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PHILIP MORRIS COMPANIES INC.
FORM 10-K
ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 1994
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE 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. [_]
----------------
At February 1, 1995, the aggregate market value of the shares of Common Stock
held by non-affiliates of the registrant was approximately $51.2 billion. At
such date, there were 851,995,058 shares of the registrant's Common Stock
outstanding.
----------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to stockholders for the year ended
December 31, 1994 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 27,
1995, to be filed with the Securities and Exchange Commission, is incorporated
in Part III hereof and made a part hereof.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS
GENERAL
Philip Morris Companies Inc. is a holding company whose principal wholly-
owned subsidiaries, Philip Morris Incorporated, Philip Morris International
Inc., Kraft Foods, Inc. and Miller Brewing Company, are engaged primarily in
the manufacture and sale of various consumer products. A wholly-owned
subsidiary of the Company, Philip Morris Capital Corporation, engages in
various financing and investment activities. As used herein, unless the context
indicates otherwise, the term "Company" means Philip Morris Companies Inc. and
its subsidiaries. The Company is the largest consumer packaged goods company in
the world.*
Philip Morris Incorporated ("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 Foods, Inc. ("Kraft"), is the largest
processor and marketer of retail packaged foods in the United States and also
sells food ingredients. A wide variety of grocery, coffee, cheese,
confectionery and processed meat products are manufactured and marketed by
Kraft in Europe, Canada and the Asia/Pacific region.
Miller Brewing Company ("Miller") is the second largest brewing company in
the United States.
SOURCE OF FUNDS -- DIVIDENDS
Because the Company is a holding company, its principal source of funds is
dividends from its subsidiaries. The Company's principal wholly-owned
subsidiaries currently are not limited by long-term debt or other agreements in
their ability to pay cash dividends or make other distributions with respect to
their common stock.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
In 1994, the Company's significant industry segments were tobacco products
(principally cigarettes), food products, beer, and financial services and real
estate. Operating revenues, operating profit (together with a reconciliation to
operating income) and identifiable assets attributable to each such segment for
each of the last three years are set forth in note 11 to the Company's
consolidated financial statements and are incorporated herein by reference to
the Company's annual report to stockholders for the year ended December 31,
1994.
In 1994 and 1993, operating profit from tobacco products was approximately
62% of the Company's total operating profit, with Philip Morris U.S.A. and
Philip Morris International contributing 33% and 29%, respectively, in each
year. Food products, beer, and financial services and real estate accounted for
approximately 32%, 4% and 2%, respectively, of the Company's total operating
profit in 1994 (33%, 2% and 3%, respectively, in 1993).
- --------
* References to the Company's competitive ranking in its various businesses are
based on sales data or, in the case of cigarettes and beer, shipments, unless
otherwise indicated.
1
During 1993, the Company provided $741 million for the costs of restructuring
its worldwide operations. In addition, the Company adopted, effective January
1, 1993, Statement of Financial Accounting Standards ("SFAS") No. 112, which
resulted in additional operating expense of $29 million in 1993. Excluding the
impacts of the restructuring and SFAS No. 112, the percentages of total
operating profit from tobacco, food, beer, and financial services and real
estate operations were approximately 59%, 34%, 4% and 3%, respectively, in
1993.
(C) NARRATIVE DESCRIPTION OF BUSINESS
TOBACCO PRODUCTS
Philip Morris U.S.A. is responsible for the manufacture, marketing and sale
of cigarettes in the United States (including military sales); subsidiaries and
affiliates of Philip Morris International and their licensees are responsible
for the manufacture, marketing and sale of tobacco products outside the United
States; and a subsidiary of Philip Morris International is responsible for
tobacco product exports from the United States.
The tobacco industry continues to be subject to health concerns, litigation,
legislation, governmental regulation, including tax increases, and privately
imposed smoking restrictions, any or all of which could have an adverse impact
on the Company.
Domestic Tobacco Products
Philip Morris U.S.A. is the largest tobacco company in the United States,
with total cigarette shipments of 219.4 billion units in 1994 (an increase of
12.7% from 1993), accounting for 44.8% of the cigarette industry's total
estimated shipments (an increase of 2.6 share points from 1993). The industry's
estimated cigarette shipments in the United States increased by 6.2% in 1994 as
compared to 1993, following a decrease of 9% in 1993 from 1992 (which decrease
was partially the result of increased distributor buying in 1992 in
anticipation of higher cigarette prices and the January 1, 1993 increase in the
federal excise tax). 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* U.S.A. OF INDUSTRY*
----------- --------- ------------- -------------
(IN BILLIONS OF UNITS) (%)
1994................................. 489.6 219.4 44.8
1993................................. 461.2 194.7 42.2
1992................................. 506.9 214.3 42.3
Philip Morris U.S.A.'s major premium brands are Marlboro, Benson & Hedges,
Merit, Virginia Slims and Parliament; its principal discount brands are Basic
and Cambridge. All of its brands are marketed to satisfy differing preferences
of adult smokers. Philip Morris U.S.A. has been the leading cigarette company
in the United States market since 1983.* Marlboro is the largest selling brand
in the United States with shipments of 137.7 billion units in 1994 (up 27% from
1993, primarily the result of the strategy implemented by Philip Morris U.S.A.
in 1993, as discussed below), with 28.1% of the United States market (23.5% in
1993).
During the first half of 1993, domestic cigarette industry volume continued
to shift from the full price (premium) segment to the discount segment which
consists of "generic" and lower-priced cigarettes that have a lower profit
margin than premium brands. In 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 brands in further
response to the highly price sensitive market environment. These changes
produced lower profit margins but higher volume. As a result of these strategic
initiatives, retail sales data compiled by Nielsen Marketing Research indicate
that Marlboro's market share rose from 22% in March 1993 to 30% in December
1994. In addition, such retail sales data indicate that the shift to
- --------
* Source: The Maxwell Consumer Report (issued by Wheat, First Securities,
Inc.).
2
the discount segment reversed in the second half of 1993. The shift back to the
premium segment continued in 1994 (69.9% retail share of the industry in
December 1994 compared with 67.6% in December 1993 and 62% in March 1993),
although the rate of the shift to the premium segment began to slow in the
latter part of 1994. 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, 1994.
The discount segment of the industry had been growing markedly prior to the
third quarter of 1993 and constituted 36.8% of United States industry shipments
in 1993, up from 30.2% in 1992. However, after reaching a high of 40.7% of the
market in the second quarter of 1993, the discount segment decreased to 32.5%
of industry shipments in December 1994, primarily as a result of the industry-
wide lower prices on premium brands and higher prices on discount brands.
Philip Morris U.S.A. accounted for 26.5% of the smaller discount segment in
1994, down from 29.4% in 1993 (reflecting a decrease in shipments of 15.2% in
1994), primarily the result of the changed product mix.
Philip Morris U.S.A. cannot predict whether, and there can be no assurance
that, the increases in Philip Morris U.S.A.'s shipments, shipment share or
retail market share discussed above will continue or the shift in domestic
cigarette industry volume from discount brands to premium brands will continue.
International Tobacco Products
Philip Morris International's total cigarette shipments in 1994 were
approximately 536 billion units (an increase of 16.6% from 1993), approximately
10.8% of the world cigarette market (excluding the United States). Philip
Morris International estimates that world cigarette industry unit sales
(excluding the United States) were approximately 5 trillion units in 1994,
which represents a compounded annual increase of approximately 1% over the last
five years. Philip Morris International also estimates that the American blend
segment of the world market has increased at a higher compounded annual rate
over the last five years, approximately 4%. The American blend segment
accounted for 98% of shipments by Philip Morris International and its
affiliates in 1994. Unit sales of Philip Morris International's principal
brand, Marlboro, increased 8.3% in 1994 over 1993 to 260 billion units, 5.2% of
the world cigarette market (excluding the United States).
Subsidiaries and affiliates of Philip Morris International and their
licensees have cigarette market 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, Finland,
France, Germany, Hong Kong, Italy, Kuwait, the Netherlands, the Philippines,
Singapore, Spain and Switzerland. Philip Morris International's leading
international brands are Marlboro, L&M, Bond Street, Philip Morris, Lark,
Chesterfield, Merit, Parliament and Virginia Slims.
A subsidiary of Philip Morris International is the leading United States
exporter of cigarettes. It exported 133.6 billion units in 1994, an increase of
16.7% from 1993. These exports constituted 25% of Philip Morris International's
total shipments.
Cigarette prices in many international markets are government-controlled, and
this, as well as excise and other tax increases, higher costs, government price
restraints and local regulations regarding import quotas and other matters,
have restricted, and may continue to restrict, the sales and operating income
of Philip Morris International in a number of markets.
In 1994, Philip Morris International acquired a tobacco company in the
Ukraine, agreed to build a new cigarette factory in Kazakhstan, started
construction of a leaf processing facility in Malaysia and entered into a
contract for the manufacture of a new export brand in China.
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Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and Smoking
Currently, the federal excise tax on cigarettes is $12 per thousand ($.24 per
pack). During 1994, increases in the excise tax ranging from $.45 to $1.75 per
pack were proposed. Legislation in the United States Senate and House of
Representatives contained identical provisions which would have resulted in an
increase of $.45 per pack over a five-year period. Congress adjourned in 1994
without taking action on the proposals. It is impossible to predict whether
Congress in 1995 will consider excise tax increases. In general, excise taxes,
sales taxes and other taxes levied by various states, counties and
municipalities affecting cigarettes have been increasing gradually. These taxes
vary considerably and, when combined with the current federal excise tax, may
be as high as $1.08 per pack.
In the opinion of Philip Morris U.S.A., past increases in the federal excise
taxes and the other taxes discussed above have had an adverse impact on sales
of cigarettes. Future increases could result in volume declines for the
domestic cigarette industry, including Philip Morris U.S.A., and might cause
shifts from the premium segment to the discount segment.
Reports with respect to the alleged harmful physical effects of cigarette
smoking have been publicized for many years and the sale, promotion and use of
cigarettes continues to be subject to increasing governmental regulation. As a
result, the tobacco industry is subject to increased governmental restrictions,
both in the United States and abroad, decreasing social acceptance of smoking,
increased pressure from anti-smoking groups and substantial increases in
federal and state taxes. In the opinion of Philip Morris U.S.A., these
developments have had, and continue to have, an adverse effect upon tobacco
industry sales. Since 1964, the Surgeon General of the United States and the
Secretary of Health and Human Services have released a number of reports which
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 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.
The Comprehensive Smoking Education Act (the "Smoking Education Act"),
enacted in 1984, requires cigarette manufacturers and importers to include the
following warning statements in rotating sequence on cigarette packages and in
advertisements: SURGEON 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. The Smoking Education Act also covers the size
and format of warnings on cigarette packages and in cigarette advertising, and
prescribes a modified version of the warnings for outdoor billboard
advertisements. In addition to the warning statements, 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
1991, the U.S. Occupational Safety and Health Administration ("OSHA") issued a
Request for Information concerning the quality of indoor
4
air, including information regarding ETS. In April 1994, OSHA issued a proposed
rule which could, inter alia, ultimately ban smoking in the workplace. Hearings
on this proposed rule have begun and are continuing. In January 1993, the
United States Environmental Protection Agency (the "EPA") issued a report
concluding, among other things, that ETS is a human lung carcinogen and that
ETS increases certain health risks for young children. In June 1993, Philip
Morris U.S.A. 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 and privately imposed
limitations that restrict or ban 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 duration, within and between the 48
contiguous states, the District of Columbia, the U.S. Virgin Islands and Puerto
Rico and within Alaska and Hawaii, and on all commercial flights to or from
Alaska and Hawaii scheduled for less than six hours. In addition, certain
United States airlines have banned smoking on international flights and various
foreign airlines have banned smoking on certain flights.
In February 1994, the United States Food and Drug Administration (the "FDA"),
in a letter to an anti-smoking group, stated that it may be possible for the
FDA to regulate cigarettes under the drug provisions of the Food, Drug, and
Cosmetic Act. The FDA stated that such jurisdiction would arise if it found
that manufacturers intend that their products contain nicotine to satisfy an
alleged addiction on the part of some of their customers. The FDA stated that
any regulation would need to be based upon a record establishing such intent.
The letter indicated that regulation of cigarettes under the Food, Drug, and
Cosmetic Act could ultimately result in the removal from the market of products
containing nicotine at levels that cause or satisfy addiction. While Philip
Morris U.S.A. does not believe that cigarettes are addictive, denies the
allegation that its products are intended to satisfy an alleged addiction and
does not believe that the FDA has the legal authority to regulate its cigarette
brands, it cannot predict the ultimate outcome of the FDA's efforts.
Legislation and other governmental action is proposed periodically at the
federal, state and local levels. During 1994, members of Congress and the
Administration proposed measures which would ban or severely restrict smoking
in workplaces and in buildings with public access, require additional health
warning and product content information on packaging and in advertising,
eliminate the tax deductibility of a portion of the cost of tobacco advertising
and authorize the FDA to regulate tobacco as a drug (see above). Moreover,
5
in recent years various Congressional committees or subcommittees have approved
legislation which would subject cigarettes to various regulations under the
Department of Health and Human Services or regulation under the Consumer
Products Safety Act, would establish anti-smoking educational campaigns or
anti-smoking programs or provide additional funding for governmental
antismoking activities, would further restrict the advertising of cigarettes,
including requiring additional warnings on packages and in advertising, would
provide that the Federal Cigarette and Labeling Act and the Smoking Education
Act could not be used as a defense against liability under state statutory or
common law, would allow state and local governments to restrict the sale and
distribution of cigarettes and further restrict certain advertising of
cigarettes and would increase, in various ways, the cost of manufacturing
cigarettes. Numerous other legislative and regulatory measures have also been
proposed at the federal, state and local levels.
It is not possible to determine what, if any, governmental legislation or
regulations will be adopted relating to cigarettes or smoking. However, if any
or all of the foregoing were to be implemented, Philip Morris U.S.A.'s volume,
operating revenues and operating income could be adversely impacted, in amounts
which cannot be determined.
A number of foreign countries have also taken steps to restrict or prohibit
cigarette advertising and promotion, to increase taxes on cigarettes and to
discourage cigarette smoking. In some cases, such restrictions are more onerous
than those in the United States. For example, advertising and promotion of
cigarettes has been banned or severely restricted for a number of years in
Australia, Canada, Finland, France, Italy, Singapore and a number of other
countries.
Litigation Involving the Tobacco Industry
There is litigation pending against the leading United States cigarette
manufacturers and others seeking compensatory and, in some cases, punitive
damages for cancer and other health effects alleged to have resulted from
cigarette smoking or exposure to cigarette smoking. As of December 31, 1994,
there were 66 and as of February 15, 1995, 64 such actions pending against the
leading United States cigarette manufacturers and others; 47 such cases were
pending as of December 31, 1993. Philip Morris U.S.A. was a defendant in 40
actions pending as of December 31, 1994 and 39 such actions pending as of
February 15, 1995; there were 22 such cases as of December 31, 1993.
Note 15 to the Company's consolidated financial statements, which are
incorporated herein by reference to the Company's annual report to stockholders
for the year ended December 31, 1994, describes smoking and health cases
pending against Philip Morris U.S.A. and, in certain instances, the Company, as
of January 23, 1995, the date of the Report of Independent Accountants with
respect to such financial statements. Item 3 herein describes certain
developments in the smoking and health litigation since January 23, 1995.
Further reference is made to such note 15 and Item 3.
Each of the Company and Philip Morris U.S.A. believes, and each has been so
advised by counsel, that it has a number of valid defenses to all smoking and
health cases pending against it, including, but not limited to, those defenses
based on preemption under the United States Supreme Court decision discussed in
note 15. In addition, in each such case naming the Company as a defendant, the
Company has sought and obtained or is seeking dismissal on the grounds that it
is not a proper party to such action. 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. An unfavorable outcome
of a pending action could encourage the commencement of additional similar
litigation.
Philip Morris U.S.A. has been advised that there is a grand jury
investigation being conducted by the U.S. Attorney for the Eastern District of
New York which is looking into possible violations of criminal law in
connection with activities relating to the Council for Tobacco Research - USA,
Inc., of which Philip Morris U.S.A. is a sponsor. The outcome of this
investigation cannot be predicted.
Philip Morris U.S.A. has received a Civil Investigative Demand from the
Antitrust Division of the United States Department of Justice in an
investigation of possible joint activity among United States
6
manufacturers in the production and sale of cigarettes, including possible
joint activity to limit new product development. The outcome of this
investigation cannot be predicted.
Distribution, Competition and Raw Materials
Philip Morris U.S.A. sells its tobacco products principally to wholesalers
(including distributors), large retail organizations, including chain stores,
vending machine operators and the armed services. Subsidiaries and affiliates
of Philip Morris International and their licensees market cigarettes and other
tobacco products worldwide, directly or through export sales organizations and
other entities with which they have contractual arrangements.
The market for tobacco products is highly competitive, characterized by brand
recognition and loyalty, with product quality, price, marketing and packaging
constituting the significant methods of competition. Promotional activities
include, in certain instances, allowances, the use of incentive items, price
reductions and other discounts. This highly competitive market, and Philip
Morris U.S.A.'s 1993 initiatives therein, are more fully described in "Tobacco
Products -- Domestic Tobacco Products" above and in the MD&A. The tobacco
products of the Company's subsidiaries, affiliates and their licensees are
extensively advertised and promoted through various media, although television
and radio advertising of cigarettes is prohibited in the United States and is
prohibited or restricted in many other countries.
Philip Morris U.S.A. 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 (subject to
Congressional review) and production adjustment programs administered by the
United States Department of Agriculture (the "USDA"), either of which can
substantially affect market prices. Philip Morris U.S.A. and Philip Morris
International believe there is an adequate supply of tobacco in the world
market to satisfy their current production requirements.
As of January 1, 1994, legislation became effective requiring, subject to
financial penalties, the use of at least 75% American-grown tobacco, which is
more expensive than imported tobacco, in cigarettes manufactured in the United
States. A provision of the Uruguay Round Amendments Act, enacted in December
1994, replaced this requirement with a tariff-rate quota system that would
allow a specified quantity of tobacco to be imported at current tariff levels,
with additional quantities subject to a significantly higher duty. The United
States is currently negotiating quota levels with foreign countries who are
traditional exporters of tobacco to the United States. Due to the high content
of American-grown tobacco used in Philip Morris U.S.A.'s products and those
exported by subsidiaries of Philip Morris International, the domestic purchase
requirement has not had, and the new tariff-rate quota system is not expected
to have, a material adverse effect on the results of operations of Philip
Morris U.S.A. or Philip Morris International.
FOOD PRODUCTS
Kraft's reporting and management structure currently comprises thirteen
business divisions (including Kraft Canada) and Kraft Foods International.
In 1994, Kraft sold The All American Gourmet Company, which produced frozen
meals and side dishes, and entered into an agreement to sell its Kraft
Foodservice distribution business. The sale of Kraft Foodservice, which closed
early in 1995, will lower Kraft's operating revenues by approximately $3.5
billion but is not expected to have a material effect on Kraft's results of
operations.
7
North America
Kraft's principal products include ready-to-eat cereals, coffee and other
beverages, dinners, desserts, bakery products, cheese and cheese 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. Kraft is the largest
packaged food company in the United States, marketing such products as
processed meat and poultry products, coffee, cheese and cheese products, and
salad dressings. Its principal brands include Kraft, Velveeta, Cracker Barrel
and Rondele cheese and cheese products, Miracle Whip salad dressing,
Philadelphia Brand cream cheese, Cheez Whiz cheese spread, Kraft and Seven Seas
pourable dressings, Parkay margarine, Kraft and Bull's-Eye barbecue sauces, Di
Giorno pastas, sauces and cheeses, 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, Claussen pickles, 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.
Kraft's Food Ingredients Division manufactures certain private label products
as well as a variety of industrial food products for sale to other food
processors, which products include edible oils, shortenings, whey products,
nondairy creamers, confection products, cheese flavorings, seasonings and
cheese analogs.
Kraft Canada is responsible for manufacturing and marketing packaged grocery,
coffee and cheese products. Major brand names include Kraft, Miracle Whip,
Philadelphia Brand, Jell-O, Post, Kool-Aid, Baker's, Tang, Shake'n Bake, Cool
Whip, P'tit Quebec, Maxwell House, Nabob and Magic Moments.
International
Kraft Foods International is responsible for manufacturing and marketing a
wide variety of coffee, confectionery, cheese, packaged grocery and processed
meat products in Europe and the Asia/Pacific region. Approximately 93% of Kraft
Food International's sales are made in Europe. International brands include a
wide variety of the products sold by Kraft, as well as Milka, Tobler,
Toblerone, Suchard, Sugus, Freia, Marabou, Daim, Estrella, Callard & Bowser,
Terry's, Splendid and Cote d'Or confections, Carte Noire, Gevalia, Grand'Mere,
Kenco, HAG, Jacobs Cafe, Jacobs Kronung, Jacques Vabre, Night & Day and Saimaza
coffees, Negroni and Simmenthal meats, Miracoli pasta dinners, Dairylea process
cheese, Vegemite spread and Hollywood chewing gum.
In Latin America, certain subsidiaries and affiliates of Philip Morris
International manufacture and market a wide variety of food products, including
Kibon ice cream, Q-Refres-Ko powdered soft drinks and a number of the products
sold by Kraft.
Distribution, Competition and Raw Materials
Kraft's products are generally sold to supermarket chains, wholesalers, club
stores, mass merchandisers, distributors, individual stores and other retail
food outlets. Products are distributed through distribution centers, satellite
warehouses, company-operated and public cold storage facilities, depots and
other facilities. Selling efforts are assisted by national and regional
advertising on television and radio and in magazines and newspapers, as well as
by sales promotions, product displays, trade incentives, informative material
offered to customers and other promotional activities. The products of Kraft
Food Ingredients are sold to food processors, foodservice operators and
distributors and retail food stores.
Products of Kraft Foods International are sold primarily through sales
offices and agents abroad. European regional distribution is coordinated from
its headquarters offices located in Zurich, Switzerland
8
and through facilities located throughout Europe. The Asia/Pacific area
operations are headquartered in Hong Kong. Kraft operations outside of the
United States and Canada are directed from the Kraft Foods International
headquarters in Rye Brook, New York. Advertising is tailored by product and
country to reach targeted audiences.
Kraft is subject to highly competitive conditions in virtually all aspects of
its business. Competitors include large national and international companies
and numerous local and regional companies. Its food products also compete with
generic products and private label products of food retailers, wholesalers and
cooperatives. Kraft competes primarily on the basis of product quality,
service, marketing, advertising and price.
Kraft is a major purchaser of milk, cheese, green coffee beans, poultry, meat
cuts, wheat, cocoa, rice, eggs, shortening, vegetable oil, aspartame, flour,
fruits and berries, sugar, corn syrup, herbs and spices and tomato products.
Kraft continuously monitors worldwide supply and cost trends of these
commodities to enable it to take appropriate action to obtain ingredients
needed for production.
Kraft purchases all of its milk requirements and a substantial portion of its
cheddar cheese requirements from independent sources, principally from
cooperatives and individual producers. The prices for United States milk
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.
The most significant cost item in coffee products is green coffee beans,
which are purchased on world markets. Green coffee bean prices are affected by
the quality and availability of supply, trade agreements among producing and
consuming nations, the unilateral policies of the producing nations, changes in
the value of the United States dollar in relation to certain other currencies
and consumer demand for coffee products.
The purchase price of poultry and meat cuts is the major factor in the cost
of Kraft's meat products. Poultry and meat prices are cyclical, affected by
market supply and demand. Meats for Oscar Mayer processed products are provided
primarily by full lot quantity purchases.
Kraft is also a major user of packaging materials purchased from many
suppliers.
The prices paid for raw materials used in food products generally reflect
external factors, among which weather conditions and commodity market
activities are significant. Although the prices of the principal raw materials
required by Kraft can be expected to fluctuate as a result of government
actions and/or market forces (which would directly affect the cost of products
and value of inventories), Kraft believes such raw materials generally to be in
adequate supply and available from numerous sources.
Regulation
Almost all of Kraft's United States food products (and packaging materials
therefor) are subject to regulations administered by the FDA, or, with respect
to products containing meat and poultry, the USDA. Among other things, the FDA
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 Kraft's United
States operating units to develop and market new products and to utilize
technological innovations in the processing of existing products. The Nutrition
Labelling and Education Act of 1991 (the "NLEA") mandates nutrition labelling
on a majority of the food products packaged for sale in the United States. In
January 1993, the FDA adopted rules and regulations under the NLEA, including
rules requiring extensive re-labelling of virtually all of Kraft's products.
Similar rules and regulations were adopted by the USDA to cover meat and
poultry
9
products. All such regulations were effective in August 1994. Compliance with
the new requirements did not have a material adverse impact on Kraft's results
of operations.
In addition, various states regulate the business of Kraft's United States
operating units by licensing dairy plants, enforcing federal and state
standards of identity for food, grading food products, inspecting plants,
regulating certain trade practices in connection with the sale of dairy
products and imposing their own labelling requirements on food products.
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, Kraft (as well as other cheese producers) sells
excess cheese production to the CCC.
Almost all of the activities of Kraft Foods International and Kraft Canada
are subject to the same kinds of regulation as Kraft's United States
businesses. Each of the operations and locations of these units is subject to
local and national and, in some cases, international (such as the European
Community) regulatory provisions. The rules and regulations relate to
labelling, packaging, food content, pricing, marketing and advertising and
related areas.
BEER
Products
Miller's brands include Miller Lite and Lite Ice, which together form the
Lite franchise; Miller Genuine Draft, MGD Light, Icehouse and Red Dog in the
premium segment; Lowenbrau, brewed and sold in the United States under a
license agreement with Lowenbrau Munchen AG; the Miller High Life family in the
near-premium segment, which includes Miller High Life, Miller High Life Light
and Miller High Life Ice; Miller Reserve Amber Ale and Miller Reserve Velvet
Stout in the specialty segment; Meister Brau, Milwaukee's Best and Magnum Malt
Liquor in the below-premium segment; Sharp's non-alcohol brew; and the
Leinenkugel brands from the Jacob Leinenkugel Brewing Co. Miller also owns and
operates Molson Breweries U.S.A. Inc., the second largest beer importer in the
United States with more than 20 brands from six countries, including the Molson
brands from Molson Breweries of Canada and Foster's Lager. Shipment volume for
Miller, including imports, exports and non-alcohol brew, increased 2.8% in 1994
compared to 1993. The increase resulted principally from performance by
Miller's major ice brands -- Lite Ice, Icehouse and Molson Ice -- as well as
Red Dog, which was launched nationwide in the fourth quarter. Miller's premium
beer shipments increased by 7.6%, although shipments of Miller Lite and Miller
Genuine Draft declined. Shipments of Miller's budget brands also were down,
reflecting a shift to premium brands. Premium brands now account for over 80%
of Miller's shipment volume.
The following table sets forth, based on shipments, the industry's sales of
beer and brewed non-alcohol beverages as estimated by Miller, Miller's unit
sales and its estimated share of industry sales:
YEARS ENDED MILLER'S SHARE
DECEMBER 31 INDUSTRY MILLER OF INDUSTRY
----------- ------------- ------------ --------------
(IN THOUSANDS OF BARRELS) (%)
1994............................. 199,083 45,243 22.7
1993............................. 198,019 44,024 22.2
1992............................. 197,255 42,221 21.4
Distribution, Competition and Raw Materials
Beer products are distributed primarily through independent beer wholesalers.
The United States malt beverage industry is highly competitive, with the
principal methods of competition being product quality,
10
price, distribution, marketing and advertising. Miller engages in a wide
variety of advertising and sales promotion activities. Barley, hops, corn and
water represent the principal ingredients used in manufacturing Miller's beer
products and are generally available in the market. The production process,
which includes fermentation and aging periods, is conducted throughout the year
and at any one time Miller has on hand only a small quantity of finished
products. Containers (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 Miller,
increases in excise taxes have 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
decreased to $5.2 billion at year-end 1994 as compared to $5.7 billion at year-
end 1993, reflecting among other things the sale of the majority ($719 million)
of its marketable securities portfolio in 1994, with $475 million of the
proceeds therefrom being paid as a dividend to the Company.
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.
OTHER MATTERS
Customers
None of the Company's business segments is dependent upon a single customer
or a few customers, the loss of which would have a material adverse effect on
the Company's results of operations.
Employees
At December 31, 1994, the Company employed approximately 165,000 people
worldwide. Kraft Foodservice, sold in February 1995, had approximately 9,000
employees at December 31, 1994.
Trademarks
Trademarks are of material importance to all three of the Company's consumer
products businesses and are protected by registration or otherwise in the
United States and most other markets where the related products are sold.
11
Environmental Regulation
The Company and its subsidiaries are subject to various federal, state and
local laws and regulations and involved in proceedings thereunder concerning
the discharge of materials into the environment or otherwise related to
environmental protection, including the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act and the Comprehensive Environmental
Response, Compensation and Liability Act (commonly known as "Superfund"). In
1994, subsidiaries (or former subsidiaries) of the Company were parties to
approximately 184 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.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
The amounts of operating revenues, operating profit and identifiable assets
attributable to each of the Company's geographic 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, 1994.
Kraft, Miller and subsidiaries of Philip Morris International export coffee
products, grocery products, cheese, processed meats, beer, tobacco and tobacco
related products. In 1994, the value of all exports from the United States by
these subsidiaries amounted to approximately $5.4 billion.
ITEM 2. DESCRIPTION OF PROPERTY.
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 or component manufacturing
facilities in 27 countries outside the United States.
FOOD PRODUCTS
The Company's subsidiaries have 92 manufacturing and processing facilities,
582 distribution centers and depots and 156 various other facilities in the
United States, as well as 126 foreign manufacturing and processing facilities
in 31 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 seven breweries, located in Milwaukee,
Wisconsin; Fort Worth, Texas; Eden, North Carolina; Albany, Georgia; Irwindale,
California; Trenton, Ohio; and Chippewa Falls, Wisconsin. Miller owns four
distributorships and owns or leases warehouses in several locations. During
1994, Miller closed its Fulton, New York brewery and sold two distributorships,
its glass-making plant and its can and bottle carrier facility and, in January
1995, sold its malting facility.
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
12
Company provided for the costs of restructuring its worldwide operations. The
charge related primarily to the downsizing or closure of approximately 40
manufacturing and other facilities. Writedowns of such facilities included in
the restructuring charge were $429 million, of which $141 million, $211 million
and $77 million related to tobacco, food and beer facilities, respectively.
During 1994, the Company downsized or closed 21 manufacturing or other
facilities.
ITEM 3. LEGAL PROCEEDINGS.
Reference is made to "Tobacco Products -- Litigation Involving the Tobacco
Industry" under Item 1 and 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, 1994 for a description of certain
legal proceedings relating to smoking and health, to the above-referenced note
15 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.
Note 15 describes an action filed in the United States District Court for the
Eastern District of Louisiana, in March 1994, in which plaintiffs made certain
allegations against the leading United States cigarette manufacturers and
others, including the Company, and sought certification of a class action. On
February 17, 1995, the court conditionally certified the class for certain
issues, including fraud, breach of warranty, intentional tort, negligence,
strict liability, consumer protection and punitive damages. However, the court
declined to certify a class on the issues of injury in fact, causation,
reliance, compensatory damages, the availability of certain affirmative
defenses and on plaintiffs' claim for medical monitoring. Defendants, including
the Company, will seek an appeal to the United States Court of Appeals for the
Fifth Circuit.
Another matter described in note 15 involves a statute enacted by the Florida
legislature in May 1994, the constitutionality of which is being challenged by
Philip Morris U.S.A. and others in an action filed in Florida State Court in
June 1994. On February 19, 1995, Philip Morris U.S.A. and one other party
petitioned the Supreme Court of Florida to prohibit two purported state
agencies from filing and maintaining an action against the tobacco industry
under the statute. On February 21, 1995, an action against the tobacco industry
was filed under the statute. Philip Morris U.S.A. and the other petitioner are
awaiting a decision on their February 19, 1995 petition.
Another matter described in note 15 concerns an action filed by the Attorney
General of Mississippi in May 1994 in Mississippi State Court against the
leading United States cigarette manufacturers and others, including the
Company, seeking the reimbursement of Medicaid and other expenditures which
plaintiffs claim were made by the State to treat smoking-related injuries. In
October 1994, the defendants, including Philip Morris U.S.A., moved for
judgment on the pleadings. On February 20, 1995, defendants' motion was denied
by the court. Further, plaintiffs' motion to strike certain of defendants'
affirmative defenses was granted. Defendants are considering several possible
appellate alternatives.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
----------------
13
EXECUTIVE OFFICERS OF THE COMPANY
The following are the executive officers of the Company as of March 1, 1995:
NAME OFFICE AGE
---- ------ ---
Geoffrey C. Bible....... Chairman of the Board and Chief Executive Officer 57
Murray H. Bring......... Executive Vice President, External Affairs, and General
Counsel 60
James M. Kilts.......... Executive Vice President, Worldwide Foods 47
Hans G. Storr........... Executive Vice President and Chief Financial Officer;
Chairman and Chief Executive Officer of PMCC 63
Lawrence A. Gates....... Senior Vice President, Human Resources and Administration 57
Marc S. Goldberg........ Senior Vice President, Planning and Worldwide Tobacco
Operations 51
Bruce S. Brown.......... Vice President, Taxes 55
Katherine P. Clark...... Vice President and Controller 46
G. Penn Holsenbeck...... Vice President, Associate General Counsel and Secretary 48
George R. Lewis......... Vice President and Treasurer 53
William I. Campbell..... Chairman of Philip Morris U.S.A. 50
John N. MacDonough...... Chairman and Chief Executive Officer of Miller 51
James J. Morgan......... President and Chief Executive Officer of Philip Morris
U.S.A. 52
William H. Webb......... President and Chief Executive Officer of Philip Morris
International 55
All of the above-mentioned officers, with the exception of Messrs. Holsenbeck
and MacDonough, have been employed by the Company in various capacities during
the past five years. Mr. Holsenbeck was elected to his current position with
the Company in January 1995. Previously, Mr. Holsenbeck held various positions
with Bethlehem Steel Corporation, including Secretary and Deputy General
Counsel from 1992 to January 1995, Assistant General Counsel from 1985 to 1992,
and Assistant Secretary from 1983 to 1992. Mr. MacDonough was Vice President,
Brand Management of Anheuser-Busch, Inc. from 1989 to 1990, Executive Vice
President, Marketing of Anheuser-Busch International, Inc. from 1991 until
September 1992, when he became President and Chief Operating Officer of Miller.
He assumed his current position in September 1993.
14
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information called for by this Item is hereby incorporated by reference
to the paragraphs captioned "Quarterly Financial Data (Unaudited)" and "Short-
Term Borrowings and Borrowing Arrangements" on pages 45 and 34, respectively,
of the Company's annual report to stockholders for the year ended December 31,
1994 and made a part hereof.
Note 7 to the Company's consolidated financial statements, which are
incorporated by reference to pages 28-46 of the Company's annual report to
stockholders for the year ended December 31, 1994 and made a part hereof,
contains a discussion of the Company's common stock purchase rights. Each share
of the Company's outstanding common stock has one related purchase right. The
Company's Board of Directors voted on March 1, 1995 to redeem these purchase
rights on April 10, 1995 by payment of the redemption price of $.01 per right
to holders of record of the Company's common stock on March 15, 1995.
ITEM 6. SELECTED FINANCIAL DATA.
The information called for by this Item is hereby incorporated by reference
to the information appearing under the caption "Selected Financial Data" on
page 26 of the Company's annual report to stockholders for the year ended
December 31, 1994 and made a part hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information called for by this Item is hereby incorporated by reference
to the paragraphs captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 19-25 of the Company's annual
report to stockholders for the year ended December 31, 1994 and made a part
hereof.
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,
1994 as set forth under the caption "Quarterly Financial Data (Unaudited)" on
page 45 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 27, 1995, to be filed with the Securities and Exchange Commission and
made a part hereof.
15
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, 1994:
Consolidated Balance Sheets at December 31,
1994 and 1993 -- 28-29
Consolidated Statements of Earnings for the
years ended December 31, 1994, 1993 and
1992....................................... -- 30
Consolidated Statements of Stockholders' Eq-
uity for the years ended December 31, 1994,
1993 and 1992.............................. -- 32
Consolidated Statements of Cash Flows for
the years ended December 31, 1994, 1993 and
1992....................................... -- 30-31
Notes to Consolidated Financial Statements.. -- 33-45
Report of Independent Accountants........... -- 46
Data submitted herewith:
Report of Independent Accountants........... S-1 --
Financial Statement Schedules:
VIII -- Valuation and Qualifying Accounts... S-2 --
Schedules other than those listed above have been omitted either because such
schedules are not required or are not applicable.
(b) Reports on Form 8-K: No Current Reports on Form 8-K were filed during the
last quarter of the period for which this Report is filed. Subsequent to the
last quarter of the period for which this Report is filed, the Company filed
its Current Report on Form 8-K dated January 26, 1995.
(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.3-10.25 are management contracts, compensatory plans or arrangements):
1.1. Form of Underwriting Agreement, including form of terms agreement. (1)
1.2. Form of First Amendment to Selling Agency Agreement. (1)
3.1. Restated Articles of Incorporation of the Company. (2)
3.2. By-Laws, as amended, of the Company. (3)
4.1. Plan of Exchange and Articles of Incorporation. (4)
4.8. Indenture dated as of August 1, 1990 between the Company and Chemical Bank,
Trustee. (5)
4.9. First Supplemental Indenture dated as of February 1, 1991 to Indenture dat-
ed as of August 1, 1990 between the Company and Chemical Bank, Trustee. (6)
4.10. Second Supplemental Indenture dated as of January 21, 1992 to Indenture
dated as of August 1, 1990 between the Company and Chemical Bank, Trustee.
(7)
4.11. 5-Year Loan and Guaranty Agreement dated as of December 17, 1993 among the
Company, the Banks named therein and Citibank, N.A., as Agent. (1)
4.12. 364-Day Loan and Guaranty Agreement, dated as of December 16, 1994, among
the Company, the Banks named therein and Citibank, N.A., as Agent.
4.13. Rights Agreement, dated as of October 25, 1989, between the Company and
First Chicago Trust Company of New York.
4.14. Notice of Redemption of Common Share Purchase Rights, dated March 13, 1995.
10.3. Financial Counseling Program of Philip Morris Incorporated and the Company.
(8)
10.4. Philip Morris Benefit Equalization Plan, as amended. (8)
10.5. Amendments, as of October 25, 1989, to the Philip Morris Benefit Equaliza-
tion Plan, as amended.
16
10.6. Automobile Policy of Philip Morris Incorporated and the Company. (8)
10.8. Pension Plan for Directors of the Company, effective July 1, 1989, as
amended. (2)
10.9. 1982 Stock Option Plan, as amended. (8)
10.10. The Philip Morris 1987 Long Term Incentive Plan, as amended. (9)
10.12. Form of Executive Master Trust between the Company, Chemical Bank and Handy
Associates.
10.13. Agreement, dated October 12, 1987, between the Company and Murray H. Bring,
as amended. (1)
10.14. Agreement, dated November 1, 1989, between the Company and Murray H. Bring.
10.15. Agreement, dated March 8, 1989, between the Company and James M. Kilts.
10.17. Deferred Incentive Payment Agreement between the Company and Michael A.
Miles, dated March 8, 1989.
10.18. Amendment, dated November 1, 1989, to the Deferred Incentive Payment Agree-
ment between the Company and Michael A. Miles, dated March 8, 1989.
10.19. Agreement, dated November 1, 1989, between the Company and Michael A.
Miles.
10.20. Form of Employment Agreement between the Company and its executive offi-
cers.
10.22. Supplemental Management Employees' Retirement Plan of the Company, as
amended. (9)
10.23. The Philip Morris 1992 Incentive Compensation and Stock Option Plan. (10)
10.24. 1992 Compensation Plan for Non-Employee Directors, as amended. (11)
10.25. Settlement Agreement and Release, dated as of June 17, 1994, between the
Company and Michael A. Miles. (12)
12. Statements re computation of ratios. (13)
13. Pages 19-46 of the Company's annual report to stockholders for the year
ended December 31, 1994, 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, 1994 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, 1993.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1989.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-14 (No. 2-96149) dated March 1, 1985.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-36450) dated August 22, 1990.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-39059) dated February 21, 1991.
(7) Incorporated by reference to the Company's Registration Statement on Form
S-3 (No. 33-45210) dated January 22, 1992.
(8) Incorporated by reference to the Company's Registration Statement on Form
8-B (No. 1-8940) dated July 1, 1985.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1990.
(10) Incorporated by reference to the Company's Proxy Statement in connection
with its annual meeting of stockholders held on April 23, 1992, filed on
March 12, 1992.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994.
(13) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 26, 1995.
17
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Philip Morris Companies Inc.
/s/ Geoffrey C. Bible
Date: March 10, 1995 By:_________________________________
(Geoffrey C. Bible,
Chairman of the Board)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
SIGNATURE TITLE DATE
/s/ Geoffrey C. Bible
____________________________________ Director, Chairman March 10, 1995
of the Board and
(Geoffrey C. Bible) Chief Executive
Officer
/s/ Hans G. Storr
____________________________________ Director, March 10, 1995
Executive Vice
(Hans G. Storr) President and
Chief Financial
Officer
/s/ Katherine P. Clark
____________________________________ Vice President and March 10, 1995
Controller
(Katherine P. Clark)
*Elizabeth E. Bailey, Murray H.
Bring, Harold Brown, William H.
Donaldson, Paul W. Douglas, Jane
Evans, Robert E. R. Huntley, Hamish
Maxwell, Rupert Murdoch, John D.
Nichols, Richard D. Parsons, Roger
S. Penske, John S. Reed, Stephen M.
Wolf, Directors
/s/ Hans G. Storr March 10, 1995
*By_________________________________
(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., which includes an explanatory paragraph related to
litigation pending against the Company, has been incorporated by reference in
this Form 10-K from the 1994 annual report to stockholders of Philip Morris
Companies Inc. and appears on page 46 therein. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedule listed in the index in Item 14(a) on page 16 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
New York, New York
January 23, 1995
S-1
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(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)
1994:
Consumer Products:
Allowance for dis-
counts............... $ 18 $538 $ -- $541 $ 15
Allowance for doubtful
accounts............. 153 38 8 31 168
Allowance for returned
goods................ 4 100 -- 100 4
---- ---- ---- ---- ----
$175 $676 $ 8 $672 $187
==== ==== ==== ==== ====
Financial Services and
Real Estate:
Provision for losses.. $ 94 $ 10 $ -- $ -- $104
==== ==== ==== ==== ====
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
==== ==== ==== ==== ====
- --------
Notes:
(a) Related to acquisitions and currency translations.
(b) Represents charges for which allowances were created.
S-2