PHILIP MORRIS COMPANIES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-8940

PHILIP MORRIS COMPANIES INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

VIRGINIA 13-3260245
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

120 PARK AVENUE, NEW YORK, N.Y. 10017
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 212-880-5000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $1 par value New York Stock Exchange

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

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At February 1, 1994, the aggregate market value of the shares of Common Stock
held by non-affiliates of the registrant was approximately $52.3 billion. At
such date, there were 877,255,534 shares of the registrant's Common Stock
outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's annual report to stockholders for the year ended
December 31, 1993 are incorporated in Item 1 of Part I, Part II and Part IV
hereof and made a part hereof. The registrant's definitive proxy statement in
connection with its annual meeting of stockholders to be held on April 21,
1994, filed with the Securities and Exchange Commission, is incorporated in
Part III hereof and made a part hereof.

PART I

ITEM 1. BUSINESS.

GENERAL DESCRIPTION OF BUSINESS

GENERAL

Philip Morris Companies Inc. is a holding company whose principal wholly-
owned subsidiaries, Philip Morris Incorporated, Philip Morris International
Inc., Kraft General Foods, Inc. and Miller Brewing Company, are engaged
primarily in the manufacture and sale of various consumer products. A wholly-
owned subsidiary of the Company, Philip Morris Capital Corporation, engages in
various financing and investment activities. As used herein, unless the context
indicates otherwise, the term "Company" means Philip Morris Companies Inc. and
its subsidiaries. The Company is the largest consumer packaged goods company in
the world.*

Philip Morris Incorporated ("Philip Morris U.S.A.") and its subsidiaries and
affiliates are engaged primarily in the manufacture and sale of cigarettes.
Philip Morris U.S.A. is the largest cigarette company in the United States.
Philip Morris International Inc. ("Philip Morris International") is a holding
company whose subsidiaries and affiliates and their licensees are engaged
primarily in the manufacture and sale of tobacco products (mainly cigarettes);
certain Latin American subsidiaries and affiliates manufacture and sell a wide
variety of food products. A subsidiary of Philip Morris International is the
leading United States exporter of cigarettes. Marlboro, the principal cigarette
brand of these companies, has been the world's largest selling cigarette brand
since 1972.

The Company's food subsidiary, Kraft General Foods, Inc. ("KGF"), is the
largest processor and marketer of packaged grocery, coffee, cheese and
processed meat products in the United States. A wide variety of similar
products is manufactured and marketed by KGF in Europe, Canada and the
Asia/Pacific region. KGF also conducts foodservice businesses and sells food
ingredients.

Miller Brewing Company ("Miller") is the second largest brewing company in
the United States.

SOURCE OF FUNDS -- DIVIDENDS

Because the Company is a holding company, one of its principal sources of
funds is dividends from its subsidiaries. The Company's principal wholly-owned
subsidiaries currently are not limited by long-term debt or other agreements in
their ability to pay cash dividends or make other distributions with respect to
their common stock.

INDUSTRY SEGMENTS

Tobacco products (mainly cigarettes), which accounted for 43% of the
Company's operating revenues in 1993 and in 1992, food products, beer and
financial services and real estate represent the Company's significant industry
segments. Operating revenues, operating profit (together with a reconciliation
to operating income) and identifiable assets attributable to each such segment
for each of the last three years, set forth in note 11 to the Company's
consolidated financial statements, are incorporated herein by reference to its
annual report to stockholders for the year ended December 31, 1993.

Operating profit from tobacco operations was approximately 62% of the
Company's total operating profit in 1993 compared with 69% in 1992, of which
Philip Morris U.S.A. and Philip Morris International contributed 33% and 29%,
respectively, in 1993 and 50% and 19%, respectively, in 1992. Food products
accounted for approximately 33% of the Company's operating profit in 1993 and
27% in 1992. Beer contributed approximately 2% and financial services and real
estate contributed approximately 3% of the Company's operating profit in 1993,
as compared with 2% each in 1992.
- --------
* Claims made with respect to the Company's competitive ranking in its various
businesses are based on sales data or, in the case of cigarettes and beer,
shipments, unless otherwise indicated.

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During 1993, the Company provided $741 million for the costs of restructuring
its worldwide operations. In addition, the Company adopted, effective January
1, 1993, Statement of Financial Accounting Standards ("SFAS") No. 112, which
resulted in additional operating expense of $29 million. Excluding the impacts
of the restructuring and SFAS No. 112, the percentages of total operating
profit from tobacco, food and beer operations were 59%, 34% and 4%,
respectively.

NARRATIVE DESCRIPTION OF BUSINESS

TOBACCO PRODUCTS

Philip Morris U.S.A. is responsible for the manufacture, marketing and sale
of cigarettes in the United States (including military sales); subsidiaries and
affiliates of Philip Morris International and their licensees are responsible
for the manufacture, marketing and sale of tobacco products outside the United
States; and a subsidiary of Philip Morris International is responsible for
tobacco product exports from the United States.

The tobacco industry continues to be subject to health concerns and
litigation, as well as tax increases, which could have an adverse impact on the
Company.

Domestic Tobacco Products

In 1993, Philip Morris U.S.A.'s total shipments of cigarettes amounted to
194.7 billion units, a decrease of 19.6 billion units (9.1%) from 1992. The
industry's estimated cigarette shipments in the United States decreased by 9.0%
in 1993 as compared to 1992, following a decrease of 0.4% in 1992 as compared
to 1991. As discussed below, in 1993, Philip Morris U.S.A. implemented a
strategy which lowered the price of Marlboro and its other premium brands. This
action resulted in lower shipments in 1993 as compared with 1992 when
distributors bought in anticipation of price increases and higher federal
excise taxes, effective January 1, 1993. The following table sets forth the
industry's estimated cigarette shipments in the United States, Philip Morris
U.S.A.'s shipments and its share of industry shipments (excluding in all cases
export and overseas military shipments):

PHILIP MORRIS
YEARS ENDED PHILIP MORRIS U.S.A. SHARE
DECEMBER 31 INDUSTRY (a) U.S.A. OF INDUSTRY (a)
----------- ------------ ------------- ---------------
(IN BILLIONS OF UNITS) (%)

1993............................ 461.2 194.7 42.2
1992............................ 507.0 214.3 42.3
1991............................ 509.1 220.7 43.4

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(a) Source: Wheat, First Securities, Inc. (John C. Maxwell, Jr.)

According to The Maxwell Consumer Report issued by Wheat, First Securities,
Inc., Philip Morris U.S.A. has been the leading cigarette company in the United
States market since 1983. Philip Morris U.S.A.'s major cigarette brands are
Marlboro, Benson & Hedges 100's, Merit, Virginia Slims, Cambridge and Basic.
Marlboro is the largest selling brand in the United States with shipments of
108.5 billion units in 1993 (down 12.4% from 1992, primarily the result of the
differences in distributor buying patterns noted above), 23.5% of the United
States market.

During the first half of 1993, domestic cigarette industry volume continued
to shift from the full price (premium) segment to the lower margin discount
segment. In April 1993, Philip Morris U.S.A. announced its decision to
institute, in the second quarter of 1993, an extensive promotional program to
reduce the average retail price of Marlboro cigarettes, a major shift in
pricing strategy designed to restore lost market share and improve long-term
profitability. In August 1993, Philip Morris U.S.A. lowered the price of its
premium brands and raised the price of its discount products in further
response to the highly price sensitive market environment. The overall effect
of these changes has been lower profit margins that have not been offset
entirely by higher volume. Lower profit margins will continue at least until
sustained improvements in the economic environment occur. As a result of these
strategic initiatives, retail sales data compiled by Nielsen Marketing Research
indicate Marlboro's market share rising from 22.1% in March 1993 to 26.8% in
December 1993. In addition, such retail sales data indicate that a reversal
occurred in the second half of

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1993 in the shift away from the premium segment (67.8% of the industry in
December 1993 compared with 64.0% in March 1993) to the discount segment. These
developments, and their impact on the Company's financial results, are more
fully discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations (the "MD&A"), incorporated herein by reference to the
Company's annual report to stockholders for the year ended December 31, 1993.

The discount segment of the industry, which consists of "generic" and lower-
priced cigarettes that have a lower profit margin than premium brands, has
grown markedly in recent years, constituting 36.8% of United States industry
shipments in 1993, up from 30.2% in 1992, but down from 39.0% and 40.7% for the
first and second quarters of 1993, respectively. Philip Morris U.S.A. accounted
for 29.4% of the discount segment in 1993, up from 27.1% in 1992.

Excise taxes, sales taxes and other taxes levied by various states, counties
and municipalities affecting cigarettes have been increasing. These taxes vary
considerably and, when combined with the federal excise tax, may be as high as
$1.05 per package of 20 cigarettes. The federal excise tax was increased by
$.04 to $.24 per package of 20 cigarettes effective January 1, 1993. As part of
its health care reform proposal, the administration has proposed an increase of
$.75 per package (to $.99), effective October 1, 1994. In the opinion of the
Company, the 1993 increase has had an adverse effect on sales and the proposed
1994 increase, if adopted, could result in volume declines for Philip Morris
U.S.A. and further shifts from the premium segment to the discount segment.

International Tobacco Products

The Company estimates that world cigarette industry unit sales (excluding the
United States) were approximately 5.0 trillion units in 1993, of which the
Company's share, including licensees, was 9.2% in 1993 and 8.6% in 1992. Unit
sales of its principal brand, Marlboro, increased 3.5% in 1993 over 1992 to
240.1 billion units, accounting for 4.8% of the world cigarette market
(excluding the United States). Subsidiaries and affiliates of Philip Morris
International and their licensees have cigarette market shares of at least
15%-- and in a number of instances substantially more than 15% -- in more than
30 markets, including Argentina, Australia, Belgium, the Canary Islands, the
Czech Republic, the Dominican Republic, Finland, France, Germany, Hong Kong,
Italy, Kuwait, Mexico, the Netherlands, the Philippines, Saudi Arabia,
Singapore, Slovakia and Switzerland.

A subsidiary of Philip Morris International is the leading United States
exporter of cigarettes. It exported 114.4 billion units in 1993, an increase of
3.6% from 1992.

Cigarette prices in many international markets are government-controlled, and
excise and other tax increases, higher costs and government price restraints in
a number of markets have restricted, and may continue to restrict, the sales
and operating income of Philip Morris International.

In 1993, Philip Morris International acquired majority interests in
government-owned tobacco companies in Lithuania, Russia and Kazakhstan and
signed a cooperation agreement with the China National Tobacco Company to
produce and sell Marlboro cigarettes for the Chinese domestic market.

Smoking and Health and Related Matters

Reports with respect to the alleged harmful physical effects of cigarette
smoking have been publicized for many years and, in the opinion of the Company,
have had and continue to have an adverse effect upon tobacco industry sales.
Since 1964, the Surgeon General of the United States and the Secretary of
Health and Human Services have released a number of reports which purport to
link cigarette smoking with a broad range of health hazards, including various
types of cancer, coronary heart disease and chronic lung disease, and recommend
various governmental measures to reduce the incidence of smoking. The 1990 and
1992

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reports focus upon the purported addictive nature of cigarettes, the purported
effects of smoking cessation, the decrease in smoking in the United States and
the economic and regulatory aspects of smoking in the Western Hemisphere. The
most recent report, released in February 1994, focuses upon cigarette smoking
by adolescents, particularly the purported addictive nature of cigarette
smoking in adolescence.

Federal legislation requires cigarette manufacturers and importers to include
the following warning statements in rotating sequence on cigarette packages and
in advertisements: SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer, Heart
Disease, Emphysema, And May Complicate Pregnancy; SURGEON GENERAL'S WARNING:
Quitting Smoking Now Greatly Reduces Serious Risks to Your Health; SURGEON
GENERAL'S WARNING: Smoking By Pregnant Women May Result in Fetal Injury,
Premature Birth, And Low Birth Weight; and SURGEON GENERAL'S WARNING: Cigarette
Smoke Contains Carbon Monoxide. Such legislation also covers the size and
format of warnings on cigarette packages and in cigarette advertising, and
prescribes a modified version of the warnings for outdoor billboard
advertisements. In addition to the warning statements, cigarette advertising in
the United States must disclose the average "tar" and nicotine deliveries of
the advertised brand or variety. Cigarette manufacturers and importers are also
required to provide annually to the Secretary of Health and Human Services a
list of ingredients added to tobacco in the manufacture of cigarettes, and the
Secretary is directed to report to Congress concerning the health effects, if
any, of such ingredients. Most of the cigarettes sold by the Company's
subsidiaries, affiliates and their licensees are sold in countries where
warning statement requirements for cigarette packages have been adopted. In
countries where such statements are not legally required, the Company places
the U.S. Surgeon General's warnings on all of its cigarette packages.

Studies with respect to the alleged health risk to nonsmokers of diluted and
modified cigarette smoke, often referred to as environmental tobacco smoke
("ETS"), have received significant publicity. In 1986, the Surgeon General of
the United States and the National Academy of Sciences reported that nonsmokers
were at increased risk of lung cancer and respiratory illness due to ETS. In
January 1993, the United States Environmental Protection Agency (the "EPA")
issued a report concluding, among other things, that ETS is a human lung
carcinogen and that ETS increases certain health risks for young children. In
June 1993, Philip Morris U.S.A. joined five other representatives of the
tobacco manufacturing and related industries in a lawsuit against the EPA
seeking a declaration that the EPA does not have the authority to regulate ETS,
and that, in view of the available scientific evidence and the EPA's failure to
follow its own guidelines in making the determination, the EPA's final risk
assessment be declared arbitrary and capricious. The EPA report, as well as
adverse publicity on ETS, have resulted in the enactment of legislation that
restricts or bans cigarette smoking in certain public places and some places of
employment.

Another federal statute established the Interagency Committee on Cigarette
and Little Cigar Fire Safety to direct the work of a Technical Study Group
created by the same statute and to make policy recommendations to Congress. The
Technical Study Group, which consisted of representatives of designated
government agencies, the tobacco and furniture industries and various other
organizations, studied the feasibility and consequences of developing
cigarettes and little cigars that would have a minimum propensity to ignite
upholstered furniture or mattresses. Based on this research, the Interagency
Committee submitted its final technical report to Congress in December 1987,
which contained the conclusion of the Technical Study Group that it is
technically feasible and may be commercially feasible to develop cigarettes
that will have a significantly reduced propensity to ignite upholstered
furniture and mattresses. Legislation in August 1990 provided for further
research under the direction of the Consumer Product Safety Commission (the
"CPSC"), with advice from a new scientific committee, the Technical Advisory
Group. The CPSC reported to Congress in August 1993 that it is practicable to
develop a performance standard for cigarette ignition propensity, but that "it
is unclear that such a standard will effectively address the number of
cigarette-related fires."

Television and radio advertising of cigarettes is prohibited in the United
States and prohibited or restricted in many other countries. Enactments by
regulatory agencies and other governmental authorities have restricted or
prohibited smoking areas aboard certain common carriers, in certain public
places and in some places of employment. Smoking is currently banned on all
commercial airline flights, regardless of

4

duration, within and between the 48 contiguous states, the District of
Columbia, the U.S. Virgin Islands and Puerto Rico and within Alaska and Hawaii,
and on all commercial flights to or from Alaska and Hawaii scheduled for less
than six hours. In addition, various foreign airlines voluntarily have banned
smoking on certain flights.

Numerous other legislative and regulatory measures have been proposed at the
federal, state and local levels which, if implemented, could adversely affect
Philip Morris U.S.A.'s cigarette business. The most significant of such
measures would increase federal, state or local taxes on cigarettes, restrict
the sale and distribution of cigarettes through limitations on points of sale,
further restrict cigarette advertising and promotion and further restrict or
prohibit smoking aboard common carriers or in public places or places of
employment.

A number of foreign countries have also taken steps to restrict or prohibit
cigarette advertising and promotion, to increase taxes on cigarettes and to
discourage cigarette smoking. In some cases, such restrictions are more onerous
than those in the United States. Canada has enacted a ban on cigarette
advertising, which is being challenged on constitutional grounds. In 1992, the
European Parliament approved a proposal to ban all tobacco advertisements in
the European Community. Various additional approvals must be obtained before
the proposal can be enacted. It is not possible to predict the outcome of this
legislative effort.

In February 1994, the Food and Drug Administration (the "FDA"), in a letter
to an anti-smoking group, claimed that it may be possible for the FDA to
regulate cigarettes under the drug provisions of the Food, Drug, and Cosmetic
Act. The FDA's claim is based upon allegations that manufacturers may intend
that their products contain nicotine to satisfy an alleged addiction on the
part of some of their customers. The FDA stated that any regulation would need
to be based upon an evidentiary record indicating such intent. The letter
indicated that regulation of cigarettes under said Act could ultimately result
in the removal from the market of products containing nicotine at levels that
cause or satisfy addiction. Because of the complexity and magnitude of the
issues raised by this claim, the FDA has asked Congress to provide "clear
direction" to the agency. While Philip Morris U.S.A. does not believe that
cigarettes are addictive and denies the allegation that its products are
intended to satisfy an alleged addiction, management cannot predict the
ultimate outcome of the FDA's efforts.

There is litigation pending against the leading United States cigarette
manufacturers seeking compensatory and, in some cases, punitive damages for
cancer and other health effects alleged to have resulted from cigarette smoking
or exposure to cigarette smoking. As of December 31, 1993, there were 47 and as
of February 15, 1994, 45 such actions pending against the leading United States
cigarette manufacturers; 55 such cases were pending as of December 31, 1992.
Philip Morris U.S.A. was a defendant in 22 actions pending as of December 31,
1993 and 21 such actions pending as of February 15, 1994; there were 27 such
cases as of December 31, 1992.

Among the defenses to certain of this litigation raised by Philip Morris
U.S.A. 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 ruling affirmed in part, and
reversed in part, a 1990 decision of the Court of Appeals for the Third
Circuit, holding that the Act preempted claims arising after 1965 that
challenged the adequacy of the federally mandated warning or the propriety of
cigarette manufacturers' advertising and promotional activities. 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

5

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.

Philip Morris U.S.A. believes, and it has been so advised by counsel, that it
has a number of valid defenses to all smoking and health cases, including, but
not limited to, those defenses based on preemption under the Supreme Court
decision referred to above. All such cases are, and will continue to be,
vigorously defended. It is not possible to predict the outcome of this
litigation. Litigation is subject to many uncertainties, and it is possible
that some of these actions could be decided unfavorably to Philip Morris U.S.A.
An unfavorable outcome of a pending action could encourage the commencement of
additional similar litigation. Reference is made to note 15 to the Company's
consolidated financial statements, incorporated herein by reference to the
Company's annual report to stockholders for the year ended December 31, 1993.

Philip Morris U.S.A. has been advised that there is a grand jury
investigation being conducted by the U.S. Attorney for the Eastern District of
New York which is looking into possible violations of criminal law in
connection with activities relating to the Council for Tobacco Research - USA,
Inc., of which Philip Morris U.S.A. is a sponsor. The outcome of this
investigation cannot be predicted.

Philip Morris U.S.A. has received a Civil Investigative Demand from the
Antitrust Division of the United States Department of Justice in an
investigation of possible joint activity among United States manufacturers in
the production and sale of cigarettes, including possible joint activity to
limit new product development. The outcome of this investigation cannot be
predicted.

Distribution, Competition and Raw Materials

Philip Morris U.S.A. sells its tobacco products principally to wholesalers
(including distributors), large retail organizations, vending machine operators
and the armed services. Subsidiaries and affiliates of Philip Morris
International and their licensees market cigarettes and other tobacco products
worldwide, directly or through export sales organizations and other entities
with which they have contractual arrangements.

The market for tobacco products is highly competitive, with product quality,
price, marketing and packaging constituting significant methods of competition.
Promotional activities include, in certain instances, allowances, the use of
incentive items, price reductions and other discounts. This highly competitive
market, and Philip Morris U.S.A.'s 1993 initiatives therein, are more fully
described in "Tobacco Products--Domestic Tobacco Products" above and in the
MD&A. The tobacco products of the Company's subsidiaries, affiliates and their
licensees are extensively advertised and promoted through various media,
although television and radio advertising of cigarettes is prohibited in the
United States and is prohibited or restricted in many other countries.

Philip Morris U.S.A. and Philip Morris International's subsidiaries and
affiliates and their licensees purchase domestic burley and flue cured leaf
tobaccos of various grades and types each year, primarily at domestic auction.
In addition, oriental tobacco and certain other tobaccos are purchased outside
the United States. The tobacco is then graded, cleaned, stemmed and redried
prior to its storage for aging up to three years. Large quantities of leaf
tobacco inventory are maintained to support cigarette manufacturing
requirements. Tobacco is an agricultural commodity subject to United States
government controls, including the tobacco price support and production
adjustment programs administered by the United States Department of Agriculture
(the "USDA").

As of January 1, 1994, legislation became effective requiring, subject to
financial penalties, the use of at least 75% American-grown tobacco, which is
more expensive than imported tobacco, in cigarettes manufactured in the United
States. Due to the high content of American-grown tobacco (approximately 65% in
1993) used in Philip Morris U.S.A.'s products and those exported by
subsidiaries of Philip Morris International, this new requirement is not
expected to have a material adverse effect on the results of operations of
Philip Morris U.S.A. or Philip Morris International.

FOOD PRODUCTS

KGF's reporting and management structure currently comprises Kraft General
Foods North America, Kraft Foodservice and Kraft General Foods International.
Kraft General Foods North America currently

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has four operating units: (i) General Foods USA, responsible for General Foods
United States packaged grocery products, coffee, cereal, beverage and certain
frozen foods businesses; (ii) Kraft USA, responsible for Kraft United States
dry grocery foods, refrigerated foods (principally dairy products), certain
frozen foods and the processed meat and poultry products businesses of Oscar
Mayer Foods; (iii) Kraft Food Ingredients, responsible for United States food
ingredients businesses; and (iv) Kraft General Foods Canada, responsible for
all General Foods and Kraft Canadian businesses. Kraft Foodservice is
responsible for United States foodservice businesses. Kraft General Foods
International is responsible for all of the Company's food, coffee and
confectionery businesses outside the United States, Canada and Latin America.

Kraft General Foods North America

General Foods USA. General Foods USA's principal products include ready-to-
eat cereals, coffee and other beverages, dinners, desserts and bakery products.
It is one of the largest processors and marketers of packaged grocery products
in the United States and is the largest processor and marketer of coffee in the
United States. Its principal brands include Maxwell House, Yuban, Sanka, Brim
and Maxim coffees, General Foods international coffees, Jell-O desserts, Post
and Nabisco ready-to-eat cereals, Log Cabin syrups,
Kool-Aid, Tang, Crystal Light, Country Time and Capri Sun beverages,
Entenmann's and Freihofer's bakery products, including the Entenmann's fat free
and cholesterol free bakery line, Oroweat specialty breads, Minute rice, Stove
Top stuffing mix, Shake'n Bake coatings, Good Seasons salad dressing mixes,
Lender's frozen bagels and Cool Whip toppings. In January 1993, KGF completed
its acquisition of the ready-to-eat cold cereals business of RJR Nabisco
Holdings Corp.

Kraft USA. Kraft USA's principal products include cheese and related
products, vegetable oil-based products, such as salad dressings, margarine and
related products, barbecue sauce, confections, cultured dairy products, frozen
pizza, meat and poultry products and packaged pasta dinners. It is one of the
largest processors and marketers of processed meat and poultry products, cheese
and cheese products and salad dressings in the United States and also processes
and markets mayonnaise products and certain frozen food products. In addition
to Kraft, its principal brands include Velveeta, Cracker Barrel and rondele
cheese products, Miracle Whip salad dressing, Philadelphia Brand cream cheese,
Cheez Whiz cheese spread, Seven Seas pourable dressings, Parkay margarine,
Bull's-Eye barbecue sauces, Di Giorno pastas, sauces and cheeses, The Budget
Gourmet frozen entrees, side dishes and dinners, Light n' Lively, Knudsen and
Breakstone's cultured dairy products, Tombstone and Jack's frozen pizzas, Oscar
Mayer luncheon meats, hot dogs, bacon, ham and other meat products, Louis Rich
luncheon meats, poultry franks, turkey bacon and other poultry products,
Lunchables lunch combinations and Claussen pickles. During 1993, KGF sold its
United States frozen desserts and frozen vegetables businesses.

Kraft Food Ingredients. Kraft Food Ingredients manufactures certain private
label products as well as a variety of industrial food products for sale to
other food processors, which products include edible oils, shortenings, whey
products, nondairy creamers, confection products, cheese flavorings, seasonings
and cheese analogs. In 1993, Kraft Food Ingredients discontinued its
manufacture and marketing of commodity oils while retaining its higher margin
value-added oil products business.

Kraft General Foods Canada. Kraft General Foods Canada is responsible for
manufacturing and marketing packaged grocery, coffee and cheese products. Major
brand names include Kraft, Miracle Whip, Philadelphia Brand, Jell-O, Post,
Nabisco (ready-to-eat cereals), Kool-Aid, Baker's, Tang, Parkay, Cool Whip,
Sanka, Maxwell House, Nabob and Magic Moments. The Canadian foodservice
business markets coffee, salad dressings and other Kraft General Foods Canada
products to restaurants, airlines, schools and other institutions. In 1993,
Kraft General Foods Canada acquired Nabob Foods Limited, a manufacturer of
coffee and other packaged goods.

Kraft Foodservice

Kraft Foodservice consists of United States foodservice businesses. Kraft
Foodservice is the second largest broadline distributor of foodservice
products, including food products and supplies manufactured by Kraft General
Foods North America and other suppliers, in the United States.

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Kraft General Foods International

Kraft General Foods International is responsible for manufacturing and
marketing a wide variety of coffee, confectionery, cheese, packaged grocery and
processed meat products in Europe and the Asia/Pacific region, and for the
Company's international foodservice business. International brands include a
wide variety of the products sold by General Foods USA and Kraft USA, as well
as Milka, Tobler, Toblerone, Suchard, Freia, Marabou, Diam, Estrella, Callard &
Bowser, Terry's, Splendid and Cote d'Or confections, Carte Noire, Gevalia,
Grand'Mere, HAG, Jacobs Cafe, Jacobs Kronung, Jacques Vabre, Night & Day and
Saimaza coffees, Negroni and Simmenthal meats, Miracoli pasta dinners, Dairylea
process cheese, Vegemite sandwich spread and Hollywood chewing gum. The
international foodservice business markets cheese, coffee and grocery products
to restaurants, airlines, schools and other institutions.

In 1993, a subsidiary of KGF completed its acquisition of Freia Marabou a.s,
a Scandinavian confectionery and snack food company. In addition, KGF acquired
The Terry's Group, a United Kingdom confectionery company, and companies in
Poland, the Czech Republic, Lithuania, Bulgaria and China.

In Latin America, certain subsidiaries of Philip Morris International
manufacture and market a wide variety of food products, including a number of
the products sold by General Foods USA and Kraft USA, as well as Kibon ice
cream and Suchard confections.

Distribution, Competition and Raw Materials

Sales of products of General Foods USA, Kraft USA and Kraft General Foods
Canada are generally made on the basis of orders by supermarket chains,
wholesalers, club stores, mass merchandisers, distributors and individual
stores. Substantially all products are distributed through retail food outlets,
including club stores and mass merchandisers. Dry grocery products are shipped
to, or picked up by, customers from plants and distribution centers or shipped
to customers from a number of satellite warehouses and other facilities. Frozen
and refrigerated products are shipped from manufacturing locations and from
intermediate company-operated and public cold storage facilities. Fresh baked
goods are delivered daily to depots and then distributed to the retail trade.
Selling efforts are assisted by national and regional advertising on television
and radio and in magazines and newspapers, as well as by sales promotions,
product displays, trade incentives, informative material offered to customers
and other promotional activities. The products of Kraft Food Ingredients are
distributed to food processors, foodservice operators and distributors and
retail food stores. Sales are made primarily through the Kraft Food Ingredients
sales force and, in some instances, independent brokers. Kraft Food Ingredients
maintains warehouse and distribution centers at each of its main manufacturing
facilities.

Local foodservice distribution centers support the operations of Kraft
Foodservice. Each Kraft Foodservice distribution center has a warehouse, sales
office and fleet of trucks to distribute products to customers in its sales
regions.

Products of Kraft General Foods International are sold primarily through
sales offices and agents abroad. The majority of the sales of this operating
unit are derived from Europe. European regional distribution is coordinated
from its headquarters offices located in Zurich, Switzerland and through
facilities located throughout Europe. The Asia/Pacific area operations are
headquartered in Hong Kong. KGF operations outside of the United States and
Canada are directed from the Kraft General Foods International headquarters in
Rye Brook, New York. Advertising is tailored by product and country to reach
targeted audiences.

KGF is subject to highly competitive conditions in virtually all aspects of
its business. Competitors include large national and international companies
and numerous local and regional companies. Its food products also compete with
generic products and private label products of food retailers, wholesalers and
cooperatives. KGF competes primarily on the basis of product quality, service,
marketing, advertising and price.

8

KGF is a major purchaser of milk, cheese, green coffee beans, poultry, meat
cuts, wheat, cocoa, rice, eggs, shortening, vegetable oil, aspartame, flour,
fruits and berries, sugar, corn syrup, herbs and spices and tomato products.
KGF continuously monitors worldwide supply and cost trends of these commodities
to enable it to take appropriate action to obtain ingredients needed for
production.

KGF purchases all of its milk requirements from outside sources, principally
from cooperatives and individual producers and a substantial part of its
cheddar cheese requirements from outside sources, principally cooperatives and
independent cheese processors, all pursuant to both contractual relationships
and informal arrangements. The prices for United States milk purchases are
substantially influenced by the floor prices established by the milk price
support program administered by the USDA. The prices paid for cheese in the
United States are based upon or substantially influenced by weekly quotations
on the National Cheese Exchange in Green Bay, Wisconsin. See "Regulation"
below.

The most significant cost item in coffee products is green coffee beans,
which are purchased on world markets. Green coffee bean prices are affected by
the quality and availability of supply, trade agreements among producing and
consuming nations, the unilateral policies of the producing nations, changes in
the value of the United States dollar in relation to certain other currencies
and consumer demand for coffee products.

The price paid for poultry (turkey) and meat cuts (pork, beef, turkey and
chicken), the principal raw materials used in manufacturing Oscar Mayer and
Louis Rich branded products, is the major factor in the cost of these products.
Poultry and meat prices are affected by market demand and supply. Meats for
Oscar Mayer processed products are provided primarily by bulk market purchases.

KGF is also a major user of packaging materials purchased from many
suppliers.

The prices paid for food product raw materials generally reflect external
forces, among which weather conditions and commodity market activities are
significant. Although the prices of the principal raw materials required by KGF
can be expected to fluctuate as a result of government actions and/or market
forces (which would directly affect the cost of products and value of
inventories), such materials are generally in adequate supply and available
from numerous sources.

Regulation

Almost all of KGF's United States food products (and packaging materials
therefor) are subject to regulations administered by the Food and Drug
Administration (the "FDA"), or, with respect to products containing meat and
poultry, the USDA. Among other things, the FDA enforces statutory prohibitions
against misbranded and adulterated foods, establishes ingredients and/or
manufacturing procedures for certain standard foods, establishes standards of
identity for food, determines the safety of food substances and establishes
labelling standards for food products. FDA regulations may, in certain
instances, affect the ability of KGF's United States operating units to develop
and market new products and to utilize technological innovations in the
processing of existing products. The Nutrition Labelling and Education Act of
1991 (the "NLEA") mandates nutrition labelling on a majority of the food
products packaged for sale in the United States. In January 1993, the FDA
adopted rules and regulations under the NLEA, including rules requiring
extensive re-labelling of virtually all of the products of General Foods USA
and Kraft USA. Similar rules and regulations have been adopted by the USDA to
cover meat and poultry products. The effective date for the new requirements is
May 1994. Management believes that compliance with the new requirements will
not have a material adverse impact on the Company's results of operations.

In addition, various states regulate the business of KGF's United States
operating units by licensing dairy plants, enforcing federal and state
standards of identity for food, grading food products, inspecting plants,
regulating certain trade practices in connection with the sale of dairy
products and imposing their own labelling requirements on food products.

9

The prices paid for grade-A raw milk in the United States are controlled in
most areas by Federal Milk Marketing Orders or state regulatory agencies. Such
orders and agencies establish basic minimum prices, with adjustments based upon
usage and geographic location. In some areas, prices for raw milk also include
additional premiums charged by suppliers. In addition, the USDA sets a support
price, which serves as a floor for the price at which the Commodity Credit
Corporation (the "CCC"), an arm of the USDA, will purchase cheese, butter and
milk powder. From time to time, KGF (as well as other cheese producers) sells
excess cheese production to the CCC.

Almost all of the activities of Kraft General Foods International and Kraft
General Foods Canada are subject to the same kinds of regulation as KGF's
United States businesses. Each of the operations and locations of these units
is subject to local and national and, in some cases, international (such as the
European Community) regulatory provisions. The rules and regulations relate to
labelling, packaging, food content, pricing, marketing and advertising and
related areas.

BEER

Products

Miller's major brands are Miller Lite, which was the largest selling reduced-
calorie beer and second largest selling brand in the United States in 1993;
Miller High Life, which, in 1993, was repositioned as a near-premium beer in 40
states by reducing its price; Miller Genuine Draft, which is one of the fastest
growing premium beers in the United States; Meister Brau and Milwaukee's Best,
sold in the below-premium segment of the United States market; Lowenbrau,
brewed and sold in the United States under a license agreement with Lowenbrau
Munchen AG; Sharp's, a brewed non-alcohol beverage; and Miller Reserve, a
super-premium beer introduced in 1992. Miller Lite, Miller Genuine Draft,
Milwaukee's Best and Miller High Life are among the top ten selling beers in
the United States. Shipment volume of Miller beer and brewed non-alcohol
beverages (including exports) increased 4.3% in 1993 compared with 1992. This
increase resulted principally from the acquisition of Molson Breweries U.S.A.,
Inc. and higher volumes for Miller High Life and Miller Genuine Draft. In 1993,
Miller High Life shipments, in aggregate, increased 11.0%, as a result of being
repositioned as a near-premium beer in 40 states. Miller shipments in the
premium segment (excluding Miller High Life) were up .6%, reflecting volume
growth in Miller Genuine Draft, partially offset by declines in Miller Lite.
Shipments in the below-premium segment were down .9%.

The following table sets forth, based on shipments, the industry's sales of
beer and brewed non-alcohol beverages as estimated by Miller, Miller's unit
sales and its share of industry sales:

YEARS ENDED MILLER'S SHARE
DECEMBER 31 INDUSTRY MILLER OF INDUSTRY
----------- ------------- ------------ --------------
(IN THOUSANDS OF BARRELS) (%)

1993............................. 197,966 44,024 22.2
1992............................. 197,253 42,145 21.4
1991............................. 196,156 43,556 22.2

In 1993, Miller acquired a 20% equity interest in Canada's Molson Breweries
and all of the United States import operations of Molson Breweries U.S.A.,
Inc., including United States marketing and distribution rights for Molson
brands.

Distribution, Competition and Raw Materials

Beer products are distributed primarily through independent beer wholesalers.
The United States malt beverage industry is highly competitive, with the
principal methods of competition being product quality, price, distribution,
marketing and advertising. Miller engages in a wide variety of advertising and
sales promotion activities. Barley, hops, corn and water represent the
principal ingredients used in manufacturing Miller's beer products and are
generally available in the market. The production process, which includes
fermentation and aging periods, is conducted throughout the year and at any one
time Miller has on hand

10

only a small quantity of finished products. Containers (bottles, cans and kegs)
for beer products are purchased from various suppliers.

Regulation

The Alcoholic Beverage Labeling Act of 1988 requires all alcoholic beverages
manufactured for sale in the United States to include the following warning
statement on containers: GOVERNMENT WARNING: (1) According to the Surgeon
General, women should not drink alcoholic beverages during pregnancy because of
the risk of birth defects; (2) Consumption of alcoholic beverages impairs your
ability to drive a car or operate machinery and may cause health problems. The
statute empowers the Bureau of Alcohol, Tobacco and Firearms (the "BATF") to
promulgate regulations to prescribe the size and format of the warning. The
BATF has published a notice in the Federal Register seeking information which
will enable the BATF to report to Congress as to whether the wording of the
warning statement should be amended. In addition, various legislative and
regulatory proposals to prohibit or restrict the advertising and marketing of
alcoholic beverages are being considered. Such warning statement requirements
and any restrictions on advertising and marketing, if enacted, could have an
adverse impact on Miller's sales, but it is not possible to predict their long-
term effects or whether such additional restrictions will be enacted.

The federal excise tax is 32 cents per package of six 12-ounce containers.
Excise taxes, sales taxes and other taxes affecting beer are also levied by
various states, counties and municipalities. In the opinion of management, the
federal excise tax, which doubled in 1991, has had and could continue to have
an adverse effect on sales.

FINANCIAL SERVICES AND REAL ESTATE

Philip Morris Capital Corporation ("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 other subsidiaries. Total assets
increased to $5.7 billion at year-end 1993 as compared to $5.3 billion at year-
end 1992, reflecting among other things the net investment of an additional $70
million in finance assets and limited partnerships and $150 million of
unrealized appreciation on securities available for sale recognized pursuant to
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," adopted effective December 31, 1993.

Mission Viejo Company ("Mission Viejo"), a wholly-owned subsidiary of PMCC,
is engaged principally in land planning, development and sales in southern
California and in the Denver, Colorado area.

CUSTOMERS

None of the Company's business segments is dependent upon a single customer
or a few customers, the loss of which would have a material adverse effect on
the Company's results of operations.

EMPLOYEES

At December 31, 1993, the Company employed approximately 173,000 people
worldwide.

TRADEMARKS

Trademarks are of material importance to all three of the Company's consumer
products businesses and are protected by registration or otherwise in the
United States and most other markets where the related products are sold.

ENVIRONMENTAL REGULATION

The Company and its subsidiaries are subject to various federal, state and
local laws and regulations and involved in proceedings thereunder concerning
the discharge of materials into the environment or otherwise related to
environmental protection, including the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act and the Comprehensive Environmental
Response, Compensation and

11

Liability Act (commonly known as "Superfund"). In 1993, subsidiaries (or former
subsidiaries) of the Company were parties to approximately 134 proceedings
involving potential liability under Superfund and for other environmental
project clean-up costs. The Company and its subsidiaries expect to continue to
make capital and other expenditures in connection with environmental laws and
regulations. Compliance with such laws and regulations, including the payment
of any monetary sanctions resulting from governmental proceedings, and the
making of such expenditures are not expected to have a material adverse effect
on the Company's results of operations, capital expenditures or competitive
position.

FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

The amounts of operating revenues, operating profit and identifiable assets
attributable to each of the Company's geographic regions and the amount of
export sales from the United States for each of the last three fiscal years are
set forth in note 11 to the Company's consolidated financial statements
incorporated herein by reference to the Company's annual report to stockholders
for the year ended December 31, 1993.

KGF, Miller and subsidiaries of Philip Morris International export coffee
products, grocery products, cheese, processed meats, beer, tobacco and tobacco
related products. In 1993 the value of all exports from the United States by
these subsidiaries amounted to approximately $4.5 billion.

ITEM 2. PROPERTIES.

TOBACCO PRODUCTS

Philip Morris U.S.A. owns nine tobacco manufacturing and processing
facilities -- six in the Richmond, Virginia area, two in Louisville, Kentucky
and one in Cabarrus County, North Carolina. Philip Morris U.S.A. owns or leases
other premises and facilities, including an operations center, a research and
development facility and various administrative facilities in Richmond and an
engineering center in York County, Virginia. Subsidiaries and affiliates of
Philip Morris International own or lease cigarette manufacturing facilities in
28 countries outside the United States.

FOOD PRODUCTS

The Company's subsidiaries have 122 manufacturing and processing facilities,
560 distribution centers and depots and 250 various other facilities in the
United States, as well as 119 foreign manufacturing and processing facilities
in 30 countries and various distribution and other facilities outside the
United States. All significant plants and properties used for production of
food products are owned, although the majority of the domestic distribution
centers and depots are leased.

BEER

Miller currently owns and operates eight breweries, located in Milwaukee,
Wisconsin; Fulton, New York (scheduled to close in 1994); Fort Worth, Texas;
Eden, North Carolina; Albany, Georgia; Irwindale, California; Trenton, Ohio;
and Chippewa Falls, Wisconsin. Miller owns a malting facility, a hops
conversion facility and a can and bottle carrier facility. Miller owns six
distributorships and owns or leases warehouses in several locations. During
1993, Miller sold its can manufacturing plants and, in February 1994, entered
into an agreement to sell its glass-making plant.

GENERAL

The plants and properties owned and operated by the Company's subsidiaries
are maintained in good condition and are believed to be suitable and adequate
for present needs. In the fourth quarter of 1993, the 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 (including the Fulton, New York brewery noted above). Writedowns of
such facilities included in the restructuring charge were $429 million, of
which $141 million, $211 million and $77 million related to tobacco, food and
beer facilities, respectively.

12

ITEM 3. LEGAL PROCEEDINGS.

Reference is made to "Tobacco Products -- Smoking and Health and Related
Matters" under Item 1 for a description of certain litigation relating to
smoking and health, to note 15 to the Company's consolidated financial
statements, incorporated herein by reference to the Company's annual report to
stockholders for the year ended December 31, 1993, for a description of certain
pending purported shareholder class actions and to "Environmental Regulation"
under Item 1 for a description of certain proceedings relating to environmental
compliance.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.
----------------

EXECUTIVE OFFICERS OF THE COMPANY

The following are the executive officers of the Company as of March 1, 1994
(a):

NAME OFFICE AGE
---- ------ ---

Michael A. Miles........ Chairman of the Board and Chief Executive Officer 54
William Murray.......... President and Chief Operating Officer 58
Geoffrey C. Bible....... Executive Vice President, Worldwide Tobacco 56
John M. Keenan.......... President and Chief Executive Officer of Kraft General
Foods International 57
John N. MacDonough...... Chairman and Chief Executive Officer of Miller 50
Richard P. Mayer........ Chairman and Chief Executive Officer of Kraft General
Foods North America 53
Hans G. Storr........... Executive Vice President and Chief Financial Officer;
Chairman and Chief Executive Officer of PMCC 62
Murray H. Bring......... Senior Vice President and General Counsel 59
Craig L. Fuller......... Senior Vice President 43
Marc S. Goldberg........ Senior Vice President 50
John J. Tucker.......... Senior Vice President 53
Dede Thompson Bartlett.. Vice President and Secretary 50
Bruce S. Brown.......... Vice President 54
George R. Lewis......... Vice President and Treasurer 52
Kathleen M. Linehan..... Vice President 43
Katherine P. Wickham.... Vice President and Controller 45

- --------
(a) Set forth as part of Part I pursuant to General Instruction G(3) to Form
10-K and Instruction 3 to Item 401(b) of Regulation S-K.

All of the above-mentioned officers, with the exception of Messrs.
MacDonough, Mayer and Fuller and Mrs. Bartlett, have been employed by the
Company in various capacities during the past five years. Mr. MacDonough was
Vice President, Brand Management of Anheuser-Busch, Inc. from 1989 to 1990,
Executive Vice President, Marketing of Anheuser-Busch International, Inc. from
1991 until September 1992, when he became President and Chief Operating Officer
of Miller. He assumed his current position in September 1993. Mr. Mayer was
Chairman of the Board and Chief Executive Officer of Kentucky Fried Chicken
Corporation from 1982 until July 1989, when he became President of General
Foods USA. He assumed his current position in April 1991. Mr. Fuller was Chief
of Staff for then Vice President George Bush from 1985 to 1989. In 1989, he
joined Wexler, Reynolds, Harrison & Schule, Inc. and became its President. In
1990, after Wexler, Reynolds, Harrison & Schule, Inc. merged with Hill and
Knowlton, he held a succession of positions with Hill and Knowlton and became
President and Chief Executive Officer of Hill and Knowlton USA in October 1991.
He assumed his present position in January 1992. Mrs. Bartlett was President
and Director of The Mobil Foundation from 1984 to 1987, Corporate Secretary and
Secretary to the Board of Directors of Mobil Corporation from 1987 to 1990 and
a consultant on board of director issues, corporate governance and public
affairs from 1990 to 1991. She assumed her current position in December 1991.

13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

ITEM 6. SELECTED FINANCIAL DATA.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The information called for by Items 5, 6 and 7 is hereby incorporated by
reference to the following captioned paragraphs (at the pages indicated) in the
Company's annual report to stockholders for the year ended December 31, 1993
and made a part hereof:

PAGES IN
ANNUAL
ITEM PARAGRAPH CAPTION IN ANNUAL REPORT REPORT
---- ---------------------------------- --------

5 Quarterly Financial Data (Unaudited).......................... 43
5 Short-Term Borrowings and Borrowing Arrangements.............. 34
6 Selected Financial Data....................................... 26
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 20-25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information called for by this Item is hereby incorporated by reference
to the Company's annual report to stockholders for the year ended December 31,
1993 as set forth under the caption "Quarterly Financial Data (Unaudited)" on
page 43 and in the Index to Consolidated Financial Statements and Schedules
(see Item 14) and made a part hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

ITEM 11. EXECUTIVE COMPENSATION.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Except for the information relating to the executive officers of the Company
set forth in Part I of this Report, the information called for by Items 10, 11,
12 and 13 is hereby incorporated by reference to the Company's definitive proxy
statement in connection with its annual meeting of stockholders to be held on
April 21, 1994, filed with the Securities and Exchange Commission and made a
part hereof.

14

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) Index to Consolidated Financial Statements and Schedules

REFERENCE
-----------------------------
FORM 10-K ANNUAL REPORT
ANNUAL REPORT TO STOCKHOLDERS
PAGE PAGE
------------- ---------------

Data incorporated by reference to the
Company's annual report to stockholders for
the year ended December 31, 1993:
Consolidated Balance Sheets at December 31,
1993 and 1992 -- 28 - 29
Consolidated Statements of Earnings for the
years ended December 31, 1993, 1992 and
1991....................................... -- 30
Consolidated Statements of Stockholders' Eq-
uity for the years ended December 31, 1993,
1992 and 1991.............................. -- 32
Consolidated Statements of Cash Flows for
the years ended December 31, 1993, 1992 and
1991....................................... -- 30 - 31
Notes to Consolidated Financial Statements.. -- 33 - 43
Report of Independent Accountants........... -- 44
Data submitted herewith:
Report of Independent Accountants........... S-1 --
Financial Statement Schedules:
VII-- Guarantees of Securities of Other
Issuers........................... S-2 --
VIII-- Valuation and Qualifying Accounts.. S-3 --
IX-- Short-Term Borrowings ............... S-4 --
X-- Supplementary Income Statement Informa-
tion.................................... S-5 --

Schedules other than those listed above have been omitted either because the
required information is contained in notes to the consolidated financial
statements or because such schedules are not required or are not applicable.

(b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K,
dated November 24, 1993 in connection with restructuring charges and the
adoption of SFAS No. 112 during the last quarter of the period for which this
Report is filed.

(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.1-10.24 are management contracts, compensatory plans or arrangements):

1.1. Form of Underwriting Agreement, including form of terms agreement.
1.2. Form of First Amendment to Selling Agency Agreement.
3.1. Restated Articles of Incorporation of the Company. (1)
3.2. By-Laws, as amended, of the Company.
4.1. Plan of Exchange and Articles of Incorporation. (2)
4.2. Indenture between the Company and Bankers Trust Company, Trustee (Chemical
Bank, Successor Trustee), dated as of December 1, 1985. (3)
4.3. Tripartite Agreement dated as of February 19, 1986 among the Company, Bank-
ers Trust Company and Chemical Bank. (3)
4.4. First Supplemental Indenture dated as of August 1, 1986 to the Indenture
dated as of December 1, 1985 between the Company and Chemical Bank, Succes-
sor Trustee. (4)
4.5. Second Supplemental Indenture dated as of November 1, 1986 to the Indenture
dated as of December 1, 1985 between the Company and Chemical Bank, Succes-
sor Trustee. (4)
4.6. Amended and Restated Indenture, dated as of April 1, 1988 between the Com-
pany and Chemical Bank, as Trustee. (5)
4.7. First Supplemental Indenture dated as of December 1, 1988 to the Amended
and Restated Indenture, dated as of April 1, 1988, between the Company and
Chemical Bank, as Trustee. (6)
4.8. Indenture dated as of August 1, 1990 between the Company and Chemical Bank,
Trustee. (7)

15

4.9. First Supplemental Indenture dated as of February 1, 1991 to Indenture dat-
ed as of August 1, 1990 between the Company and Chemical Bank, Trustee. (8)
4.10. Second Supplemental Indenture dated as of January 21, 1992 to Indenture
dated as of August 1, 1990 between the Company and Chemical Bank, Trustee.
(9)
4.11. 5-Year Loan and Guaranty Agreement dated as of December 17, 1993 among the
Company, the Banks named therein and Citibank, N.A., as Agent.
4.12. 364-Day Loan and Guaranty Agreement dated as of December 17, 1993 among the
Company, the Banks named therein and Citibank, N.A., as Agent.
4.13. Rights Agreement, dated as of October 25, 1989, between the Company and
First Chicago Trust Company of New York. (10)
4.14. Copies of other instruments defining the rights of holders of long-term
debt of the Company and its subsidiaries are not filed herewith because the
aggregate amount of securities authorized under each of such other instru-
ments is less than 10% of the consolidated assets of the Company and its
subsidiaries. The Company hereby agrees that it will furnish to the Securi-
ties and Exchange Commission a copy of each such other instrument upon the
Commission's request.
10.3. Financial Counseling Program of Philip Morris Incorporated and the Company.
(11)
10.4. Philip Morris Benefit Equalization Plan, as amended. (11)
10.5. Amendments, as of October 25, 1989, to the Philip Morris Benefit Equaliza-
tion Plan, as amended. (10)
10.6. Automobile Policy of Philip Morris Incorporated and the Company. (11)
10.8. Pension Plan for Directors of the Company, effective July 1, 1989, as
amended. (1)
10.9. 1982 Stock Option Plan, as amended. (11)
10.10. The Philip Morris 1987 Long Term Incentive Plan, as amended. (12)
10.12. Form of Executive Master Trust between the Company, Chemical Bank and Handy
Associates. (10)
10.13. Agreement, dated October 12, 1987, between the Company and Murray H. Bring,
as amended.
10.14. Agreement, dated November 1, 1989, between the Company and Murray H. Bring.
(10)
10.17. Deferred Incentive Payment Agreement between the Company and Michael A.
Miles, dated March 8, 1989. (13)
10.18. Amendment, dated November 1, 1989, to the Deferred Incentive Payment Agree-
ment between the Company and Michael A. Miles, dated March 8, 1989. (10)
10.19. Agreement, dated November 1, 1989, between the Company and Michael A.
Miles. (10)
10.20. Form of Employment Agreement between the Company and its executive offi-
cers. (10)
10.22. Supplemental Management Employees' Retirement Plan of the Company, as
amended. (12)
10.23. The Philip Morris 1992 Incentive Compensation and Stock Option Plan. (14)
10.24. 1992 Compensation Plan for Non-Employee Directors, as amended. (4)
12. Statements re computation of ratios.
13. Pages 20-44 of the Company's annual report to stockholders for the year
ended December 31, 1993, but only to the extent set forth in Items 1, 5, 6,
7, 8 and 14 hereof. With the exception of the aforementioned information
incorporated by reference in this Annual Report on Form 10-K, the Company's
annual report to stockholders for the year ended December 31, 1993 is not
to be deemed "filed" as part of this Report.
21. Subsidiaries of the Company.
23. Consent of independent accountants.
24. Powers of attorney.

- --------
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-14 (No. 2-96149) dated March 1, 1985.

16

(3) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-6525) dated June 13, 1986.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-21033) dated April 7, 1988.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-25906) dated December 8, 1988.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-36450) dated August 22, 1990.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-39059) dated February 21, 1991.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-45210) dated January 22, 1992.
(10) Incorporated by reference to the Company's Current Report on Form 8-K
dated November 8, 1989.
(11) Incorporated by reference to the Company's Registration Statement on Form
8-B dated July 1, 1985.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990.
(13) Incorporated by reference to the Company's Form SE dated March 30, 1989,
constituting a part of the Company's Annual Report on Form 10-K for the
year ended December 31, 1988.
(14) Incorporated by reference to the Company's Proxy Statement in connection
with its annual meeting of stockholders held on April 23, 1992, filed on
March 12, 1992.

17

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

Philip Morris Companies Inc.

/s/ Michael A. Miles
Date: March 16, 1994 By:_________________________________
(Michael A. Miles,
Chairman of the Board)

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:

SIGNATURE TITLE DATE

/s/ Michael A. Miles
____________________________________ Director, Chairman March 16, 1994
of the Board and
(Michael A. Miles) Chief Executive
Officer

/s/ Hans G. Storr
____________________________________ Director, March 16, 1994
Executive Vice
(Hans G. Storr) President and
Chief Financial
Officer

/s/ Katherine P. Wickham
____________________________________ Vice President and March 16, 1994
Controller
(Katherine P. Wickham)

*Elizabeth E. Bailey, Murray H.
Bring, Harold Brown, Jose Antonio
Cordido-Freytes, William H.
Donaldson, Paul W. Douglas, Jane
Evans, Robert E. R. Huntley, Hamish
Maxwell, T. Justin Moore, Jr.,
Rupert Murdoch, William Murray,
John D. Nichols, Richard D.
Parsons, Roger S. Penske, John S.
Reed, John M. Richman, Stephen M.
Wolf,
Directors

/s/ Hans G. Storr March 16, 1994
*By_________________________________
(Hans G. Storr
Attorney-in-fact)

18

REPORT OF INDEPENDENT ACCOUNTANTS

Our report on our audits of the consolidated financial statements of Philip
Morris Companies Inc. has been incorporated by reference in this Form 10-K from
the 1993 annual report to stockholders of Philip Morris Companies Inc. and
appears on page 44 therein. In connection with our audits of such financial
statements, we have also audited the related financial statement schedules
listed in the index in Item 14(a) on page 15 of this Form 10-K.

In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.

/s/ Coopers & Lybrand
Coopers & Lybrand
New York, New York
January 24, 1994

S-1

PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES

SCHEDULE VII -- GUARANTEES OF SECURITIES OF OTHER ISSUERS
AS OF DECEMBER 31, 1993
(IN MILLIONS)

COL. A COL. B COL. C (a) COL. F
-------------- ------------ -------------------------- ------------
AMOUNT
NAME OF ISSUER TITLE OF
OF SECURITIES SECURITIES NATURE OF
GUARANTEED GUARANTEED GUARANTEED AND OUTSTANDING GUARANTEE
-------------- ------------ -------------------------- ------------
Consumer Products:

Compagnie (pounds)610 $909 Guarantee of
Financiere million principal
Richemont AG 10 1/4% and interest
Sterling
Notes
maturing in
1994

Other (b) Various $ 23 Primarily
notes guarantees
of principal
and interest
Financial Services and
Real Estate:
Various special- Various $130 Primarily
purpose municipal letters of guarantees
districts credit of principal
established in supporting and 210 days
connection with the long-term of interest
development of bonds issued
Highlands Ranch by such
properties of districts
Mission Viejo
Company in Douglas
County, Colorado

- --------
Notes:

(a) None of the above securities were owned by the Company, held in treasury
of the applicable issuer, or in default. Accordingly, columns D, E and G
have been omitted from this Schedule.
(b) Primarily former subsidiaries of the Company.

S-2

PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES

SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN MILLIONS)

COL. A COL. B COL. C COL. D COL. E
------ ---------- --------------------- ---------- ----------
ADDITIONS
---------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
(a) (b)

1993:
Consumer Products:
Allowance for dis-
counts............... $ 23 $572 $ -- $577 $ 18
Allowance for doubtful
accounts............. 157 35 2 41 153
Allowance for returned
goods................ 7 134 -- 137 4
---- ---- ---- ---- ----
$187 $741 $ 2 $755 $175
==== ==== ==== ==== ====
Financial Services and
Real Estate:
Provision for losses.. $ 94 $ -- $ -- $ -- $ 94
==== ==== ==== ==== ====
1992:
Consumer Products:
Allowance for dis-
counts............... $ 23 $585 $ -- $585 $ 23
Allowance for doubtful
accounts............. 133 40 26 42 157
Allowance for returned
goods................ 6 55 -- 54 7
---- ---- ---- ---- ----
$162 $680 $ 26 $681 $187
==== ==== ==== ==== ====
Financial Services and
Real Estate:
Provision for losses.. $ 81 $ 13 $ -- $ -- $ 94
==== ==== ==== ==== ====
1991:
Consumer Products:
Allowance for dis-
counts............... $ 22 $550 $ -- $549 $ 23
Allowance for doubtful
accounts............. 164 46 2 79(c) 133
Allowance for returned
goods................ 10 41 -- 45 6
---- ---- ---- ---- ----
$196 $637 $ 2 $673 $162
==== ==== ==== ==== ====
Financial Services and
Real Estate:
Provision for losses.. $ 49 $ 32 $ -- $ -- $ 81
==== ==== ==== ==== ====

- --------
Notes:
(a) Related to acquisitions.
(b) Represents charges for which allowances were created.
(c) Includes adjustments to Jacobs Suchard acquisition balance sheet of $11
million.

S-3

PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
SCHEDULE IX -- SHORT-TERM BORROWINGS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN MILLIONS)

COL. A COL. B COL. C COL. D COL. E COL. F
------ ------ ------ ------ ------ ------
WEIGHTED WEIGHTED
AVERAGE MAXIMUM AVERAGE AVERAGE
INTEREST AMOUNT AMOUNT INTEREST
BALANCE AT RATE AT OUTSTANDING OUTSTANDING RATE
CATEGORY OF AGGREGATE END OF END OF DURING THE DURING THE DURING THE
SHORT-TERM BORROWINGS PERIOD PERIOD PERIOD PERIOD PERIOD
--------------------- ---------- -------- ----------- ----------- ----------
(a) (b) (c)

1993:
Consumer Products:
Bank loans............ $ 276 9.3% $ 276 $ 211 10.1%
Commercial paper...... 2,288 3.4% 4,949 3,752 3.2%
Amount reclassified to
long-term debt....... (2,296)
------
$ 268
======
Financial Services and
Real Estate:
Commercial paper...... $ 929 3.3% $ 932 $ 813 3.1%
======
1992:
Consumer Products:
Bank loans............ $ 158 7.6% $ 338 $ 201 9.2%
Commercial paper...... 1,190 3.5% 2,698 1,528 4.1%
------
$1,348
======
Financial Services and
Real Estate:
Commercial paper...... $ 758 3.4% $ 911 $ 683 3.7%
======
1991:
Consumer Products:
Bank loans............ $ 338 8.9% $1,661 $ 577 9.4%
Commercial paper...... 1,686 5.4% 6,209 3,562 6.5%
Amount reclassified to
long-term debt....... (1,510)
------
$ 514
======
Financial Services and
Real Estate:
Commercial paper...... $ 818 4.9% $ 885 $ 723 6.0%
======

- --------
Notes:
(a) The Company's credit facilities include a revolving bank credit agreement
which enables the Company to refinance short-term debt on a long-term
basis. Accordingly, short-term borrowings at December 31, 1993 and 1991
intended to be refinanced were reclassified to long-term debt.
(b) The average amount outstanding was computed primarily on a daily average
basis.
(c) The weighted average interest rate is based on the total interest
incurred for the period divided by the average amount outstanding during
the period and presented in Column E.

S-4

PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN MILLIONS)

COLUMN A COLUMN B
-------- --------------------
CHARGED TO
ITEM COSTS AND EXPENSES
---- --------------------
1993 1992 1991
------ ------ ------

1. Maintenance and repairs................................ $ 927 $ 964 $ 948
2. Advertising costs (a).................................. $2,356 $2,419 $2,420

- --------
Note:
(a) Advertising comprises public media and direct mail expenses only.

S-5

EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION PAGE NO.
- ------- ----------- --------

1.1. Form of Underwriting Agreement, including form of terms agreement.
1.2. Form of First Amendment to Selling Agency Agreement.
3.1. Restated Articles of Incorporation of the Company. (1)
3.2. By-Laws, as amended, of the Company.
4.1. Plan of Exchange and Articles of Incorporation. (2)
4.2. Indenture between the Company and Bankers Trust Company, Trustee (Chemical
Bank, Successor Trustee), dated as of December 1, 1985. (3)
4.3. Tripartite Agreement dated as of February 19, 1986 among the Company, Bank-
ers Trust Company and Chemical Bank. (3)
4.4. First Supplemental Indenture dated as of August 1, 1986 to the Indenture
dated as of December 1, 1985 between the Company and Chemical Bank, Succes-
sor Trustee. (4)
4.5. Second Supplemental Indenture dated as of November 1, 1986 to the Indenture
dated as of December 1, 1985 between the Company and Chemical Bank, Succes-
sor Trustee. (4)
4.6. Amended and Restated Indenture, dated as of April 1, 1988 between the Com-
pany and Chemical Bank, as Trustee. (5)
4.7. First Supplemental Indenture dated as of December 1, 1988 to the Amended
and Restated Indenture, dated as of April 1, 1988, between the Company and
Chemical Bank, as Trustee. (6)
4.8. Indenture dated as of August 1, 1990 between the Company and Chemical Bank,
Trustee. (7)
4.9. First Supplemental Indenture dated as of February 1, 1991 to Indenture dat-
ed as of August 1, 1990 between the Company and Chemical Bank, Trustee. (8)
4.10. Second Supplemental Indenture dated as of January 21, 1992 to Indenture
dated as of August 1, 1990 between the Company and Chemical Bank,
Trustee. (9)
4.11. 5-Year Loan and Guaranty Agreement dated as of December 17, 1993 among the
Company, the Banks named therein and Citibank, N.A., as Agent.
4.12. 364-Day Loan and Guaranty Agreement dated as of December 17, 1993 among the
Company, the Banks named therein and Citibank, N.A., as Agent.
4.13. Rights Agreement, dated as of October 25, 1989, between the Company and
First Chicago Trust Company of New York. (10)
4.14. Copies of other instruments defining the rights of holders of long-term
debt of the Company and its subsidiaries are not filed herewith because the
aggregate amount of securities authorized under each of such other instru-
ments is less than 10% of the consolidated assets of the Company and its
subsidiaries. The Company hereby agrees that it will furnish to the Securi-
ties and Exchange Commission a copy of each such other instrument upon the
Commission's request.
10.3. Financial Counseling Program of Philip Morris Incorporated and the
Company. (11)
10.4. Philip Morris Benefit Equalization Plan, as amended. (11)
10.5. Amendments, as of October 25, 1989, to the Philip Morris Benefit Equaliza-
tion Plan, as amended. (10)
10.6. Automobile Policy of Philip Morris Incorporated and the Company. (11)
10.8. Pension Plan for Directors of the Company, effective July 1, 1989, as
amended. (1)
10.9. 1982 Stock Option Plan, as amended. (11)
10.10. The Philip Morris 1987 Long Term Incentive Plan, as amended. (12)
10.12. Form of Executive Master Trust between the Company, Chemical Bank and Handy
Associates. (10)
10.13. Agreement, dated October 12, 1987, between the Company and Murray H. Bring,
as amended.
10.14. Agreement, dated November 1, 1989, between the Company and Murray H.
Bring. (10)

EXHIBIT
NO. DESCRIPTION PAGE NO.
- ------- ----------- --------

10.17. Deferred Incentive Payment Agreement between the Company and Michael A.
Miles, dated March 8, 1989. (13)
10.18. Amendment, dated November 1, 1989, to the Deferred Incentive Payment Agree-
ment between the Company and Michael A. Miles, dated March 8, 1989. (10)
10.19. Agreement, dated November 1, 1989, between the Company and Michael A.
Miles. (10)
10.20. Form of Employment Agreement between the Company and its executive offi-
cers. (10)
10.22. Supplemental Management Employees' Retirement Plan of the Company, as
amended. (12)
10.23. The Philip Morris 1992 Incentive Compensation and Stock Option Plan. (14)
10.24. 1992 Compensation Plan for Non-Employee Directors, as amended. (4)
12. Statements re computation of ratios.
13. Pages 20-44 of the Company's annual report to stockholders for the year
ended December 31, 1993, but only to the extent set forth in Items 1, 5, 6,
7, 8 and 14 hereof. With the exception of the aforementioned information
incorporated by reference in this Annual Report on Form 10-K, the Company's
annual report to stockholders for the year ended December 31, 1993 is not
to be deemed "filed" as part of this Report.
21. Subsidiaries of the Company.
23. Consent of independent accountants.
24. Powers of attorney.

- --------
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-14 (No. 2-96149) dated March 1, 1985.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-6525) dated June 13, 1986.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-21033) dated April 7, 1988.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-25906) dated December 8, 1988.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-36450) dated August 22, 1990.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-39059) dated February 21, 1991.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-45210) dated January 22, 1992.
(10) Incorporated by reference to the Company's Current Report on Form 8-K
dated November 8, 1989.
(11) Incorporated by reference to the Company's Registration Statement on Form
8-B dated July 1, 1985.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990.
(13) Incorporated by reference to the Company's Form SE dated March 30, 1989,
constituting a part of the Company's Annual Report on Form 10-K for the
year ended December 31, 1988.
(14) Incorporated by reference to the Company's Proxy Statement in connection
with its annual meeting of stockholders held on April 23, 1992, filed on
March 12, 1992.