Exhibit 99
PHILIP MORRIS COMPANIES INC.
and SUBSIDIARIES
Consolidated Financial Statements
for the period ended December 31, 1995
REPORT OF INDEPENDENT ACCOUNTANTS
_________________________________
To the Board of Directors and Stockholders of
Philip Morris Companies Inc.:
We have audited the accompanying consolidated balance sheets of Philip
Morris Companies Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Philip Morris
Companies Inc. and subsidiaries at December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 13 to the consolidated financial statements, the
Company adopted in 1993 the method of accounting for postemployment benefits
prescribed by Statement of Financial Accounting Standards No. 112.
/s/ Coopers & Lybrand L.L.P.
New York, New York
January 29, 1996
PHILIP MORRIS COMPANIES INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS, at December 31,
(in millions of dollars, except per share data)
__________
ASSETS
1995 1994
------- -------
CONSUMER PRODUCTS
Cash and cash equivalents $ 1,138 $ 184
Receivables, net 4,508 4,382
Inventories:
Leaf tobacco 3,332 3,029
Other raw materials 1,721 1,943
Finished product 2,809 3,015
------- -------
7,862 7,987
Other current assets 1,371 1,355
------- -------
Total current assets 14,879 13,908
Property, plant and equipment, at cost:
Land and land improvements 726 743
Buildings and building equipment 4,976 4,834
Machinery and equipment 11,542 11,248
Construction in progress 1,357 1,429
------- -------
18,601 18,254
Less accumulated depreciation 7,485 7,083
------- -------
11,116 11,171
Goodwill and other intangible assets
(less accumulated amortization of
$3,873 and $3,342) 19,319 19,744
Other assets 2,866 2,633
------- -------
TOTAL CONSUMER PRODUCTS ASSETS 48,180 47,456
FINANCIAL SERVICES AND REAL ESTATE
Finance assets, net 4,991 4,519
Real estate held for development and sale 339 401
Other assets 301 273
------- -------
TOTAL FINANCIAL SERVICES AND
REAL ESTATE ASSETS 5,631 5,193
------- -------
TOTAL ASSETS $53,811 $52,649
======= =======
1995 1994
------- -------
LIABILITIES
CONSUMER PRODUCTS
Short-term borrowings $ 122 $ 181
Current portion of long-term debt 1,926 712
Accounts payable 3,364 3,789
Accrued liabilities:
Marketing 2,114 2,086
Taxes, except income taxes 1,075 948
Employment costs 995 926
Other 2,706 2,290
Income taxes 1,137 1,325
Dividends payable 834 708
------- -------
Total current liabilities 14,273 12,965
Long-term debt 12,324 14,085
Deferred income taxes 356 385
Accrued postretirement health care costs 2,273 2,164
Other liabilities 5,643 5,609
------- -------
TOTAL CONSUMER PRODUCTS LIABILITIES 34,869 35,208
FINANCIAL SERVICES AND REAL ESTATE
Short-term borrowings 671 604
Long-term debt 783 890
Deferred income taxes 3,382 3,010
Other liabilities 121 151
------- -------
TOTAL FINANCIAL SERVICES AND
REAL ESTATE LIABILITIES 4,957 4,655
------- -------
Total liabilities 39,826 39,863
Contingencies (Note 15)
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share
(935,320,439 shares issued) 935 935
Earnings reinvested in the business 19,779 17,489
Currency translation adjustments 467 (47)
------- -------
21,181 18,377
Less cost of repurchased stock
(104,150,433 and 82,461,374 shares) 7,196 5,591
------- -------
Total stockholders' equity 13,985 12,786
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $53,811 $52,649
======= =======
See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS of EARNINGS
for the years ended December 31,
(in millions of dollars, except per share data)
___________
1995 1994 1993
-------- ------- --------
Operating revenues $66,071 $65,125 $60,901
Cost of sales 26,685 28,351 26,771
Excise taxes on products 12,932 11,349 10,280
------- ------- -------
Gross profit 26,454 25,425 23,850
Marketing, administration and research costs 15,337 15,372 15,694
Amortization of goodwill 591 604 569
------- ------- -------
Operating income 10,526 9,449 7,587
Interest and other debt expense, net 1,179 1,233 1,391
------- ------- -------
Earnings before income taxes and
cumulative effect of accounting changes 9,347 8,216 6,196
Provision for income taxes 3,869 3,491 2,628
------- ------- -------
Earnings before cumulative effect
of accounting changes 5,478 4,725 3,568
Cumulative effect of changes in method
of accounting (28) (477)
------- ------- -------
Net earnings $ 5,450 $ 4,725 $ 3,091
======= ======= =======
Per share data:
Earnings before cumulative effect of
accounting changes $ 6.51 $ 5.45 $ 4.06
Cumulative effect of changes in
method of accounting (.03) (.54)
------- ------- -------
Net earnings $ 6.48 $ 5.45 $ 3.52
======= ======= =======
See notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY
(in millions of dollars, except per share data)
__________
Earnings Currency Cost of Total
Common Reinvested in Translation Repurchased Stockholders'
Stock the Business Adjustments Stock Equity
------ -------------- ----------- ----------- -------------
Balances, January 1, 1993 $935 $14,867 $ (34) $(3,205) $12,563
Net earnings 3,091 3,091
Exercise of stock options and issuance
of other stock awards (51) 108 57
Cash dividends declared
($2.60 per share) (2,280) (2,280)
Currency translation adjustments (677) (677)
Stock repurchased (1,218) (1,218)
Net unrealized appreciation on securities 91 91
----- -------- ------ ------- --------
Balances, December 31, 1993 935 15,718 (711) (4,315) 11,627
Net earnings 4,725 4,725
Exercise of stock options and issuance
of other stock awards (217) 324 107
Cash dividends declared
($3.03 per share) (2,623) (2,623)
Currency translation adjustments 664 664
Stock repurchased (1,600) (1,600)
Net unrealized depreciation on securities (114) (114)
----- -------- ------ ------- --------
Balances, December 31, 1994 935 17,489 (47) (5,591) 12,786
Net earnings 5,450 5,450
Exercise of stock options and issuance
of other stock awards (77) 470 393
Cash dividends declared
($3.65 per share) (3,065) (3,065)
Redemption of stock rights (9) (9)
Currency translation adjustments 514 514
Stock repurchased (2,075) (2,075)
Net unrealized depreciation on securities (9) (9)
----- -------- ------ ------- --------
Balances, December 31, 1995 $935 $19,779 $ 467 $(7,196) $13,985
===== ======== ====== ======= ========
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS of CASH FLOWS
for the years ended December 31,
(in millions of dollars)
__________
1995 1994 1993
------- -------- --------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings - CONSUMER PRODUCTS $ 5,345 $ 4,591 $ 2,960
- FINANCIAL SERVICES AND REAL ESTATE 105 134 131
------- ------- -------
Net earnings 5,450 4,725 3,091
Adjustments to reconcile net earnings to operating cash flows:
CONSUMER PRODUCTS
Depreciation and amortization 1,671 1,722 1,619
Deferred income tax provision (benefit) 15 237 (430)
(Gains) losses on sales of businesses (275) 19 (46)
Cumulative effect of accounting changes 46 774
Restructuring charge 741
Cash effects of changes, net of the effects
from acquired and divested companies:
Receivables, net (466) (239) 105
Inventories (5) (387) 396
Accounts payable (260) 582 700
Income taxes 504 202 158
Other working capital items (482) (288) (736)
Other 354 180 203
FINANCIAL SERVICES AND REAL ESTATE
Deferred income tax provision 299 376 461
Decrease (increase) in real estate receivables 35 (30) 34
Decrease (increase) in real estate held for development and sale 61 86 (2)
Other (22) (82) (64)
------- ------- -------
Operating cash flow before income taxes on sales of
businesses and interest payment on zero coupon bonds 6,925 7,103 7,004
Income taxes on sales of businesses (238) (8) (37)
Interest payment on zero coupon bonds - financial
services and real estate (156)
------- ------- -------
Net cash provided by operating activities 6,687 6,939 6,967
------- ------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
CONSUMER PRODUCTS
Capital expenditures (1,621) (1,726) (1,592)
Purchase of businesses, net of acquired cash (217) (146) (3,161)
Proceeds from sales of businesses 2,202 300 553
Other 17 28 49
FINANCIAL SERVICES AND REAL ESTATE
Investments in finance assets (613) (582) (597)
Proceeds from finance assets 123 889 527
------- ------- -------
Net cash used in investing activities (109) (1,237) (4,221)
------- ------- -------
Net cash provided by operating and investing activities $ 6,578 $ 5,702 $ 2,746
------- ------- -------
See notes to consolidated financial statements.
Continued
5
CONSOLIDATED STATEMENTS of CASH FLOWS (Continued)
for the years ended December 31,
(in millions of dollars)
__________
1995 1994 1993
------- ------- -------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
CONSUMER PRODUCTS
Net (repayment) issuance of short-term borrowings $ (21) $ 172 $ 1,220
Long-term debt proceeds 564 97 1,027
Long-term debt repaid (1,302) (1,817) (2,154)
FINANCIAL SERVICES AND REAL ESTATE
Net issuance (repayment) of short-term borrowings 67 (325) 171
Long-term debt proceeds 185
Long-term debt repaid (139) (44) (290)
Repurchase of outstanding stock (2,111) (1,532) (1,218)
Dividends paid (2,939) (2,487) (2,291)
Stock rights redemption (9)
Issuance of shares 291 54 39
Other (28) (20) (34)
------- ------- -------
Net cash used in financing activities (5,627) (5,717) (3,530)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents 3 17 (55)
------- ------- -------
Cash and cash equivalents:
Increase (decrease) 954 2 (839)
Balance at beginning of year 184 182 1,021
------- ------- -------
Balance at end of year $ 1,138 $ 184 $ 182
======= ======= =======
Cash paid: Interest - Consumer products $ 1,293 $ 1,340 $ 1,391
======= ======= =======
- Financial services and real estate $ 89 $ 229 $ 81
======= ======= =======
Income taxes $ 3,067 $ 2,449 $ 2,092
======= ======= =======
See notes to consolidated financial statements.
6
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
__________
Note 1. Summary of Significant Accounting Policies:
____________________________________________________
Basis of presentation:
The consolidated financial statements include all significant subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of operating revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
Balance sheet accounts are segregated by two broad types of business.
Consumer products assets and liabilities are classified as either current
or non-current, whereas financial services and real estate assets and
liabilities are unclassified, in accordance with respective industry
practices.
Cash and cash equivalents:
Cash equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.
Inventories:
Inventories are stated at the lower of cost or market. The last-in, first-
out ("LIFO") method is used to cost substantially all domestic
inventories. The cost of other inventories is determined by the average
cost or first-in, first-out methods. It is a generally recognized
industry practice to classify the total amount of leaf tobacco inventory
as a current asset although part of such inventory, because of the
duration of the aging process, ordinarily would not be utilized within
one year.
Advertising costs:
Advertising costs are expensed generally as incurred.
Depreciation, amortization and goodwill valuation:
Depreciation is recorded by the straight-line method. Substantially all
goodwill and other intangible assets are amortized by the straight-line
method, principally over 40 years. The Company periodically evaluates
the recoverability of goodwill and measures any impairment by comparison
to estimated undiscounted cash flows from future operations.
Financial instruments:
Derivative financial instruments are used by the Company to manage its
foreign currency and interest rate exposures. Realized and unrealized
gains and losses on foreign currency swaps that are effective as hedges
of net assets in foreign subsidiaries are offset against the foreign
exchange gains or losses as a component of stockholders' equity. The
interest differential to be paid or received under the currency and
related interest rate swap agreements is recognized over the life of the
related debt and is included in interest and other debt expense, net.
Unrealized gains and losses on forward contracts that are effective as
hedges of assets, liabilities and commitments are deferred and recognized
in income as the related transaction is realized.
Continued
7
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Accounting changes:
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 116, "Accounting for Contributions
Received and Contributions Made." This Statement requires the Company to
recognize an unconditional promise to make a contribution as an expense
in the period the promise is made. The Company had previously expensed
contributions when payment was made. The cumulative effect at January 1,
1995 of adopting SFAS No. 116 reduced 1995 net earnings by $7 million
($.01 per share), net of $4 million of income tax benefits. The
application of SFAS No. 116 did not materially reduce earnings before
cumulative effect of accounting changes.
The Company's adoption of SFAS No. 106 for non-U.S. postretirement benefits
other than pensions, effective January 1, 1995, is discussed in Note 14.
The Company's adoption of SFAS No. 112 for postemployment benefits,
effective January 1, 1993, is discussed in Note 13.
SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" will be adopted by
the Company on January 1, 1996. The Company estimates that the effect of
adoption will not be material.
Note 2. Divestitures and Acquisitions:
_______________________________________
During 1995, the Company sold its bakery businesses and its North American
margarine, specialty oils, marshmallows, caramels and Kraft Foodservice
distribution businesses. In addition, several smaller international food
businesses were sold. Operating revenues and operating income of these
businesses for the period owned in 1995 were $2.0 billion and $107 million,
respectively, and for the year ended December 31, 1994 were $5.9 billion
and $267 million, respectively. Net assets of the businesses sold were
$1.8 billion. Total proceeds and net pretax gains from the sales of these
businesses were $2.1 billion and $275 million, respectively. As part of
this divestiture program, the Company offered an early retirement program
and is downsizing or closing other food facilities. The cost of these
actions offset the gains from businesses sold.
During 1994, the Company sold The All American Gourmet Company (frozen dinners
business) for $170 million. The effect of this disposition, and other
smaller acquisitions and dispositions, was not material to the Company's
1994 results of operations.
During 1993, the Company acquired Freia Marabou a.s, a Scandinavian
confectionery company, at a cost of $1.3 billion, a North American ready-
to-eat cold cereal business at a cost of $448 million and The Terry's
Group, a United Kingdom confectionery company for $295 million. In
addition, the Company acquired a 20% equity interest in Molson Breweries in
Canada and 100% of Molson Breweries U.S.A., at a cost of $320 million. The
Company also increased its investment in tobacco and food operations in
Central and Eastern Europe. The effects of these, and other smaller
acquisitions, were not material to the Company's 1993 results of
operations.
Continued
8
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
During 1993, the Company sold its North American ice cream and frozen
vegetables businesses and beer can manufacturing plants. The proceeds from
the sales of these businesses aggregated $498 million. The effects of
these sales of businesses were not material to the Company's 1993 results
of operations.
Note 3. Restructuring:
_______________________
In 1993, the Company provided for the costs of restructuring its worldwide
operations. The charge related primarily to the downsizing or closure of
approximately 40 manufacturing and other facilities. This restructuring
charge reduced 1993 earnings before income taxes, net earnings and earnings
per share by $741 million, $457 million and $.52, respectively.
Note 4. Inventories:
_____________________
The cost of approximately 50% of inventories in 1995 and 48% of inventories in
1994 was determined using the LIFO method. The stated LIFO values of
inventories were approximately $750 million and $870 million lower than the
current cost of inventories at December 31, 1995 and 1994, respectively.
Note 5. Short-Term Borrowings and Borrowing Arrangements:
__________________________________________________________
At December 31, the Company's short-term borrowings and related average
interest rates consisted of the following:
1995 1994
---------------------- ----------------------
(in millions)
Average Average
Amount Year-End Amount Year-End
Outstanding Rate Outstanding Rate
----------- -------- ----------- --------
Consumer products:
Bank loans $ 209 13.1% $ 215 12.0%
Commercial paper 2,495 5.8% 2,505 5.9%
Amount reclassified
as long-term debt (2,582) (2,539)
------- -------
$ 122 $ 181
======= =======
Financial services and
real estate:
Commercial paper $ 671 5.9% $ 604 5.9%
======= =======
The fair values of the Company's short-term borrowings at December 31, 1995
and 1994, based upon market rates, approximate the amounts disclosed above.
Continued
9
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The Company and its subsidiaries maintain credit facilities with a number of
lending institutions, amounting to approximately $15.4 billion at December
31, 1995. Approximately $15.3 billion of these facilities were unused at
December 31, 1995. Certain of these facilities are used to support
commercial paper borrowings, are available for acquisitions and other
corporate purposes and require the maintenance of a fixed charges coverage
ratio.
The Company's credit facilities include revolving bank credit agreements
totaling $12.0 billion. An agreement for $4.0 billion expires in October
1996, and an agreement for $8.0 billion expires in 2000 enabling the
Company to refinance short-term debt on a long-term basis. Accordingly,
short-term borrowings intended to be refinanced were reclassified as long-
term debt.
Note 6. Long-Term Debt:
________________________
At December 31, the Company's long-term debt consisted of the following:
1995 1994
---- ----
(in millions)
Consumer products:
Short-term borrowings, reclassified $ 2,582 $ 2,539
Notes, 6.15% to 9.75% (average effective
rate 8.20%), due through 2004 8,598 9,760
Debentures, 6.0% to 8.5%
(average effective rate 10.71%),
$1.3 billion face amount,
due through 2017 1,018 995
Foreign currency obligations:
Swiss franc, 2.0% to 7.0%
(average effective rate 6.03%),
due through 2000 1,303 942
Deutsche mark, 2.75% to 6.38%
(average effective rate 6.12%),
due through 2000 392 182
Other 102 118
Other 255 261
------- -------
14,250 14,797
Less current portion of long-term debt (1,926) (712)
------- -------
$12,324 $14,085
======= =======
Continued
10
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
1995 1994
---- ----
(in millions)
Financial services and real estate:
Eurodollar notes, 6.75% and 6.625%,
(average effective rate 6.7%)
due 1997 and 1999 $ 400 $ 400
Foreign currency obligations:
Swiss franc, 4.75%, due 1996 - 123
ECU notes, 9.25% and 8.50%, due
1997 and 1998 383 367
----- -----
$ 783 $ 890
===== =====
Aggregate maturities of long-term debt, excluding short-term borrowings
reclassified as long-term debt, are as follows:
Financial services and
Consumer products real estate
----------------- ----------------------
(in millions)
1996 $1,926
1997 1,852 $392
1998 1,555 192
1999 1,789 199
2000 874
2001-2005 3,283
2006-2010 169
Thereafter 487
The revolving credit facility under which the consumer products short-term
debt was reclassified as long-term debt expires in 2000 and any amounts
then outstanding mature.
Based on market quotes, where available, or interest rates currently available
to the Company for issuance of debt with similar terms and remaining
maturities, the aggregate fair value of consumer products and financial
services and real estate long-term debt, including current portion of long-
term debt, at December 31, 1995 and 1994 was $15.9 billion and $15.7
billion, respectively.
Continued
11
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Note 7. Capital Stock:
_______________________
Shares of authorized common stock are 4 billion; issued, repurchased and
outstanding were as follows:
Net
Shares Shares Shares
Issued Repurchased Outstanding
----------- ------------- ------------
Balances, January 1, 1993 935,320,439 (42,563,254) 892,757,185
Exercise of stock options
and issuance of other
stock awards 1,612,405 1,612,405
Repurchased (17,278,900) (17,278,900)
------------ ----------- -----------
Balances, December 31, 1993 935,320,439 (58,229,749) 877,090,690
Exercise of stock options
and issuance of other
stock awards 4,569,731 4,569,731
Repurchased (28,801,356) (28,801,356)
------------ ----------- -----------
Balances, December 31, 1994 935,320,439 (82,461,374) 852,859,065
Exercise of stock options
and issuance of other
stock awards 6,470,262 6,470,262
Repurchased (28,159,321) (28,159,321)
------------ ----------- -----------
Balances, December 31, 1995 935,320,439 (104,150,433) 831,170,006
=========== ============ ===========
At December 31, 1995, 42,021,339 shares of common stock were reserved for
stock options and other stock awards under the Company's stock plans and
10,000,000 shares of Serial Preferred Stock, $1.00 par value, were
authorized, none of which have been issued.
Continued
12
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
In 1989, the Company distributed rights for each outstanding share of its
common stock. The rights were not exercisable until ten days after public
announcement that any person had acquired 10% or more of the Company's
common stock or ten business days after any person announced a tender offer
for 10% or more of the Company's common stock. In 1995, the Company
redeemed the rights for $.01 per right, at a total cost of $9 million.
Note 8. Stock Plans:
_____________________
Under the Philip Morris 1992 Incentive Compensation and Stock Option Plan, the
Company may grant to eligible employees stock options, stock appreciation
rights, restricted stock and annual incentive and long-term performance
cash awards. Up to 37 million shares of common stock are authorized for
grant, of which no more than 9 million shares may be awarded as restricted
stock. Stock options are granted at an exercise price of not less than
fair value on the date of the grant.
At December 31, 1995 and 1994, options under the 1992 plan and previous plans
were exercisable for 20,700,934 shares and 27,253,547 shares, respectively.
Shares available to be granted at December 31, 1995 and 1994 were
12,639,175 and 20,064,190, respectively.
Options activity was as follows for the years ended December 31,
1995 1994 1993
--------------- --------------- --------------
Balances, beginning of year 27,765,157 30,035,681 23,802,744
Granted 7,983,200 511,610 8,433,540
Exercised (6,750,112) (2,394,089) (1,821,944)
Cancelled (590,121) (388,045) (378,659)
-------------- -------------- -------------
Balances, end of year 28,408,124 27,765,157 30,035,681
============== ============== =============
Range of exercise prices
at year-end $18.44-$100.00 $10.66-$100.00 $8.67-$100.00
Price range of shares
exercised during
the year $10.66-$77.81 $8.67-$49.06 $7.26-$63.69
Weighted average grant
price per share $74.78 $69.73 $49.09
Continued
13
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The Company may grant shares of restricted stock to eligible employees, giving
them in most instances all of the rights of stockholders, except that they
may not sell, assign, pledge or otherwise encumber such shares. During
1995 and 1994, the Company granted 212,000 shares and 2,636,940 shares,
respectively, of restricted stock to eligible U.S. based employees and also
issued to eligible non-U.S. employees rights to receive 48,000 and
1,034,320 like shares, respectively. Such shares and rights are subject to
forfeiture if certain employment conditions are not met. No shares of
restricted stock or rights were granted in 1993. At December 31, 1995,
restrictions on the stock, net of forfeitures, lapse as follows: 1996-
295,110 shares; 1997-2,912,270 shares; 1998-50,000 shares; 1999-20,000
shares; 2000-225,000 shares and 2001 and thereafter-163,000 shares.
The fair value of the restricted shares and rights at the date of grant is
amortized to expense ratably over the restriction period. At December 31,
1995 the unamortized portion of $103 million is reported as a reduction of
earnings reinvested in the business.
In June 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation". The Statement allows companies
to measure compensation cost in connection with employee stock compensation
plans using a fair value based method or to continue to use an intrinsic
value based method, which generally does not result in compensation cost.
The Company currently plans to continue using the intrinsic value based
method.
Note 9. Earnings per Share:
____________________________
Earnings per common share have been calculated on the weighted average number
of shares of common stock outstanding for each year, which was 841,558,296,
867,288,869 and 878,120,884 for 1995, 1994 and 1993, respectively.
Continued
14
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Note 10. Pretax Earnings and Provision for Income Taxes:
_________________________________________________________
Pretax earnings and provision for income taxes consisted of the following:
1995 1994 1993
------ ------ ------
(in millions)
Pretax earnings:
United States $6,622 $5,781 $4,078
Outside United States 2,725 2,435 2,118
------ ------ ------
Total pretax earnings $9,347 $8,216 $6,196
====== ====== ======
Provision for income taxes:
United States federal:
Current $1,946 $1,540 $1,199
Deferred 97 458 278
------ ------ ------
2,043 1,998 1,477
State and local 434 419 311
------ ------ ------
Total United States 2,477 2,417 1,788
------ ------ ------
Outside United States:
Current 1,175 919 830
Deferred 217 155 10
------ ------ ------
Total outside United States 1,392 1,074 840
------ ------ ------
Total provision for
income taxes $3,869 $3,491 $2,628
====== ====== ======
At December 31, 1995 applicable United States federal income taxes and foreign
withholding taxes have not been provided on approximately $4.7 billion of
accumulated earnings of foreign subsidiaries that are expected to be
permanently reinvested abroad. If these amounts were not considered
permanently reinvested, additional deferred income taxes of approximately
$285 million would have been provided.
Continued
15
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The effective income tax rate on pretax earnings differed from the U.S.
federal statutory rate for the following reasons:
1995 1994 1993
---- ---- ----
Provision computed at U.S. federal
statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local income taxes, net of
federal tax benefit 3.0 3.3 3.3
Rate differences - foreign operations 1.9 1.0 0.6
Goodwill amortization 2.1 2.4 3.0
Other (0.6) 0.8 0.5
---- ---- ----
Provision for income taxes 41.4% 42.5% 42.4%
==== ==== ====
The tax effects of temporary differences which gave rise to consumer products
deferred income tax assets and liabilities consisted of the following:
December 31,
1995 1994
-------- --------
(in millions)
Deferred income tax assets:
Accrued postretirement and postemployment
benefits $ 968 $ 925
Accrued liabilities 451 542
Restructuring, strategic and other reserves 331 315
Other 814 754
------- -------
Gross deferred income tax assets 2,564 2,536
Valuation allowance (125) (108)
------- -------
Total deferred income tax assets 2,439 2,428
------- -------
Deferred income tax liabilities:
Property, plant and equipment (1,687) (1,691)
Prepaid pension costs (197) (223)
------- -------
Total deferred income tax liabilities (1,884) (1,914)
------- -------
Net deferred income tax assets $ 555 $ 514
======= =======
Financial services and real estate deferred income tax liabilities are
primarily attributable to temporary differences from investments in finance
leases.
Continued
16
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Note 11. Segment Reporting:
____________________________
Tobacco, food, beer, and financial services and real estate are the major
segments of the Company's operations. The Company's major products are
cigarettes, cheese, coffee, chocolate confections, processed meat products,
various packaged grocery products and beer. The Company's consolidated
operations outside the United States, which are principally in the tobacco
and food businesses, are organized into geographic regions by segment, with
Europe the most significant. Intersegment transactions are not reported
separately since they are not material.
For purposes of segment reporting, operating profit is operating income
exclusive of certain unallocated corporate expenses. See Note 2 regarding
divestitures and acquisitions and Note 3 regarding restructuring. The 1993
restructuring resulted in a reduction of tobacco, food and beer operating
profit of $245 million, $357 million and $139 million, respectively.
Substantially all goodwill amortization is attributable to the food
segment.
Identifiable assets are those assets applicable to the respective industry
segments. Reportable segment data were as follows:
Continued
17
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Data by Segment for the years ended December 31,
------------------------------------------------
1995 1994 1993
------- ------- -------
(in millions)
Operating revenues:
Tobacco $32,316 $28,671 $25,973
Food 29,074 31,669 30,372
Beer 4,304 4,297 4,154
Financial services and real estate 377 488 402
------- ------- -------
Total operating revenues $66,071 $65,125 $60,901
======= ======= =======
Operating profit:
Tobacco $ 7,177 $ 6,162 $ 4,910
Food 3,188 3,108 2,608
Beer 444 413 215
Financial services and real estate 164 208 249
------- ------- -------
Total operating profit 10,973 9,891 7,982
Unallocated corporate expenses 447 442 395
------- ------- -------
Operating income $10,526 $ 9,449 $ 7,587
======= ======= =======
Identifiable assets:
Tobacco $11,196 $ 9,926 $ 9,523
Food 33,447 34,822 33,253
Beer 1,751 1,706 1,706
Financial services and real estate 5,632 5,193 5,659
------- ------- -------
52,026 51,647 50,141
Other assets 1,785 1,002 1,064
------- ------- -------
Total assets $53,811 $52,649 $51,205
======= ======= =======
Depreciation expense:
Tobacco $ 350 $ 360 $ 342
Food 556 539 538
Beer 101 108 140
Financial services and real estate 1 2
Capital expenditures:
Tobacco $ 525 $ 529 $ 527
Food 948 1,072 944
Beer 115 121 92
Continued
18
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Data by Geographic Region for the years ended December 31,
----------------------------------------------------------
1995 1994 1993
------- ------- -------
(in millions)
Operating revenues:
United States - domestic $32,479 $35,936 $34,282
- export 5,920 4,942 4,105
Europe 23,076 19,888 18,304
Other 4,596 4,359 4,210
------- ------- -------
Total operating revenues $66,071 $65,125 $60,901
======= ======= =======
Operating profit:
United States $ 8,031 $ 7,306 $ 5,695
Europe 2,366 1,914 1,689
Other 576 671 598
------- ------- -------
Total operating profit 10,973 9,891 7,982
Unallocated corporate expenses 447 442 395
------- ------- -------
Operating income $10,526 $ 9,449 $ 7,587
======= ======= =======
Identifiable assets:
United States $32,521 $33,622 $34,522
Europe 15,981 14,845 12,766
Other 3,524 3,180 2,853
------- ------- -------
52,026 51,647 50,141
Other assets 1,785 1,002 1,064
------- ------- -------
Total assets $53,811 $52,649 $51,205
======= ======= =======
Continued
19
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Note 12. Pension Plans:
________________________
The Company and its subsidiaries sponsor noncontributory defined benefit
pension plans covering substantially all U.S. employees. The plans provide
retirement benefits for salaried employees based generally on years of
service and compensation during the last years of employment. Retirement
benefits for hourly employees generally are a flat dollar amount for each
year of service. The Company funds these plans in amounts consistent with
the funding requirements of federal laws and regulations.
Pension coverage for employees of the Company's non-U.S. subsidiaries is
provided, to the extent deemed appropriate, through separate plans, many of
which are governed by local statutory requirements. The plans provide
pension benefits that are based primarily on years of service and
employees' salaries near retirement. The Company provides for obligations
under such plans by depositing funds with trustees or purchasing insurance
policies. The Company records liabilities for unfunded foreign plans.
U.S. Plans
__________
Net pension cost (income) consisted of the following:
1995 1994 1993
-------- ------ ------
(in millions)
Service cost - benefits earned during the year $ 110 $ 130 $ 151
Interest cost on projected benefit obligation 367 342 362
(Return) loss on assets - actual (1,344) 94 (796)
- deferred gain (loss) 848 (605) 314
Amortization of net gain upon
adoption of SFAS No. 87 (26) (28) (28)
Other cost (income) 75 49 (47)
------- ----- -----
Net pension cost (income) $ 30 $ (18) $ (44)
======= ===== =====
During 1995, 1994 and 1993, the Company sold businesses and instituted early
retirement and workforce reduction programs resulting in other pension
expense of $103 million and curtailment gains of $28 million in 1995,
additional pension expense of $49 million in 1994 and curtailment gains of
$47 million in 1993.
Continued
20
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The funded status of U.S. plans at December 31 was as follows:
1995 1994
------- -------
(in millions)
Actuarial present value of accumulated
benefit obligation - vested $4,116 $3,491
- nonvested 354 270
------ ------
4,470 3,761
Benefits attributable to projected salaries 786 549
------ ------
Projected benefit obligation 5,256 4,310
Plan assets at fair value 6,649 5,735
------ ------
Excess of assets over projected
benefit obligation 1,393 1,425
Unamortized net gain upon
adoption of SFAS No. 87 (140) (169)
Unrecognized prior service cost 131 140
Unrecognized net gain from
experience differences (807) (802)
------ ------
Prepaid pension cost $ 577 $ 594
====== ======
The projected benefit obligation at December 31, 1995, 1994 and 1993 was
determined using an assumed discount rate of 7.25%, 8.5% and 7.5%,
respectively, and assumed compensation increases of 4.5%, 5.0% and 4.0% at
December 31, 1995, 1994 and 1993, respectively. The assumed long-term rate
of return on plan assets was 9% at December 31, 1995, 1994 and 1993. Plan
assets consist principally of common stock and fixed income securities.
The Company and certain of its subsidiaries sponsor deferred profit-sharing
plans covering certain salaried, nonunion and union employees.
Contributions and costs are determined generally as a percentage of pretax
earnings, as defined by the plans. Certain other subsidiaries of the
Company also maintain defined contribution plans. Amounts charged to
expense for defined contribution plans totaled $201 million, $191 million
and $214 million in 1995, 1994 and 1993, respectively.
Continued
21
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Non-U.S. Plans
______________
Net pension cost consisted of the following:
1995 1994 1993
------- -------- --------
(in millions)
Service cost - benefits earned during the year $ 80 $ 72 $ 63
Interest cost on projected benefit obligation 160 136 138
(Return) loss on assets - actual (195) 4 (153)
- deferred gain (loss) 74 (113) 55
Amortization of net loss (gain) upon adoption
of SFAS No. 87 1 (1) (1)
------ ----- ------
Net pension cost $ 120 $ 98 $ 102
====== ===== ======
The funded status of the non-U.S. plans at December 31 was as follows:
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
-------------------- --------------------
1995 1994 1995 1994
------ ------ ------ ------
(in millions)
Actuarial present value of
accumulated benefit
obligation - vested $1,257 $1,046 $ 703 $ 606
- nonvested 46 76 69 63
------ ------ ----- ------
1,303 1,122 772 669
Benefits attributable to
projected salaries 324 316 125 115
------ ------ ----- ------
Projected benefit obligation 1,627 1,438 897 784
Plan assets at fair value 1,780 1,532 59 51
------ ------ ----- ------
Plan assets in excess of (less
than) projected benefit
obligation 153 94 (838) (733)
Unamortized net loss (gain)
upon adoption of SFAS No. 87 11 (13) 14 6
Unrecognized net gain from
experience differences (42) (34) (12)
------ ------ ----- ------
Prepaid (accrued) pension cost $ 122 $ 81 $(858) $ (739)
====== ====== ===== ======
Continued
22
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The assumptions used in 1995, 1994 and 1993 were as follows:
1995 1994 1993
-------- --------- --------
Discount rates 4.5% to 10.0% 5.0% to 13.0% 5.0% to 12.0%
Compensation increases 3.5% to 9.0% 3.5% to 11.0% 3.5% to 11.0%
Long-term rates of
return on plan assets 4.5% to 11.0% 5.5% to 12.0% 5.0% to 12.0%
Plan assets consist primarily of common stock and fixed income securities.
Note 13. Postemployment Benefits:
___________________________________
Effective January 1, 1993, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." This Statement requires the
Company to accrue the costs of postemployment benefits, other than pensions
and postretirement health care benefits, over the working lives of
employees. The Company previously had expensed the cost of these benefits,
which are principally severance and disability, when the related event
occurred.
The cumulative effect at January 1, 1993 of adopting SFAS No. 112, which was
calculated on an undiscounted basis, reduced 1993 net earnings by $477
million ($.54 per share), net of $297 million of income tax benefits.
Adoption of SFAS No. 112 did not materially reduce 1993 earnings before
cumulative effect of accounting changes.
Note 14. Postretirement Benefits Other Than Pensions:
______________________________________________________
Since January 1, 1991, the Company has accrued the estimated cost of retiree
benefit payments, other than pensions, during employees' active service
periods as prescribed by SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," for its U.S. retiree benefit
plans.
Effective January 1, 1995, the Company adopted SFAS No. 106 for its Canadian
retiree benefit plans. Consistent with the transition methodology for U.S.
plans adopted in 1991, the Company recognized this change in accounting on
the immediate recognition basis. The cumulative effects as of January 1,
1995 of adopting SFAS No. 106 for the Canadian plans were an increase in
other assets of $14 million, an increase in accrued postretirement health
care costs of $35 million and a decrease in 1995 net earnings of $21
million ($.02 per share). However, application of SFAS No. 106 for Canadian
employees during the year ended December 31, 1995 did not materially reduce
earnings before cumulative effect of accounting changes. Prior to January
1, 1995, the cost of postretirement health care benefits for Canadian
employees was expensed as incurred and was not significant for the years
ended December 31, 1994 and 1993.
Health care benefits for retirees outside the United States and Canada are
generally covered through local government plans. The Company and its U.S.
and Canadian subsidiaries provide health care and other benefits to
substantially all retired employees, their covered dependents and
beneficiaries. Generally, employees who have attained age 55 and who have
rendered at least 5 to 10 years of service are eligible for these benefits.
Certain health care plans are contributory; other benefit plans are
noncontributory.
Continued
23
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Net postretirement health care costs consisted of the following:
1995 1994 1993
------ ------ ------
(in millions)
Service cost - benefits earned during the period $ 46 $ 57 $ 59
Interest cost on accumulated postretirement
benefit obligation 179 165 159
Amortization of unrecognized net (gain) loss
from experience differences (2) 6
Amortization of unrecognized prior service cost (13) (15) (16)
Other (income) cost (13) 32 (59)
----- ----- -----
Net postretirement health care costs $ 197 $ 245 $ 143
===== ===== =====
During 1995, 1994 and 1993, the Company sold businesses and instituted early
retirement and workforce reduction programs resulting in other pension
expense of $21 million and curtailment gains of $34 million in 1995,
additional expense of $32 million in 1994 and net curtailment and
settlement gains of $59 million in 1993.
The Company's postretirement health care plans currently are not funded. The
status of the plans at December 31 was as follows:
1995 1994
------- ------
(in millions)
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $1,353 $1,165
Fully eligible active plan participants 253 133
Other active plan participants 927 804
------ ------
2,533 2,102
Unrecognized net (loss) gain from experience
differences (303) 14
Unrecognized prior service cost 140 186
------ ------
Accrued postretirement health care costs $2,370 $2,302
====== ======
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for U.S. plans was 9.5% in 1994, 9.0% in
1995 and 8.5% in 1996, gradually declining to 5.0% by the year 2003 and
remaining at that level thereafter. For Canadian plans, the assumed health
care cost trend rate was 15.0% in 1995 and 14.0% in 1996, gradually
declining to 5.0% by the year 2005 and remaining at that level thereafter.
A one-percentage-point increase in the assumed health care cost trend rates
for each year would increase the accumulated postretirement benefit
obligation as of December 31, 1995 and net postretirement health care cost
for the year then ended by approximately 11% and 17%, respectively.
Continued
24
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The accumulated postretirement benefit obligations for U.S. plans at December
31, 1995, 1994 and 1993 were determined using assumed discount rates of
7.25%, 8.5% and 7.5%, respectively. The accumulated postretirement benefit
obligation at December 31, 1995 for Canadian plans was determined using an
assumed discount rate of 9.75%.
Note 15. Contingencies:
________________________
Legal proceedings covering a wide range of matters are pending in various U.S.
and foreign jurisdictions against the Company and its subsidiaries,
including Philip Morris Incorporated ("PM Inc.").
In certain of the proceedings pending against PM Inc. and, in some cases, the
Company and/or certain of its other subsidiaries, plaintiffs allege injury
resulting from cigarette smoking, addiction to cigarette smoking or
exposure to environmental tobacco smoke ("ETS") and seek compensatory and,
in some cases, punitive damages. As of December 31, 1995, there were 125
such smoking and health cases pending in the United States. Of these
cases, 88 were filed in the state of Florida and served between April 28,
1995 and December 31, 1995. One-hundred nine of the smoking and health
cases involve allegations of various injuries allegedly related to
cigarette smoking, four of which purport to be class actions. Eleven of
the smoking and health cases, including one which purports to be a class
action, involve allegations of various personal injuries allegedly related
to exposure to environmental tobacco smoke. Five of these cases involve
states that have commenced actions seeking reimbursement for Medicaid and
other expenditures claimed to have been made to treat diseases allegedly
caused by cigarette smoking. In addition, a purported class action
involving allegations of various personal injuries allegedly related to
cigarette smoking is pending in Canada against, among others, an entity in
which the Company has a 40% indirect ownership interest, and another such
action is pending in Brazil against a subsidiary of the Company, among
others. In addition, other tobacco related litigation includes five
lawsuits arising from the recall of certain of PM Inc.'s products, one of
which purports to be a class action. In addition, there is one lawsuit
pending, which purports to be a class action, involving allegations of
defective filtered products. There are also three lawsuits pending in
which plaintiffs have alleged that PM Inc. failed to manufacture a fire-
safe cigarette, including one which purports to be a class action.
Continued
25
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
The plaintiffs' allegations of liability in those cases in which individuals
seek recovery for personal injuries allegedly caused by cigarette smoking
are based on various theories of recovery, including negligence, gross
negligence, strict liability, fraud, misrepresentation, design defect,
failure to warn, breach of express and implied warranties, conspiracy,
concert of action, unjust enrichment, common law public nuisance,
indemnity, market share liability, and violations of deceptive trade
practices laws and antitrust statutes. Plaintiffs also seek punitive
damages in many of these cases. Defenses raised by defendants in these
cases include lack of proximate cause, assumption of the risk, comparative
fault and/or contributory negligence, lack of design defect, statutes of
limitations or repose, equitable defenses such as "unclean hands" and lack
of benefit, failure to state a claim and preemption by the Federal
Cigarette Labeling and Advertising Act, as amended (the "Act"). In June
1992, the United States Supreme Court held that the Act, as enacted in
1965, does not preempt common law damage claims but that the Act, as
amended in 1969, preempts claims arising after 1969 against cigarette
manufacturers "based on failure to warn and the neutralization of federally
mandated warnings to the extent that those claims rely on omissions or
inclusions in advertising or promotions." The Court also held that the
1969 Act does not preempt claims based on express warranty, fraudulent
misrepresentation or conspiracy. The Court also held that claims for
fraudulent concealment were preempted except "insofar as those claims
relied on a duty to disclose...facts through channels of communication
other than advertising or promotion." (The Court did not consider whether
such common law damage claims were valid under state law.) The Court's
decision was announced by a plurality opinion. The effect of the decision
on pending and future cases will be the subject of further proceedings in
the lower federal and state courts. Additional similar litigation could be
encouraged if legislative proposals to eliminate the federal preemption
defense, pending in Congress, were enacted. It is not possible to predict
whether any such legislation will be enacted.
A description of pending class action and state Medicaid litigation follows.
SMOKING AND HEALTH CLASS ACTION AND MEDICAID LITIGATION
-------------------------------------------------------
In 1991, a purported class action was filed against the leading United States
cigarette manufacturers, in which certain flight attendants, claiming to
represent a class of approximately 60,000 individuals, alleged personal
injury caused by exposure to ETS aboard aircraft. Broin, et al. v. Philip
Morris Incorporated, et al., Circuit of the Eleventh Judicial Circuit in
and for Dade County Florida, Case No. 91-49738-CA-20. In December 1994,
the trial court certified a class consisting of "all non-smoking flight
attendants who are or have been employed by airlines based in the United
States and are suffering from diseases and disorders caused by their
exposure to second hand cigarette smoke in airline cabins." Defendants
appealed the class certification decision and order to the Florida Third
District Court of Appeals. On January 3, 1996, the Florida Third District
Court of Appeals affirmed the trial court's class certification decision.
On January 18, 1996, defendants filed with the Florida Third District Court
of Appeals, a motion for rehearing, rehearing en banc or certification of
the case to the Florida Supreme Court.
Continued
26
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
In May 1994, an action was filed in a Florida state court against the leading
United States tobacco manufacturers and others, including the Company, by
plaintiffs alleging injury and purporting to represent a class of certain
smokers, certain former smokers and their heirs. Engle, et al. v. R.J.
Reynolds Tobacco Company, et al., Circuit Court of the Eleventh Judicial
Circuit in and for Dade County, Florida, Case No. 94-08273-CA-20.
Subsequently, the Company was voluntarily dismissed from this action, which
otherwise continues against the tobacco manufacturers, including PM Inc.
In October 1994, the trial court granted plaintiffs' motion for class
certification. The class, as certified, comprises "all United States
citizens and residents and their survivors who have...suffered, presently
suffer, or who have died from diseases and medical conditions caused by
their addiction to cigarettes that contain nicotine." Defendants appealed
the class certification decision and order to the Florida Third District
Court of Appeals. Oral argument on the appeal was held in September 1995
at which time the court took the matter under advisement.
In May 1994, the State of Florida enacted a statute which purports to abolish
affirmative defenses in actions brought by the state seeking reimbursement
of Medicaid costs. The statute purports in such actions to adopt a market
share liability theory, to permit the introduction of statistical evidence
to prove causation, and to allow the state not to identify the individual
Medicaid recipients who received the benefits at issue in such action. Two
lawsuits are presently pending relating to the statute: (1) In June 1994,
PM Inc. and others filed suit in Florida state court challenging the
constitutionality of the statute. Associated Industries of Florida, Inc.,
et al. v. State of Florida Agency for Health Care Administration, et al.,
Circuit Court of the Second Judicial Circuit in and for Leon County,
Florida, Case No. 94-3128. In June 1995, the Court declared certain parts
of the statute to be unconstitutional and declared other parts to be
constitutional. The Court also declared that the agency charged with
enforcing the statute was unconstitutional. In July, the State of Florida
appealed the ruling and PM Inc. then cross-appealed. In August 1995, the
Florida Supreme Court accepted the appeal. The Florida Supreme Court heard
oral arguments on the appeal in November 1995 and took the matter under
advisement; (2) In February 1995, the State of Florida filed an action
against the tobacco industry under the statute, attempting to recover
certain Medicaid costs and seeking certain injunctive relief, the funding
of certain programs and the disgorging of profits from the sale of
cigarettes in Florida. The State of Florida, et al. v. The American
Tobacco Company, et al., Circuit Court of the Fifteenth Judicial Circuit in
and for Palm Beach County, Florida, Case No. CL 95 1466 AO. This action
had been stayed by the trial court pending further order of the court. In
October 1995, the court partially lifted the stay to allow the entry of a
case management order and to permit plaintiffs to file a motion seeking
permission to take discovery. In addition to these two lawsuits, during
the second quarter of 1995, legislation repealing the statute was passed by
the Florida legislature and vetoed by the Governor of Florida after the
legislature had adjourned. At its next session, the legislature may
consider overriding the veto.
Continued
27
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
In March 1994, an action was filed in the United States District
Court for the Eastern District of Louisiana against the leading United
States cigarette manufacturers and others, including the Company, seeking
certification of a purported class action on behalf of all United States
residents who allege that they are addicted, or are the legal survivors of
persons who were addicted, to tobacco products. Castano, et al. v. The
American Tobacco Company Inc., et al., United States District Court,
Eastern District of Louisiana, Case No. 94-1044. Plaintiffs allege that
the cigarette manufacturers concealed and/or misrepresented information
regarding the addictive nature of nicotine and manipulated the levels of
nicotine in their tobacco products to make such products addictive.
Plaintiffs' motion for class certification was heard in December 1994, and
in February 1995, the court conditionally certified the class for certain
issues relating to allegations of 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, certain
affirmative defenses and on plaintiffs' claim for medical monitoring.
Defendants, including the Company, asked the District Court to certify its
class certification decision for immediate appeal to the United States
Court of Appeals for the Fifth Circuit. The Court granted that request and
the Fifth Circuit has agreed to hear the appeal.
In March 1994, an action was filed in an Alabama state court against three
leading United States cigarette manufacturers, including PM Inc. Lacey, et
al. v. Lorillard Tobacco Company, Inc., et al., Circuit Court of Fayette
County, Alabama, Case No. CV-94-024. Plaintiff, claiming to represent all
smokers who have smoked or are smoking cigarettes sold by defendants in the
State of Alabama, seeks compensatory and punitive damages not to exceed
$48,500 per each class member as well as injunctive relief arising from
defendants' alleged failure to disclose additives used in their cigarettes.
In April 1994, defendants removed the case to the United States District
Court for the Northern District of Alabama and filed a motion to dismiss
the complaint. Plaintiff subsequently filed a motion to remand to an
Alabama state court. The motion to remand has not been ruled upon. A
motion to stay the proceedings until the court rules upon the motion to
remand was granted in June 1994.
In May 1994, an action was filed in Mississippi state court against the
leading United States cigarette manufacturers and others, including the
Company, by the Attorney General of Mississippi seeking reimbursement of
Medicaid and other expenditures by the State of Mississippi claimed to have
been made to treat diseases allegedly caused by cigarette smoking. Moore
v. The American Tobacco Company, et al., Chancery Court of Jackson County,
Mississippi, Case No. 94-1429. Plaintiff also seeks punitive damages and
an injunction barring defendants from selling or encouraging the sale of
cigarettes to minors. In February 1995, the Court granted plaintiff's
motion to strike certain of defendants' challenges to the sufficiency of
the complaint and denied defendants' motion for judgement on the pleadings.
The court subsequently denied defendants' motion for partial summary
judgment, which asserted that the Attorney General lacked the authority to
bring those claims seeking Medicaid reimbursement. In July 1995,
plaintiffs filed a motion seeking to preclude defendants, including PM
Inc., from asserting their "set off" defenses which seek reduction or
elimination of damages based on benefits arising to the state through the
sale of cigarettes. That motion is still pending.
Continued
28
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
In August 1994, an action was filed in Minnesota state court against the
leading United States cigarette manufacturers and others by the Attorney
General of Minnesota and Blue Cross and Blue Shield of Minnesota seeking
reimbursement of Medicaid and other expenditures by plaintiffs claimed to
have been made to treat diseases allegedly caused by cigarette smoking.
Minnesota, et al. v. Philip Morris Incorporated, et al., Minnesota District
Court, Second Judicial District, County of Ramsey, Case No. C1-94-8565.
Plaintiffs' asserted causes of action include negligent performance of a
voluntary undertaking, violation of Minnesota antitrust laws, violation of
consumer protection statutes, restitution, and conspiracy. Plaintiffs also
seek injunctive relief, as well as treble damages for the alleged antitrust
violations. In August 1995, defendants requested that the Minnesota
Supreme Court determine whether Blue Cross/Blue Shield of Minnesota has
standing to bring a direct cause of action against defendants to recover
alleged increased health care cost. In September 1995, the Supreme Court
accepted review of this matter, and oral argument was heard on January 29,
1996.
In September 1994, an action was filed in West Virginia state court against
the leading United States cigarette manufacturers and others, including the
Company, by the Attorney General of West Virginia seeking reimbursement of
Medicaid and other expenditures by the State of West Virginia claimed to
have been made to treat diseases allegedly caused by cigarette smoking.
McGraw v. The American Tobacco Company, et al., Circuit Court of Kanawha
County, West Virginia, Case 94-1707. Plaintiff asserts causes of action
for restitution, public nuisance, negligent performance of a voluntary
undertaking, fraud, conspiracy and concert of action, aiding and abetting,
violation of consumer protection statutes, and violation of the West
Virginia Antitrust Act. Plaintiff also seeks an injunction barring
defendants from selling or encouraging the sale of cigarettes to minors.
In December 1994, defendants filed a motion to dismiss, claiming that the
Attorney General did not have standing to assert certain counts in the
complaint, and separate motions to dismiss the antitrust and consumer fraud
counts of the complaint. In addition, the non-manufacturing defendants,
including the Company, have moved to dismiss based upon the absence of
personal jurisdiction. In May 1995, the Court dismissed eight of ten
counts of the complaint for lack of standing and in October 1995, the Court
issued a final order entering judgment on behalf of defendants as to those
eight counts. The Court did not rule on the antitrust and consumer fraud
counts. In October 1995, the Court granted defendants' motion to prohibit
prosecution of this case pursuant to a contingent fee agreement with
private counsel ruling that the Attorney General lacked the authority to
enter into such an agreement.
Continued
29
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
_________
In November 1995, PM Inc., the other leading United States cigarette
manufacturers and the Tobacco Institute filed a lawsuit in the District
Court of Travis County, Texas against the Attorney General of the State of
Texas, the Health and Human Services Commission of the State of Texas, the
Department of Health of the State of Texas, and the Department of Human
Services of the State of Texas. The suit seeks to obtain declaratory
relief to enjoin the filing and prosecution of a lawsuit, which the
Attorney General has threatened to bring against plaintiffs seeking to
recover Medicaid costs related to medical conditions allegedly caused by
cigarette smoking. The complaint asserts that the threatened lawsuit would
violate the United States Constitution and federal law as well as the Texas
Constitution and Texas statutory and common law. Philip Morris
Incorporated, et al. v. Dan Morales, Attorney General of the State of
Texas, et al., District Court of Travis County, Texas, No. 94-14807.
In November 1995, PM Inc., along with four other tobacco manufacturers,
commenced an action in the United States District Court of Massachusetts
against the Attorney General of Massachusetts seeking declaratory and
injunctive relief in connection with, inter alia, the constitutionality of
two recently enacted Massachusetts statutory provisions (as construed by
the Attorney General). The complaint alleges that the Attorney General of
Massachusetts had threatened to bring a lawsuit seeking to recover Medicaid
costs against plaintiffs purportedly pursuant to these statutory
provisions. The complaint asserts claims based upon the United States
Constitution and federal law, as well as certain Massachusetts state
constitutional, statutory and common law claims. Philip Morris
Incorporated, et al. v. Scott Harshbarger, United States District Court,
District of Massachusetts, Case No. 95-12574-GAO. In December 1995, the
Attorney General moved to dismiss the complaint.
In December 1995, the Commonwealth of Massachusetts filed a complaint in the
Superior Court, Middlesex County, Massachusetts against PM Inc. and nine
other parties. The Commonwealth's complaint seeks certain declaratory and
equitable relief, damages, and restitution, including recovery of "the
smoking-related costs to the Commonwealth", such as increased expenditures
for medical assistance provided under Massachusetts' Medicaid
program...[and] medical assistance provided under the Common Health
Program. The Commonwealth's complaint asserts five counts: undertaking of
special duty, breach of warranty, conspiracy and concert of action,
restitution, and unjust enrichment. By letters dated the date of the
complaint, the Massachusetts Attorney General advised PM Inc. and certain
other parties that the Attorney General intended to add claims under a
Massachusetts "Consumer Protection" Act, demanded that $1,372,440,000 be
paid, and asserted that if that sum were not paid (or if a reasonable
written settlement offer were not made), "double or treble damages,
together with interest, costs, and attorneys' fees" could be sought. On
January 2, 1996, defendants removed the Commonwealth's action to the United
States District Court for the District of Massachusetts. Commonwealth of
Massachusetts v. Philip Morris Inc., et al., United States District Court,
the District of Massachusetts, Case No. 96-10014-GAD.
Continued
30
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
On January 22, 1996, PM Inc., four other leading United States cigarette
manufacturers, the Tobacco Institute and a local retailer, commenced an
action in the Circuit Court of Talbot County, Maryland against the Governor
and Attorney General of the State of Maryland and the Department of Health
and Mental Hygiene of Maryland seeking certain declaratory relief. The
action was commenced in response to the Governor and Attorney General's
threatened lawsuit against the cigarette manufacturers seeking to recover
Medicaid costs related to medical conditions allegedly caused by cigarette
smoking. The complaint seeks a declaration that, under Maryland law, any
contingent fee contract between the Attorney General and private attorneys
to be appointed assistant counsel for the State and compensated in such a
manner is an unauthorized exercise of the Attorney General's constitutional
and statutory powers, and is illegal and void as against the laws and
public policy of the State. Philip Morris Incorporated, et al. v. Parris
N. Glendening, Governor of the State of Maryland, et al., Circuit Court for
Talbot County, Maryland, Case No. CG 2829.
In February 1995, Rothman's, Benson & Hedges, Inc. (in which the Company,
through subsidiaries, owns a 40% interest) was served with a statement of
claim commencing a purported class action in the Ontario Court of Justice,
Toronto, Canada, against Imperial Tobacco Limited, RJR-MacDonald Inc., and
Rothman's, Benson & Hedges. LeTourneau v. Rothman's et al., Ontario Court
of Justice, Toronto, Canada. Court File No. 95-CU-82186. The lawsuit
seeks damages in the amount of $1,000,000 and punitive and exemplary
damages and an order requiring the funding of rehabilitation centers.
Plaintiffs seek certification of a class of persons who have suffered loss
as a result of their alleged nicotine addiction and their estates and
persons with related Family Law Act claims. Defendants have requested a
more particular statement of claim prior to delivering their statement of
defense. In July 1995, the court granted Mr. LeTourneau's motion to
withdraw as a class representative and two new class representatives have
been substituted.
In July 1995, a purported class action on behalf of all Brazilian smokers and
former smokers was filed in State Court in Sao Paulo, Brazil, naming Philip
Morris Marketing, S.A. ("PM Marketing") as a codefendant. The Smoker
Health Defense Association, et al. v. Souza Cruz, S.A. and Philip Morris
Marketing, S.A., 19th Lower Civil Court of the Central Courts of the
Judiciary District of Sao Paulo, Brazil. Plaintiffs allege that defendants
failed to warn that smoking is "addictive" and engaged in misleading
advertising. Plaintiffs have obtained an ex-parte order reversing the
burden of proof and placing the burden on defendants. PM Marketing has
appealed the order and has denied all material allegations in the
complaint. In October 1995, PM Marketing requested that the action be
dismissed based on plaintiffs' lack of standing and failure to follow
proper filing procedures. In December 1995, the court denied PM
Marketing's request for dismissal as well as its request to seek recusal
of the judge assigned to this matter.
Continued
31
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
OTHER TOBACCO RELATED CLASS ACTION LITIGATION
---------------------------------------------
In June 1995, a complaint was filed in the United States District Court for
the District of Maryland naming PM Inc. as the sole defendant. Sacks, et
al. v. Philip Morris Inc., United States District Court, District of
Maryland, Case No. WMN-95-1840. The lawsuit seeks certification of a class
consisting of "all persons and estates injured as a result of the
defendant's alleged failure to manufacture a fire safe cigarette since
1987." Plaintiffs allege in their complaint that PM Inc. intentionally
withheld and suppressed material information relating to technology to
produce a cigarette less likely to cause fires and failed to design and
sell its cigarettes using the alleged technology. Causes of action are
asserted based on federal and state consumer protection statutes, strict
liability, negligence and breach of implied warranties. Compensatory and
punitive damages are sought. In September 1995, PM Inc. filed a motion to
dismiss the complaint based on plaintiffs' failure to state a claim.
In May 1995, PM Inc. announced a recall of certain of its products and in June
and July four purported class actions relating to the recall were filed,
one in New Jersey, one in Texas and two in Louisiana. Netherland, et al.
v. Philip Morris USA, et al., United States District Court, Western
District of Louisiana, Monroe Division, Case No. CV95-1249-M; Sansone, et
al. v. Hoechst Celanese Corporation, et al., Superior Court of New Jersey,
Hudson County, Case No. HUD-L-4342-95; Tijerina, et al. v. Philip Morris,
Inc., et al., United States District Court, Northern District of Texas,
Amarillo Division, Case No. 2-95-CV-120; and Walton, et al. v. Philip
Morris, Inc., United States District Court, Middle District of Louisiana,
Case No. 95-693. The actions alleged, among other things, that PM Inc.
sold defective products that caused injury to plaintiffs. In the Louisiana
cases, PM Inc. has removed the cases to federal court. In the Sansone
action in New Jersey, PM Inc., in July 1995, filed an answer denying the
material allegations of the complaint and filed a motion to dismiss
portions of plaintiffs' complaint. In September 1995, a consent order was
entered with the court dismissing all of plaintiffs' claims except strict
liability. In December 1995, a consent order dismissing the remaining
claim in the Sansone action was submitted to the court. In the Walton
action in Louisiana, plaintiff voluntarily dismissed the case in November
1995.
In September 1995, plaintiffs in the Tijerina action (referenced above), filed
a second amended complaint to change the scope of the complaint to allege
that PM Inc., has, for many years, knowingly manufactured filtered products
that are defective because they contain "defective filters". The second
amended complaint also names two additional plaintiffs. The second amended
complaint also purports to be brought on behalf of a class of all persons
who have used filtered products manufactured by PM Inc. and who have
suffered adverse health effects. Tijerina, et al v. Philip Morris, Inc.,
et al., United States District Court, Northern District of Texas, Amarillo
Division, Case No. 2-95-CV-120. Plaintiffs allege that the filters in
these products contain hazardous chemicals, that cellulose acetate fibers
break away from the filters and are inhaled and ingested by the consumer
when the filtered products are used and that the tobacco in these products
contains harmful pesticide residues. Plaintiffs further allege that they
relied on PM Inc.'s false and fraudulent misrepresentations, made through
advertising, regarding the safety of the use of the filters. Motions to
dismiss certain of plaintiffs' claims and their putative expert witness
designations are pending.
Continued
32
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
OTHER CLASS ACTION LITIGATION
-----------------------------
In April 1993, the Company and certain officers and directors were named as
defendants in the first of a number of purported shareholder class actions
which have been consolidated in the United States District Court for the
Southern District of New York. San Leandro Emergency Medical Group Profit
Sharing Plan, et al. v. Philip Morris Companies Inc., et al., United States
District Court for the Southern District of New York, Case No. 93 Civ.
2131. These lawsuits allege that the Company violated federal securities
laws by making false and misleading statements concerning the effects of
discount cigarettes on PM Inc.'s premium tobacco business prior to April 2,
1993, the date upon which PM Inc. announced revisions in its marketing and
pricing strategies for its premium and discount brands. In December 1994,
defendants' motion to dismiss, heard by the Court in November 1993, was
granted and the case was dismissed. Plaintiffs' appeal was argued before
the United States Court of Appeals for the Second Circuit in September
1995. On January 25, 1996, the Second Circuit affirmed the District
Court's dismissal of the complaint against the Company, but reinstated a
claim of alleged insider trading against one of the individual defendants.
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in a complaint filed as a purported class action in the
United States District Court in the Eastern District of New York.
Lawrence, et al. v. Philip Morris Companies Inc., et al., United States
District Court, Eastern District of New York, Case No. 94 Civ. 1494 (JG).
Plaintiffs allege that defendants violated the federal securities laws by
maintaining artificially high levels of profitability through an inventory
management practice pursuant to which defendants allegedly shipped more
inventory to customers than was necessary to satisfy market demand. In
December 1994, a motion to dismiss by defendants was denied. Defendants
have filed an answer denying the material allegations of the complaint. In
August 1995, the Court granted plaintiffs' motion for class certification,
certifying this action as a class action on behalf of all persons (other
than persons associated with defendants) who purchased common stock of the
Company during the period July 10, 1991 through April 1, 1993, inclusive,
and who held such stock at the close of business on April 1, 1993. In
December 1995, the Court denied the Company's motion to amend the court's
class certification order to permit the Company to take an interlocutory
appeal from that order to the United States Court of Appeals for the Second
Circuit.
In April 1994, the Company, PM Inc. and certain officers and directors were
named as defendants in several purported class actions that have been
consolidated in the United States District Court in the Southern District
of New York. Kurzweil, et al. v. Philip Morris Companies Inc., et al.,
United States District Court for the Southern District of New York, Case
Nos. 94 Civ. 2373 (MBM) and 94 Civ. 2546 (MBM) and State Board of
Administration of Florida, et al. v. Philip Morris Companies Inc., et al.,
United States District Court for the Southern District of New York, Case
No. 94 Civ. 6399 (MBM). In those cases, plaintiffs assert that defendants
violated federal securities laws by, among other things, making allegedly
false and misleading statements regarding the allegedly addictive qualities
of cigarettes. In each case, plaintiffs claim to have been misled by
defendants' knowing and intentional failure to disclose material
information. In September 1995, the court granted defendants' motion to
dismiss the two complaints in their entirety. The court granted plaintiff
in the State Board action leave to replead one of its claims.
Continued
33
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
In March 1995, an antitrust action was filed in California state court against
four leading United States cereal manufacturers, including the Post
Division of Kraft Foods, Inc., by plaintiffs purporting to represent all
California residents who purchased defendants' cereal products for
consumption during the four years preceding the date upon which the
complaint was filed. McIver, et al. v. General Mills, Inc., et al.,
Superior Court of the State of California, County of Santa Barbara, Case
No. 206666. Plaintiffs seek treble damages and the return of profits
resulting from defendants' alleged conspiracy to fix and raise prices of
cereal products sold to California consumers. In April 1995, a second
purported class action similar to the earlier action was filed in the same
court. In August 1995, the two cases were consolidated. In September
1995, the court granted defendants' motions for summary judgment. In
December 1995, plaintiffs filed an appeal of that decision with the
California Court of Appeals.
The Company and each of its subsidiaries named as a defendant believes, and
each has been so advised by counsel handling the respective cases, that it
has a number of valid defenses to all litigation pending against it. 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 smoking and
health case could encourage the commencement of additional similar
litigation. There have also been a number of adverse legislative,
regulatory, political and other developments concerning cigarette smoking
and the tobacco industry. These developments generally receive widespread
media attention. The Company is not able to evaluate the effect of these
developing matters on pending litigation and the possible commencement of
additional litigation.
Management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome of all pending
litigation. It is possible that the Company's results of operations or
cash flows in a particular quarterly or annual period or its financial
position could be materially affected by an ultimate unfavorable outcome of
certain pending litigation. Management believes, however, that the
ultimate outcome of all pending litigation should not have a material
adverse effect on the Company's financial position.
Continued
34
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Note 16. Additional Information:
_________________________________
1995 1994 1993
------ ------ ------
(in millions)
Years ended December 31:
Depreciation expense $1,024 $1,027 $1,042
====== ====== ======
Rent expense $ 390 $ 426 $ 380
====== ====== ======
Research and development expense $ 481 $ 435 $ 421
====== ====== ======
Advertising expense $3,724 $3,358 $2,970
====== ====== ======
Interest and other debt expense, net:
Interest expense $1,259 $1,288 $1,478
Interest income (80) (55) (87)
------ ------ ------
$1,179 $1,233 $1,391
====== ====== ======
Interest expense of financial services
and real estate operations included
in cost of sales $ 84 $ 78 $ 87
====== ====== ======
Note 17. Financial Services and Real Estate Operations:
________________________________________________________
Philip Morris Capital Corporation ("PMCC") is a wholly-owned subsidiary of the
Company. PMCC invests in leveraged and single-investor leases and other
tax-oriented financing transactions and third party financial instruments
and also engages in various financing activities for customers and
suppliers of the Company's subsidiaries. Additionally, PMCC is engaged
through its wholly-owned subsidiary, Mission Viejo Company, in land
planning, development and sales activities in California and Colorado.
Pursuant to a support agreement, the Company has agreed to retain ownership of
100% of the voting stock of PMCC and make periodic payments to PMCC to the
extent necessary to ensure that earnings available for fixed charges equal
at least 1.25 times its fixed charges. No payments were required in 1995,
1994 or 1993.
Continued
35
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Condensed balance sheet data at December 31, follow:
1995 1994
------ ------
(in millions)
Assets
Finance leases $6,858 $6,048
Other investments 471 542
------ ------
7,329 6,590
Less unearned income and allowances 2,336 2,067
------ ------
Finance assets, net 4,993 4,523
Real estate held for development and sale 339 401
Goodwill, net of accumulated amortization 35 36
Other assets 267 276
------ ------
Total assets $5,634 $5,236
====== ======
Liabilities and stockholder's equity
Short-term borrowings $ 671 $ 604
Long-term debt 783 890
Deferred income taxes 3,382 3,010
Other liabilities 121 151
Stockholder's equity 677 581
------ ------
Total liabilities
and stockholder's equity $5,634 $5,236
====== ======
The amounts shown above include receivables and payables with the Company and
its other subsidiaries. These amounts were eliminated in the Company's
consolidated balance sheets.
Finance leases consist of a portfolio of investments in transportation, power
generation, manufacturing facilities and real estate. Rentals receivable
for leveraged leases represent unpaid rentals less principal and interest
on third-party nonrecourse debt.
Effective December 31, 1993, PMCC adopted the method of accounting prescribed
by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under SFAS No. 115, PMCC's investment securities, included in
other investments, are classified as available for sale and are recorded at
fair value, with unrealized gains and losses included as a component of
stockholders' equity, net of related deferred tax effects.
Continued
36
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Other investments also include real estate and commercial receivables, the
total estimated fair values of which, at December 31, 1995 and 1994,
approximated their carrying values. Fair values were estimated by
discounting projected cash flows using the current rates for similar loans
to borrowers with similar credit ratings and maturities.
Condensed income statement data follow for the years ended December 31,
1995 1994 1993
----- ----- -----
(in millions)
Revenues:
Financial services $ 197 $ 257 $ 276
Real estate 184 236 134
----- ----- -----
Total revenues 381 493 410
Expenses:
Financial services 107 114 105
Real estate 129 190 90
----- ----- -----
Total expenses 236 304 195
Equity in earnings of limited
partnership investments 15 17 8
----- ----- -----
Earnings before income taxes
and cumulative adjustment 160 206 223
Cumulative pretax adjustment
related to leveraged leases 23
----- ----- -----
Earnings before income taxes 160 206 246
Provision for income taxes:
Current year 55 72 75
Cumulative adjustment
related to leveraged leases 40
----- ----- -----
Total provision for income taxes 55 72 115
----- ----- -----
Net earnings $ 105 $ 134 $ 131
===== ===== =====
During 1993, PMCC's portfolio of leveraged leases was recalculated using a 35%
federal income tax rate, retroactive to January 1, 1993. A cumulative
adjustment was recorded that increased 1993 earnings before income taxes,
increased the provision for income taxes and decreased net earnings by $23
million, $40 million and $17 million, respectively.
Continued
37
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
Note 18. Financial Instruments:
________________________________
Derivative financial instruments
________________________________
The Company operates internationally, with manufacturing and sales facilities
in various locations around the world. Derivative financial instruments
are used by the Company for purposes other than trading, principally to
reduce exposures to market risks resulting from fluctuations in interest
rates and foreign exchange rates by creating offsetting exposures. The
Company is not a party to leveraged derivatives.
The Company has foreign currency and related interest rate swap agreements
which were executed to reduce the Company's borrowing costs and serve as
hedges of the Company's net assets in foreign subsidiaries, principally
those denominated in Swiss francs. At December 31, 1995 and 1994, the
notional principal amounts of these agreements were $2.0 billion and $1.6
billion, respectively. Aggregate maturities at December 31, 1995 were as
follows (in millions): 1996-$489; 1997-$737; 1998-$185; 1999-$350 and 2000-
$215. The notional amount is the amount used for the calculation of
interest payments which are exchanged over the life of the swap transaction
and is equal to the amount of foreign currency or dollar principal
exchanged at maturity.
Forward exchange contracts are used by the Company to reduce the effect of
fluctuating foreign currencies on short-term foreign currency denominated
intercompany and third party transactions. At December 31, 1995 and 1994,
the Company had forward exchange contracts, with maturities of less than
one year, of $1.2 billion and $1.6 billion, respectively.
Credit exposure and credit risk
_______________________________
The Company is exposed to credit loss in the event of nonperformance by
counterparties to the swap agreements. However, such exposure was not
material at December 31, 1995, and the Company does not anticipate
nonperformance. Further, the Company does not have a significant credit
exposure to an individual counterparty.
Fair value
__________
The aggregate fair value, based on market quotes, of the Company's total debt
at December 31, 1995 was $16.7 billion as compared to its carrying value of
$15.8 billion. The aggregate fair value of the Company's total debt did
not differ materially from its carrying value at December 31, 1994. The
estimated fair value of financial services and real estate other
investments, including commercial and real estate receivables, approximated
their carrying values at December 31, 1995 and 1994.
The carrying values of the foreign currency and related interest rate swap
agreements and of the forward contracts, which did not differ materially
from their fair values, were not material.
See Notes 5, 6 and 17 for additional disclosures of fair value for short-term
borrowings, long-term debt and financial instruments within the financial
services and real estate operations, respectively.
Continued
38
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
__________
Note 19. Quarterly Financial Data (Unaudited):
- -----------------------------------------------
1995 Quarters
-------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
(in millions, except per share data)
Operating revenues $16,517 $17,129 $16,689 $15,736
======= ======= ======= =======
Gross profit $ 6,467 $ 6,816 $ 6,764 $ 6,407
Earnings before cumulative
effect of accounting
changes $ 1,363 $ 1,410 $ 1,433 $ 1,272
Cumulative effect of
changes in method of
accounting
(See Notes 1 and 14) (28)
------- ------- ------- -------
Net earnings $ 1,335 $ 1,410 $ 1,433 $ 1,272
======= ======= ======= =======
Per share data:
Earnings before cumulative
effect of accounting
changes $ 1.60 $ 1.67 $ 1.71 $ 1.53
Cumulative effect of
changes in method of
accounting (.03)
------- ------- ------- -------
Net earnings $ 1.57 $ 1.67 $ 1.71 $ 1.53
======= ======= ======= =======
Dividends declared $ .825 $ .825 $ 1.00 $ 1.00
======= ======= ======= =======
Market price - high $68 $76-5/8 $84-1/8 $94-3/8
- low $55-3/4 $65-1/4 $71-3/8 $82-5/8
During the year, the Company sold its bakery businesses and its
North American margarine, specialty oils, marshmallows, caramels and Kraft
Foodservice distribution businesses. In addition, several smaller
international food businesses were sold. Pretax net gains from the sales
of these businesses were $275 million, most of which were reflected in
fourth quarter earnings. In the fourth quarter of 1995, the Company also
recorded provisions in connection with these divestitures, primarily for an
early retirement program and the write-down of assets of food facilities to
be downsized or closed. The net impact of these divestitures and
provisions was not material to fourth quarter operating income, pretax
earnings or earnings per share.
Continued
39
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Concluded
__________
1994 Quarters
-------------------------------------
1st 2nd 3rd 4th
-------- ------- ------- -------
(in millions, except per share data)
Operating revenues $15,500 $16,414 $16,710 $16,501
======= ======= ======= =======
Gross profit $ 5,929 $ 6,480 $ 6,579 $ 6,437
======= ======= ======= =======
Net earnings $ 1,171 $ 1,232 $ 1,230 $ 1,092
======= ======= ======= =======
Per share data:
Net earnings $ 1.34 $ 1.42 $ 1.42 $ 1.27
======= ======= ======= =======
Dividends declared $ .69 $ .69 $ .825 $ .825
======= ======= ======= =======
Market price - high $61 $55-3/8 $62-3/8 $64-1/2
- low $49-5/8 $47-1/4 $51-3/4 $56-1/8
40