1.38 $ 1.19 $ 1.11 $ .38 Cumulative effect of accounting change (.54) ------- -------- ------- ------- Net earnings $ .84 $ 1.19 $ 1.11 $ .38 ======= ======== ======= ======= Dividends declared $ .65 $ .65 $ .65 $ .65 ======= ======== ======= ======= Market price - high $77-5/8 $64-3/4 $51-3/8 $59-3/8 - low $60-5/8 $ 45 $45-3/8 $45-1/2
Effective January 1, 1993, the Company changed its method of accounting for postemployment benefits. This change in accounting reduced previously reported net earnings by $4 million in the first quarter, $5 million in the second quarter ($.01 per share) and $4 million in the third quarter. See Note 13. During the fourth quarter of 1993, the Company provided $741 million pretax, $457 million after tax, for the costs of restructuring its worldwide operations. The pretax charge was included in marketing, administration and research costs. See Note 3. 36 -----END PRIVACY-ENHANCED MESSAGE-----