SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission file number 1-8940
Philip Morris Companies Inc.
(Exact name of registrant as specified in its charter)
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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 offices) (Zip Code)
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Registrant's telephone number, including area code: 212-880-5000
Securities registered pursuant to Section 12(b) of the Act:
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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At February 29, 1996, the aggregate market value of the shares of Common
Stock held by non-affiliates of the registrant was approximately $82.0
billion. At such date, there were 829,752,427 shares of the registrant's
Common Stock outstanding.
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Documents Incorporated by Reference
Portions of the registrant's annual report to stockholders for the year
ended December 31, 1995, are incorporated in Part I, Part II and Part IV hereof
and made a part hereof. The registrant's definitive proxy statement for use in
connection with its annual meeting of stockholders to be held on April 25, 1996,
is incorporated in Part III hereof and made a part hereof.
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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 ("PM Inc."), which conducts business under the
trade name "Philip Morris U.S.A.", and its subsidiaries and affiliates are
engaged primarily in the manufacture and sale of cigarettes. PM Inc. 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. A wide
variety of grocery, coffee, cheese, confectionery and processed meat products
are manufactured and marketed in the United States and Canada by Kraft and by
its subsidiary, Kraft Foods International, Inc. ("Kraft Foods
International"), in Europe 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 1995, 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, 1995 (the "1995 Annual Report").
In 1995, operating profit from tobacco products was approximately 65% of
the Company's total operating profit (up from 62% in 1994), with PM Inc. and
Philip Morris International contributing 34% and 31%, respectively (compared
with 33% and 29%, respectively, in 1994). Food products, beer, and financial
services and real estate accounted for approximately 29%, 4% and 2%,
respectively, of the Company's total operating profit in 1995 (32%, 4% and
2%, respectively, in 1994).
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* 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.
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(c) Narrative Description of Business
Tobacco Products
PM Inc. 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 industry continues to be subject to health concerns relating to the
use of tobacco products and exposure to environmental tobacco smoke,
legislation, including tax increases, governmental regulation, privately
imposed smoking restrictions, governmental and grand jury investigations and
litigation, any or all of which could have an adverse impact on the Company.
Domestic Tobacco Products
PM Inc. is the largest tobacco company in the United States, with total
cigarette shipments of 221.8 billion units in 1995 (an increase of 1.1% from
1994), accounting for 46.1% of the cigarette industry's total estimated
shipments in the United States (an increase of 1.3 share points from 1994).
The industry's estimated cigarette shipments in the United States decreased
by 1.7% in 1995, compared with 1994, in line with the United States
industry's historical long-term average rate of decline of 1% to 2% per
annum. The following table sets forth the industry's estimated cigarette
shipments in the United States, PM Inc.'s shipments and its share of United
States industry shipments:
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Years Ended PM Inc.
December 31 Industry* PM Inc. Share of Industry*
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(in billions of units) (%)
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1995..................... 481.1 221.8 46.1
1994** .................. 489.6 219.4 44.8
1993 .................... 461.2 194.7 42.2
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PM Inc.'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. PM Inc. 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 144.9 billion units in 1995 (up 5.2% from
1994, despite a limited product recall), equating to 30.1% of the United
States market (up from 28.1% in 1994).
During 1995, domestic cigarette industry volume continued to shift from
the discount segment, which consists of "generic" and lower-priced cigarettes
that have a lower profit margin than premium brands, to the full-price
(premium) segment (70% of industry shipments in 1995, compared with 67.5% in
1994). The shift from the discount segment began in the second half of 1993,
reflecting a pricing strategy implemented by PM Inc. in response to the
domestic tobacco market, which was becoming increasingly price-sensitive.
Previously, the discount segment of the industry had been growing markedly
and constituted as much as 40.7% of United States industry shipments in the
second quarter of 1993, up from 30.2% in 1992. PM Inc.'s 1995 share of the
premium segment was 54.5%, an increase of 0.9 share points over 1994.
Shipments of premium cigarettes accounted for 82.7% of PM Inc.'s 1995 volume,
up from 80.7% in 1994. In 1995, United States industry shipments within the
discount segment declined 9.2% from 1994 levels; PM Inc.'s 1995 shipments
within this category declined 9.1%, resulting in a share of 26.6% of the
discount segment (up 0.1 share points from 1994). These developments and
their impact on the Company's financial statements 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
1995 Annual Report.
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* Source: The Maxwell Consumer Report (issued by Wheat, First Securities,
Inc.).
** The increase in industry shipments in 1994 from 1993 was due in part to
increased distributor buying in 1992 (made in anticipation of higher
cigarette prices and the January 1, 1993, increase in the federal excise
tax), which reduced 1993 shipments.
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PM Inc. cannot predict change or rates of change in the relative sizes of
the premium and discount segments or in PM Inc.'s shipments, market share
(based on shipments) or retail market share.
International Tobacco Products
Philip Morris International's total cigarette shipments grew 10.7% in
1995, to approximately 593.2 billion units. Philip Morris International's
share of the world cigarette market (excluding the United States) was
approximately 12% in 1995, up from approximately 11% in 1994. Philip Morris
International estimates that world cigarette industry unit shipments
(excluding the United States) were approximately 5.0 trillion units in 1995,
which represents a compounded annual increase of approximately 1% per year
over the last five years. Philip Morris International estimates that the
American-style segment of the world market (excluding the United States) has
increased at a compounded annual rate of more than 3% per year over the last
five years. It also estimates that the American-style segment constituted
approximately 32% of the world cigarette market (excluding the United States)
in 1995, up from approximately 31% in 1994; shipments by Philip Morris
International accounted for approximately 36% of this segment in 1995, versus
approximately 34% in 1994. Unit sales of Philip Morris International's
principal brand, Marlboro, increased 6.4% in 1995 over 1994, to 276.7 billion
units, more than 5% of the world cigarette market (excluding the United
States).
Philip Morris International has a cigarette market share 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, Japan, 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, Parliament, Merit and Virginia
Slims.
A subsidiary of Philip Morris International is the leading United States
exporter of cigarettes. It exported 164.1 billion units in 1995, an increase
of 22.8% from 1994. These exports constituted 28% of Philip Morris
International's total unit volume in 1995.
In 1995, Philip Morris International increased capacity and improved
productivity through various capital projects. Philip Morris International
modernized and expanded a manufacturing plant in the Czech Republic, began
construction of a new plant in Lithuania, and undertook plant renovations in
Krasnodar, Russia, and in Kharkov, Ukraine. It also began a program to
increase capacity in Holland, announced plans to upgrade its tobacco-
processing facility in Switzerland and to build a new factory in Kazakhstan,
completed construction of a leaf-processing facility in Malaysia, and concluded
an agreement under which a third party will contract-manufacture Marlboro
cigarettes in China for the Chinese market. In February 1996, Philip Morris
International acquired an initial 33% share of Poland's largest tobacco
company, Zaklady Przemyslu Tytoniowego w Krakowie S.A. ("ZPTK"). Within the
next three years, Philip Morris International will receive an additional 32% of
the company, provided it has completed certain investments in ZPTK's
manufacturing facilities and at such time is in compliance with other
contractual commitments.
Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and
Smoking
Cigarettes are subject to substantial excise taxes in the United States
and to similar taxes in most foreign markets. The United States federal
excise tax on cigarettes, last increased in 1993, is $12 per 1,000 ($.24 per
pack). During 1995, several measures were proposed to increase the federal
excise tax on cigarettes. However, no hearings were held on any of these
measures, and none was passed by Congress. In general, excise taxes, sales
taxes and other cigarette-related taxes levied by various states, counties
and municipalities have been increasing. These taxes vary considerably and,
when combined with the current federal excise tax, may be as high as $1.26
per pack.
In the opinion of PM Inc. and Philip Morris International, past increases in
the federal excise tax and the other taxes discussed above have had an adverse
impact on sales of cigarettes. Any future increases, the extent of which cannot
be predicted, could result in volume declines for the cigarette industry,
including PM Inc. and Philip Morris International, and might cause shifts from
the premium segment to the discount segment.
3
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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 continue to be subject to increasing governmental regulation.
As a result, the tobacco industry, both in the United States and abroad, is
subject to increased governmental restrictions, decreasing social acceptance
of smoking, increased pressure from anti-smoking groups, unfavorable press
reports, governmental investigations and substantial increases in excise
taxes. In the opinion of PM Inc. and Philip Morris International, 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
purporting to link cigarette smoking with a broad range of health hazards,
including various types of cancer, coronary heart disease and chronic lung
disease, and recommending various governmental measures to reduce the
incidence of smoking. The 1988, 1990, 1992 and 1994 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, and 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,
pursuant to an agreement sanctioned by the Federal Trade Commission (the
"FTC"), cigarette advertising in the United States must disclose the average
"tar" and nicotine yields of the advertised brand or variety. It has been
reported that the FTC is considering changes to the test method used to rate
the "tar" and nicotine yields of cigarettes sold in the United States. It is
also possible that the FTC will promulgate new regulations governing or
restricting advertising or marketing claims based on "tar" and nicotine
ratings.
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 markets where such statements
are not legally required, the Company's policy is to place the United States
Surgeon General's warnings on all cigarette packages.
Studies with respect to the alleged health risk to nonsmokers of diluted
and modified cigarette smoke, often referred to as environmental tobacco
smoke ("ETS"), have received significant publicity. In 1986, the Surgeon
General of the United States and the National Academy of Sciences reported
that nonsmokers were at increased risk of lung cancer and respiratory illness
due to ETS. In January 1993, the United States Environmental Protection
Agency (the "EPA") issued a report concluding, among other things, that ETS
is a human lung carcinogen and that ETS increases certain health risks for
young children. In June 1993, PM Inc. 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 and ordered
withdrawn. 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. It has been reported that the International Agency for Research
on Cancer of the World Health Organization is conducting research on ETS that
may be published sometime during 1996.
4
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Enactments by regulatory agencies and other governmental authorities,
together with private initiatives, have restricted or prohibited smoking areas
aboard certain common carriers, including domestic and certain international
commercial airline flights, in certain public places and in some places of
employment.
In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban
smoking in the workplace. Hearings on this proposed rule were held from
September 1994 through March 1995. The period for post-hearing submissions on
the proposed rule ended on February 9, 1996. OSHA has not yet issued either a
final rule or a proposed revised rule.
For several years, Congress has provided funds for the development of test
methodologies and standards aimed at measuring the propensity of cigarettes
to ignite upholstered furniture or mattresses. The Company cannot predict
whether these efforts will result in legislation or regulation.
Television and radio advertising of cigarettes is prohibited in the United
States and prohibited or restricted in many other countries. In June 1995, PM
Inc. entered into a consent decree with the Department of Justice, pursuant
to which it agreed to reposition its brand advertising at professional
football, baseball, basketball and hockey arenas so as not to be
inadvertently exposed to prominent television coverage.
In June 1992, the Alcohol, Drug Abuse and Mental Health Act was enacted.
This act requires states to adopt a minimum age of at least 18 for purchases
of tobacco products and to establish a system to monitor, report and reduce
the illegal sale of tobacco products to minors in order to continue receiving
federal funding for mental health and drug abuse programs. In January 1996,
regulations implementing this legislation were announced by the Department of
Health and Human Services.
In June 1995, PM Inc. announced that it has voluntarily undertaken a
program to limit minors' access to cigarettes. Elements of the program
include discontinuing free cigarette sampling to consumers in the United
States, discontinuing the distribution of cigarettes by mail to consumers in
the United States, placing a notice on cigarette cartons and packs for sale
in the United States stating "Underage Sale Prohibited," working with others
in support of state legislation to prevent youth access to tobacco products,
taking measures to encourage retailer compliance with minimum-age laws, and
independent auditing of the program.
In August 1995, President Clinton announced, and the United States Food and
Drug Administration (the "FDA") initiated, a rulemaking proceeding purportedly
designed to prevent minors from smoking. In the proposed regulations, the FDA
asserted that it has jurisdiction over nicotine as a "drug" and over cigarettes
as a medical "device" (a nicotine delivery system) under the provisions of the
Food, Drug and Cosmetic Act. The proposed regulations include severe
restrictions on the distribution, marketing and advertising of cigarettes, and
require cigarette manufacturers to fund a $150 million-a-year campaign to
discourage minors from using tobacco products. The period for public comment on
the FDA's plan initially ended on January 2, 1996. The FDA's assertion of
jurisdiction, if not reversed by judicial or legislative action, could lead to
more expansive FDA-imposed restrictions on cigarette operations than those set
forth in the current proposed regulations. PM Inc., four other domestic
cigarette manufacturers and an advertising firm have sued the FDA, seeking a
judicial declaration that the FDA has no authority to regulate cigarettes and
asking the court to issue an injunction requiring the FDA to withdraw its
proposed regulations. Similar suits have been filed against the FDA by
manufacturers of smokeless tobacco products, by a trade association of cigarette
retailers and by advertising agency associations.
On March 18, 1996, the FDA placed in its rulemaking docket statements from
three former employees of PM Inc. concerning, according to the FDA Commissioner,
"the role of nicotine in the design and manufacture of cigarettes." As a result
of this and unrelated developments, the FDA has reopened for limited purposes
for thirty days the period during which the public may comment on the statements
and two specific aspects of its proposed regulations.
Legislation and other governmental action potentially affecting the
tobacco industry is proposed periodically at the federal, state and local
levels. During 1995, members of Congress, the Clinton Administration and
state officials proposed measures that would ban or severely restrict smoking
in workplaces and in buildings with public access and on international
flights that have a nexus with the United States, require additional health
warning and product content information on packaging and in advertising,
eliminate the tax deductibility of a portion of the cost
5
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of tobacco advertising, significantly increase the excise and similar taxes on
cigarettes, and authorize the FDA to regulate tobacco products (see above). In
November 1995, Congress passed a measure that bans or severely restricts
vending machines and the provision of free tobacco products in federal
buildings and on federal property. In recent years various members of Congress
have introduced legislation--some of which has been the subject of hearings or
floor debate--that would subject cigarettes to various regulations under the
Department of Health and Human Services or regulation under the Consumer
Products Safety Act, establish anti-smoking educational campaigns or
anti-smoking programs or provide additional funding for governmental
anti-smoking activities, further restrict the advertising of cigarettes,
including requiring additional warnings on packages and in advertising,
provide that the Federal Cigarette Labeling and Advertising Act and the
Smoking Education Act could not be used as a defense against liability under
state statutory or common law, and allow state and local governments to
restrict the sale and distribution of cigarettes and further restrict certain
advertising of cigarettes.
A number of foreign countries have also taken steps to restrict or
prohibit cigarette advertising and promotion, to increase taxes on
cigarettes, to control prices, to restrict imports and to discourage
cigarette smoking.
It is not possible to determine the outcome of the FDA regulatory
initiative announced by President Clinton or the related litigation, or to
predict what, if any, other foreign or domestic governmental legislation or
regulations will be adopted relating to the advertising, sale or use of
cigarettes or to the tobacco industry generally. However, if any or all of
the foregoing were to be implemented, the volume, operating revenues and
operating income of PM Inc., Philip Morris International and the Company
could be adversely impacted, in amounts that cannot be determined.
PM Inc. has received requests for information in connection with various
governmental investigations of the tobacco industry.
In June 1995, The New York Times published an article that made
allegations about PM Inc. documents and supposedly secret research relating
to nicotine. Following publication of that article, PM Inc. has received
grand jury subpoenas from the United States Attorney for the Southern
District of New York.
PM Inc. has received Civil Investigative Demands ("CIDs") from the United
States Department of Justice requiring PM Inc. to produce documents and
respond to interrogatories relating to the possibility of "joint activity to
restrain competition in the manufacture and sale of cigarettes, including
joint activity to limit or restrict research and development or product
innovations." Certain present and former employees of PM Inc. have been
deposed or have received CIDs noticing their depositions in connection with
the investigation.
The United States Attorney for the Eastern District of New York is
reviewing the status of a grand jury investigation, begun in 1992, of
possible violations of criminal law in connection with activities relating to
The Council for Tobacco Research -- U.S.A., Inc., a research organization of
which PM Inc. is a sponsor.
PM Inc. has received grand jury subpoenas from the United States Department
of Justice requesting documents relating to an investigation of testimony
provided by tobacco industry executives before Congress.
PM Inc. has received a grand jury subpoena from the United States Attorney
for the Eastern District of Virginia requesting documents relating to an
investigation of Healthy Buildings International, Inc.
While the outcomes of these investigations cannot be predicted, PM Inc.
believes it has acted lawfully.
Smoking and Health Litigation
There is litigation pending in various jurisdictions 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, "addiction" to cigarette smoking or
exposure to ETS. As of December 31, 1995, there were 125 such smoking and
health cases pending in the United States against PM Inc. and, in some cases,
the Company. Of these cases, 88 were filed in the state of Florida and served
between April 28, 1995, and
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December 31, 1995. One hundred and nine of the smoking and health cases, four of
which purport to be class actions, involve allegations of various injuries
allegedly related to cigarette smoking. Eleven of the smoking and health cases,
including one that purports to be a class action, involve allegations of various
personal injuries allegedly related to exposure to ETS. Five of the cases
pending as of December 31, 1995, 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.
Note 15 to the Company's consolidated financial statements, incorporated
herein by reference to the Company's 1995 Annual Report, describes certain
litigation pending against the Company and its subsidiaries and related
entities, including smoking and health cases. Item 3 herein describes certain
subsequent developments in such litigation. Further reference is made to such
Note 15 and Item 3.
In March 1996, Liggett Group, Inc., a United States manufacturer and
seller of cigarettes ("Liggett"), announced an agreement to settle the Castano
case described in such Note 15 and Item 3. The agreement is subject to court
approval. Liggett also announced an agreement to settle the Medicaid
reimbursement actions brought by the states of Florida, Louisiana,
Massachusetts, Mississippi and West Virginia as described in such Note 15 and
Item 3. As part of each settlement, Liggett agreed to comply with certain
aspects of the regulations proposed by the FDA, to make certain payments and
to cooperate in limited ways with otherwise adverse parties in certain
investigations and lawsuits. The terms of the settlements would be available
to any other defendant that has a share of the Untied States domestic
cigarette market of less than 30% if it acquires or is acquired by Liggett,
and each settlement can be terminated by Liggett upon the occurrence of
specified events. Liggett's sales account for approximately 2% of the Untied
States domestic cigarette market. The major cigarette manufacturers in the
United States, including PM Inc., have stated that they do not intend to
settle any smoking and health litigation and that they will continue to defend
all such actions vigorously.
The Attorneys General of other states have announced they are considering
filing Medicaid reimbursement actions.
Distribution, Competition and Raw Materials
PM Inc. 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. The tobacco products of the
Company's subsidiaries, affiliates and their licensees are 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.
PM Inc. 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. PM Inc. and Philip Morris International
believe there is an adequate supply of tobacco in the world markets to
satisfy their current production requirements.
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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
allows a specified quantity of tobacco to be imported at current tariff
levels, with additional quantities subject to a significantly higher duty.
Due to the high content of American-grown tobacco used in PM Inc.'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 PM Inc. or Philip Morris International.
Food Products
Kraft's reporting and management structure currently consists of Kraft
Foods North America, which comprises eleven business divisions (including
Kraft Canada), and Kraft Foods International. Effective January 1995, the
North American food business was reorganized to fully integrate the
operations of the former Kraft U.S.A. and General Foods U.S.A. The combined
organization, named Kraft Foods, Inc., has begun to streamline operations and
improve effectiveness and customer response. In December 1995, Kraft Foods
International was realigned to capitalize on growth opportunities, and
reorganized into four separate regional business divisions: Western Europe;
Northern Europe; Central and Eastern Europe, Middle East and Africa; and
Asia/Pacific.
During 1995, Kraft sold its bakery businesses and its North American
margarine, specialty oils, marshmallows, caramels and Kraft Foodservice
distribution businesses and several small international food businesses. In
1994, Kraft sold The All American Gourmet Company, which produced frozen
meals and side dishes. The sales of these businesses are not expected to have
a material effect on the Company's future results of operations and are
expected to improve the profit margin of North American food operations.
North America
Kraft is the largest packaged food company in North America. Kraft's
principal products include ready-to-eat cereals, coffee and other beverages,
desserts, cheese and cheese products, frozen toppings, stuffing mix, syrup,
vegetable oil-based products, such as salad dressings, barbecue sauce,
cultured dairy products, frozen pizza, processed meat and poultry products,
frozen bagels and packaged pasta dinners. Its principal brands include Kraft,
Velveeta and Cracker Barrel cheese and cheese products, Miracle Whip salad
dressing, Philadelphia Brand cream cheese, Cheez Whiz cheese sauce, Kraft and
Seven Seas pourable dressings, Kraft and Bull's-Eye barbecue sauces, DiGiorno
pastas, sauces and cheeses, Light n' Lively, Knudsen and Breakstone's cultured
dairy products, Tombstone, Jack's and DiGiorno 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, Nabob,
Sanka 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, Minute rice, Stove Top
stuffing mix, Shake 'N Bake coatings, Good Seasons salad dressing mixes,
Lender's bagels and Cool Whip toppings.
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, the Middle East, Africa and the Asia/Pacific
region. Approximately 93% of Kraft Foods International's sales are made in
Europe. International brands include a wide variety of the products sold by
Kraft in North America, as well as Milka, Tobler, Toblerone, Suchard, Sugus,
Freia, Marabou, Daim, Estrella, Callard & Bowser, Terry's and Cote d'Or
confections, Carte Noire, Gevalia, Grand'Mere, Kenco, HAG, Jacobs Cafe,
Jacobs Kronung, Jacques Vabre, Night & Day, Saimaza and Splendid coffees,
Miracoli pasta dinners, Dairylea processed 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, various powdered soft drinks and a number of the
other products sold by Kraft.
8
<PAGE>
Distribution, Competition and Raw Materials
Kraft's products in North America 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.
Products of Kraft Foods International are sold primarily through sales
offices and agents abroad. European distribution is coordinated from offices
located in Zurich, Switzerland; Vienna, Austria; and Cheltenham, England. The
Asia/Pacific area operations are headquartered in Hong Kong. Kraft Foods
International's operations outside of the United States and Canada are
directed from its 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 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, hazelnuts, vegetable oil, fruits and berries, and
sugar and other sweeteners. 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 and
other dairy product purchases are substantially influenced by government
programs as well as market supply and demand.
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 processed meat products. Poultry and meat prices are cyclical
and are 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 such as weather conditions, commodity market activities and
the effects of governmental agricultural programs. 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 to be generally available from numerous sources and in adequate
supply.
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, these
agencies enforce statutory prohibitions against misbranded and adulterated
foods, establish ingredients and/or manufacturing procedures for certain
standard foods, establish standards of identity for food, determine the
safety of food substances and establish labeling standards and nutrition
labeling requirements 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.
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
9
<PAGE>
certain trade practices in connection with the sale of dairy products and
imposing their own labeling requirements on food products.
Many of the food commodities on which Kraft's United States businesses
rely are subject to governmental agricultural programs. These programs have
substantial effects on prices and supplies and are subject to Congressional
review.
Almost all of the activities of the Company's food operations outside of
the United States 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 Union) regulatory provisions. The rules and regulations relate
to labeling, packaging, food content, pricing, marketing and advertising and
related areas.
Beer
Products
Miller's brands include Miller Beer, Miller Lite, Miller Lite Ice, Miller
Genuine Draft, MGD Light, Red Dog and Icehouse in the premium segment; the
Miller High Life family in the near-premium segment, including Miller High
Life, Miller High Life Light and Miller High Life Ice; Lowenbrau, brewed and
sold in the United States under license from Lowenbrau Munchen AG in the
above-premium segment; Meister Brau, Milwaukee's Best and Magnum Malt Liquor
in the below-premium segment; and Sharp's non-alcohol brew. Competing in the
specialty segment are the Leinenkugel, Celis and Shipyard brands. New products
introduced in 1995 include Miller Genuine Red, Leinenkugel's Honey Weiss and
Autumn Gold, Southpaw Light and Big Sky, a near-premium beer sold primarily in
Wisconsin. 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 Canada, Asahi and
Foster's Lager. New Molson Breweries U.S.A. products introduced in 1995 were
Foster's Special Bitter and Molson Red Jack Ale. Shipment volume for Miller,
including imports, exports and non-alcohol brew, decreased 0.5% in 1995,
compared with 1994, in line with the industry. The decrease resulted primarily
from reduced shipments of below-premium brands, as well as Lite Ice, Molson
Ice and Miller Genuine Draft, partially offset by volume increases due to
sales of Red Dog during its first full year in the marketplace and improved
sales of Miller Lite. Miller's premium and above-premium beer shipments
increased by 1.3% in 1995. Premium and above-premium brands accounted for
81.8% of Miller's shipment volume in 1995, up from 80.4% in 1994.
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:
<TABLE>
<CAPTION>
Years Ended Miller's
December 31 Industry Miller Share of Industry
- ------------ -------- ------ -----------------
(in thousands of barrels) (%)
<S> <C> <C> <C>
1995 ................ 198,554 45,006 22.7
1994 ................ 199,572 45,243 22.7
1993 ................ 198,019 44,024 22.2
</TABLE>
Internationally, Miller has formed a number of new alliances with brewers
and beverage companies in Japan, Brazil, China and Great Britain.
Distribution, Competition and Raw Materials
Beer products are distributed primarily through independent beer
wholesalers. The United States malt beverage industry is highly competitive,
with the principal methods of competition being product quality, price,
distribution, marketing and advertising. Miller engages in a wide variety of
advertising and sales promotion activities. Barley, hops, corn and water
represent the principal ingredients used in manufacturing Miller's beer
products and are generally available in the market. The production process,
which includes fermentation and aging periods, is conducted throughout the
year, and at any one time Miller has on hand only a small quantity of
finished products. Containers
10
<PAGE>
(bottles, cans and kegs) for beer products are purchased from various
suppliers. Miller expects cost increases for aluminum and other packaging and
brewing materials as supply agreements expire during 1996.
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 to regulate the size and format of the
warning.
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 shipments.
Financial Services and Real Estate
Philip Morris Capital Corporation ("PMCC") invests in leveraged and direct
finance leases, other tax-oriented financing transactions and third-party
financial instruments, and also engages in various financing activities for
customers and suppliers of the Company's other subsidiaries. Total assets
increased to $5.6 billion at year-end 1995, compared with $5.2 billion at
year-end 1994, reflecting the net investment of an additional $490 million in
finance assets.
Mission Viejo Company, a wholly-owned subsidiary of PMCC, is engaged
principally in land planning, development and sales activities 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, 1995, the Company employed approximately 151,000 people
worldwide.
Trademarks
Trademarks are of material importance to all three of the Company's
consumer products businesses and are protected by registration or otherwise
in the United States and most other markets where the related products are
sold.
Environmental Regulation
The Company and its subsidiaries are subject to various federal, state and
local laws and regulations 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 1995, subsidiaries (or former
subsidiaries) of the Company were involved in approximately 185 matters
subjecting them to potential remediation costs under Superfund or otherwise.
The Company and its subsidiaries expect to continue to make capital and other
expenditures in connection with environmental laws and regulations. Although
it is not possible to predict precise levels of environmental related
expenditures, compliance with such laws and regulations, including the
payment of any remediation costs and the making of such expenditures, have
not had and are not expected to have a material adverse effect on the
Company's results of operations, capital expenditures or financial position.
11
<PAGE>
Share Repurchase Program
In October 1994, the Company commenced a program to spend up to $6 billion
to repurchase shares of its Common Stock in open market transactions over
three years. The Company is currently repurchasing shares at an annualized
rate of $2.6 billion.
Forward-Looking and Cautionary Statements
The Company and its representatives may from time to time make written or
oral forward-looking statements, including statements contained in the
Company's filings with the Securities and Exchange Commission and in its
reports to stockholders. In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company; any such statement is qualified by reference to the
following cautionary statements.
The tobacco industry continues to be subject worldwide to health concerns
relating to the use of tobacco products and exposure to ETS, legislation,
including tax increases, governmental regulation, privately imposed smoking
restrictions, governmental and grand jury investigations and litigation. Each of
the Company's operating subsidiaries is subject to intense competition, changes
in consumer preferences, the effects of changing prices for its raw materials
and local economic conditions. The performance of each of Philip Morris
International and Kraft Foods International is affected by foreign economies and
currency movements. Developments in any of these areas, which are more fully
described elsewhere in Part I hereof and in Management's Discussion and Analysis
of Financial Condition and Results of Operations on pages 19-25 of the Company's
1995 Annual Report, each of which is incorporated into this section by
reference, could cause the Company's results to differ materially from results
that have been or may be projected by or on behalf of the Company. The Company
cautions that the foregoing list of important factors is not exclusive. The
Company does not undertake to update any forward-looking statement that may be
made from time to time by or on behalf of the Company.
(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 segments 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 1995 Annual
Report.
Kraft, Miller and subsidiaries of Philip Morris International export
coffee products, grocery products, cheese, processed meats, beer, tobacco and
tobacco-related products. In 1995, the value of all exports from the United
States by these subsidiaries amounted to approximately $5.9 billion.
Item 2. Description of Property.
Tobacco Products
PM Inc. owns 9 tobacco manufacturing and processing facilities--6 in the
Richmond, Virginia, area, 2 in Louisville, Kentucky, and 1 in Cabarrus
County, North Carolina. PM Inc. 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
Newport News, Virginia. Subsidiaries and affiliates of Philip Morris
International own, lease or have an interest in cigarette or component
manufacturing facilities in 28 countries outside the United States.
Food Products
The Company's subsidiaries have 60 manufacturing and processing
facilities, 217 distribution centers and depots and 178 various other
facilities in the United States, as well as 117 foreign manufacturing and
processing facilities in 34 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.
12
<PAGE>
Beer
Miller currently owns and operates 8 breweries, located in Milwaukee,
Wisconsin (2); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia;
Irwindale, California; Trenton, Ohio; and Chippewa Falls, Wisconsin. Miller
owns
a majority interest in the Celis Brewery in Austin, Texas, and the
Shipyard Brewery in Portland, Maine. Miller also owns a beer distributorship in
Oklahoma, a hops processing facility in Wisconsin, and owns or leases
warehouses in several locations.
General
The plants and properties owned and operated by the Company's subsidiaries
are maintained in good condition and are believed to be suitable and adequate
for present needs. In the fourth quarter of 1993, the Company provided for
the costs of restructuring its worldwide operations. The charge related
primarily to the downsizing or closure of approximately 40 manufacturing and
other facilities, of which 26 were downsized or closed during 1994 and 1995.
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. The 1993 restructuring and
its impact on the Company's financial statements are more fully described in
the MD&A, incorporated herein by reference to the Company's 1995 Annual
Report.
Item 3. Legal Proceedings.
Reference is made to "Tobacco Products--Smoking and Health Litigation"
under Item 1 and to Note 15 to the Company's consolidated financial
statements, incorporated herein by reference to the Company's 1995 Annual
Report ("Note 15"), for a description of certain pending legal proceedings.
Certain litigation developments since the date of Note 15 are summarized
below.
In October 1994, the trial court in the Engle case described in Note 15
granted plaintiffs' motion for class certification. Defendants appealed the
class certification decision and order to the Florida Third District Court of
Appeal. On January 31, 1996, the Court of Appeal affirmed the trial court's
order, with the modification that the subject class be restricted to Florida
citizens and residents rather than United States citizens and residents. On
February 15, 1996, defendants filed with the Florida Third District Court of
Appeal a motion for rehearing and a motion for rehearing en banc. In both
motions, defendants sought, in the alternative, an order remanding the case to
the trial court for a determination of whether certification of such a class
meets the manageability and superiority requirements of the Florida Rules of
Civil Procedure. Defendants also filed a motion for certification of the case
to the Florida Supreme Court. On March 4, 1996, plaintiffs notified the trial
court that they believe that the case is ready to be set for trial. On March
13, 1996, defendants filed a joint opposition to the notice of trial.
On March 1, 1996, the trial court in the State of Florida case described in
Note 15 partially lifted the stay for the limited purpose of permitting motions
to dismiss to be filed. Oral argument of the motions to dismiss is scheduled
for May 28, 1996.
In February 1995, the court in the Castano case described in Note 15
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 and PM Inc.,
appealed the decision to the United States Court of Appeals for the Fifth
Circuit. Oral argument has been scheduled for April 2, 1996.
On March 18, 1996, in the Lacey case described in Note 15, the court denied
plaintiff's motion to remand the case to the Alabama state court. Also on March
18, 1996, the court denied defendants' motion to dismiss, which had been filed
in May 1994.
On February 16, 1996, in the Moore case described in Note 15, the Governor
of Mississippi filed a Petition for Writ of Mandamus and Prohibition and for
Declaratory Judgment with the Mississippi Supreme Court requesting, among
other things, that the court issue a Writ of Mandamus and Prohibition
requiring the Attorney General to cease and desist from actions for recovery
of Medicaid funds until employed and/or directed to do so by the
13
<PAGE>
Governor. On February 20, 1996, PM Inc. and the other defendants in the
Moore case filed a Petition for Writ of Prohibition and/or Mandamus with the
Mississippi Supreme Court requesting that the court instruct the trial judge to
dismiss those portions of the Attorney General's lawsuit that seek recovery of
the Medicaid funds.
In October 1995, the court in the McGraw case described in Note 15 granted
defendants' motion to prohibit prosecution of this case pursuant to a
contingent fee arrangement with private counsel, ruling that the Attorney
General lacked the authority to enter into such an agreement. On January 23,
1996, plaintiff filed a motion for leave to file an amended complaint to join
the Public Employees Insurance Agency Financial Board as a party plaintiff.
In May 1995, the trial court dismissed eight of the ten counts of the
complaint for lack of standing. In October 1995, the court issued a final
order entering judgment on behalf of defendants. On February 15, 1996,
the Attorney General filed a Petition for Appeal with the Supreme Court of
Appeals of West Virginia from the October 1995 order, requesting that the
court reverse the trial court's ruling that the Attorney General does not
have the authority to pursue the common-law and declaratory judgment counts
of the complaint. Oral argument has been scheduled for May 30, 1996.
On February 6, 1996, in the Morales case described in Note 15, plaintiffs,
including PM Inc., amended their complaint to include a request for a
declaration that the Attorney General has no authority to enter into contingent
fee agreements with private attorneys. On February 23, 1996, plaintiffs,
including PM Inc., filed a motion for partial summary judgment on counts I and
II of their amended complaint (which request, respectively, a declaration that
the Attorney General has no authority under Texas law to seek reimbursement of
Medicaid expenditures from plaintiffs outside of the assignment/subrogation
remedy provided by statute, and a declaration that the assignment/subrogation
remedy is the exclusive remedy for recovery of Medicaid expenditures from third
parties).
On February 1, 1996, plaintiff in the Commonwealth of Massachusetts
case described in Note 15 served a motion to remand the action to the state
court in which it was originally filed. The motion to remand was orally
argued on February 26, 1996.
On February 16, 1996, in the action against the Governor of the State of
Maryland described in Note 15, the plaintiffs, including PM Inc., filed a
motion for summary judgment on the grounds that any contingent fee contract
between the Attorney General of Maryland and private attorneys to be appointed
assistant counsel for the State and compensated in such a manner is invalid
under Maryland law. On February 23, 1996, defendants filed a motion to dismiss
or, in the alternative, for summary judgment, arguing that plaintiffs have no
standing to assert the challenges they make in the complaint and that the
Attorney General has the power under Maryland law to retain contingency fee
counsel.
On March 13, 1996, an action was filed in Louisiana state court against the
leading United States cigarette manufacturers and others, including the
Company, by the Attorney General of Louisiana seeking reimbursement of Medicaid
and other expenditures claimed to have been made to treat eligible citizens of
the State of Louisiana for diseases allegedly caused by cigarette smoking.
Ieyoub, et al. v. The American Tobacco Company, et al., 14th Judicial District
Court, Parish of Calcasieu, Louisiana, Case No. 96-1209. Plaintiff asserts
various claims under Louisiana law and seeks an injunction prohibiting the sale
of cigarettes to minors, an unspecified amount of compensatory damages for past
and future health care expenditures by the State, an unspecified amount of
punitive damages, attorneys' fees, and prejudgment and legal interest. The
Company has not yet received service of the complaint.
On March 18, 1996, plaintiff in the Netherland case described in Note 15
filed a motion to amend the complaint. The proposed amendment would add a
manufacturer of packaging materials as a defendant and would seek to expand the
proposed class from individuals in the State of Louisiana to all persons in the
United States who were allegedly injured by cigarettes subject to the product
recall announced by PM Inc. in May 1995. PM Inc. has filed a motion to strike
all class allegations.
On March 5, 1996, plaintiffs in the Tijerina case described in Note 15
filed an amendment to the complaint which limits the proposed class to all
people who have purchased and smoked within the State of Texas certain filtered
products manufactured by PM Inc.
In August 1995, the trial court in the Lawrence case described in Note 15
granted plaintiffs' motion for class certification and, in December 1995, the
court denied defendants' motion to amend the court's class certification
14
<PAGE>
order to permit the Company to take an interlocutory appeal from that order
to the United States Court of Appeals for the Second Circuit. On February 8,
1996, the Company filed a Petition for Writ of Mandamus with the United States
Court of Appeals for the Second Circuit requesting the Court of Appeals to
direct the trial court to withdraw its order granting class certification.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-------------
Executive Officers of the Company
The following are the executive officers of the Company as of March 1,
1996:
<TABLE>
<CAPTION>
Name Office Age
---- ------ ----
<S> <C> <C>
Geoffrey C. Bible.......... Chairman of the Board and Chief Executive Officer 58
Murray H. Bring............ Executive Vice President, External Affairs and General Counsel 61
Bruce S. Brown............. Vice President, Taxes 56
Louis C. Camilleri......... President and Chief Executive Officer of Kraft Foods International 41
Katherine P. Clark......... Vice President and Controller 47
Dinyar S. Devitre.......... Senior Vice President, Corporate Planning 48
Lawrence A. Gates.......... Senior Vice President, Human Resources and Administration 58
Marc S. Goldberg........... Senior Vice President, Worldwide Operations and Technology 52
G. Penn Holsenbeck......... Vice President, Associate General Counsel and Secretary 49
James M. Kilts............. Executive Vice President, Worldwide Food 48
George R. Lewis............ Vice President and Treasurer 54
John N. MacDonough......... Chairman and Chief Executive Officer of Miller 52
James J. Morgan............ President and Chief Executive Officer of PM Inc. 53
Robert S. Morrison......... Chairman and Chief Executive Officer of Kraft 53
Steven C. Parrish.......... Senior Vice President, Corporate Affairs 45
Hans G. Storr.............. Executive Vice President and Chief Financial Officer; Chairman 64
and Chief Executive Officer of PMCC
William H. Webb............ President and Chief Executive Officer of Philip Morris International 56
</TABLE>
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
15
<PAGE>
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 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 August 1993.
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 paragraph captioned "Quarterly Financial Data (Unaudited)"
on page 46 of the Company's 1995 Annual Report and made a part hereof.
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 1995 Annual Report 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 1995 Annual Report 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 1995 Annual Report as set forth under the caption
"Quarterly Financial Data (Unaudited)" on page 46 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 for use in connection with its annual meeting of
stockholders to be held on April 25, 1996, and made a part hereof.
16
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Index to Consolidated Financial Statements and Schedules
<TABLE>
<CAPTION>
Reference
----------------------------
Form 10-K 1995 Annual
Annual Report Report
Page Page
------------ ------------
<S> <C> <C>
Data incorporated by reference to the Company's 1995
Annual Report:
Consolidated Balance Sheets at December 31, 1995 and
1994 ................................................ -- 28-29
Consolidated Statements of Earnings for the years ended
December 31, 1995, 1994 and 1993 .................... -- 30
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1994 and 1993 ........ -- 32
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993 .............. -- 30-31
Notes to Consolidated Financial Statements ............. -- 33-46
Report of Independent Accountants....................... -- 47
Data submitted herewith:
Report of Independent Accountants....................... S-1 --
Financial Statement Schedule--Valuation and
Qualifying Accounts ................................. S-2 --
</TABLE>
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 February 1, 1996.
(c) The following exhibits are filed as part of this Report (Exhibit Nos.
10.3-10.26 are management contracts, compensatory plans or arrangements):
<TABLE>
<CAPTION>
<S> <C>
1.1. Form of Underwriting Agreement, including form of terms agreement. (1)
1.2. Form of First Amendment to Selling Agency Agreement. (2)
3.1. Restated Articles of Incorporation of the Company.
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 dated 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 October 26, 1995 among the Company, the Banks named
therein and Citibank, N.A., as Agent.
10.3. Financial Counseling Program of PM Inc. and the Company. (8)
10.4. Philip Morris Benefit Equalization Plan, as amended. (8)
17
<PAGE>
10.5. Amendments, as of October 25, 1989, to the Philip Morris Benefit Equalization Plan, as amended. (9)
10.6. Automobile Policy of PM Inc. and the Company. (8)
10.9. 1982 Stock Option Plan, as amended. (8)
10.10. The Philip Morris 1987 Long Term Incentive Plan, as amended.(10)
10.12. Form of Executive Master Trust between the Company, Chemical Bank and Handy
Associates. (9)
10.13. Agreement, dated October 12, 1987, between the Company and Murray H. Bring, as
amended. (2)
10.14. Agreement, dated November 1, 1989, between the Company and Murray H. Bring. (9)
10.15. Agreement, dated March 8, 1989, between the Company and James M. Kilts. (9)
10.20. Form of Employment Agreement between the Company and its executive officers. (9)
10.22. Supplemental Management Employees' Retirement Plan of the Company, as amended. (10)
10.23. The Philip Morris 1992 Incentive Compensation and Stock Option Plan. (11)
10.24. 1992 Compensation Plan for Non-Employee Directors, as amended.
10.25. Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996.
10.26. Form of Employee Grantor Trust Enrollment Agreement.
12. Statements re computation of ratios. (1)
13. Pages 19-47 of the Company's 1995 Annual Report, 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 1995 Annual Report 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.
</TABLE>
- ----------
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
February 1, 1996.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 33-59109) dated May 4, 1995.
(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, 1994.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990.
(11) 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.
18
<PAGE>
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.
Date: March 27, 1996 By: /s/ GEOFFREY C. BIBLE
-------------------------------------
(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:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ GEOFFREY C. BIBLE Director, Chairman of the March 27, 1996
- --------------------------------------------- Board and Chief
(Geoffrey C. Bible) Executive Officer
/s/ HANS G. STORR Director, Executive Vice March 27, 1996
- --------------------------------------------- President and Chief
(Hans G. Storr) Financial Officer
/s/ KATHERINE P. CLARK Vice President and March 27, 1996
- --------------------------------------------- Controller
(Katherine P. Clark)
*ELIZABETH E. BAILEY, MURRAY H. BRING, HAROLD
BROWN, WILLIAM H. DONALDSON, JANE
EVANS, ROBERT E. R. HUNTLEY, RUPERT
MURDOCH, JOHN D. NICHOLS, RICHARD D.
PARSONS, ROGER S. PENSKE, JOHN S.
REED, STEPHEN M. WOLF, Directors
*By: /s/ HANS G. STORR March 27, 1996
----------------------------------------
(Hans G. Storr
Attorney-in-fact)
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on our audits of the consolidated financial statements of
Philip Morris Companies Inc. has been incorporated by reference in this Form
10-K from the 1995 annual report to stockholders of Philip Morris Companies
Inc. and appears on page 47 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 17 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.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
January 29, 1996
S-1
<PAGE>
PHILIP MORRIS COMPANIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1995, 1994 and 1993
(in millions)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ -------- ----------------------- ------- ---------
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- ---------- ------------ -------- ---------- ----------
(a) (b)
<S> <C> <C> <C> <C> <C>
1995:
CONSUMER PRODUCTS:
Allowance for discounts ............................... $ 15 $551 $ -- $554 $ 12
Allowance for doubtful accounts ....................... 168 35 (12) 28 163
Allowance for returned goods .......................... 4 40 -- 41 3
---- ---- ----- ---- ----
$187 $626 $(12) $623 $178
==== ==== ===== ==== ====
FINANCIAL SERVICES AND REAL ESTATE:
Provision for losses .................................. $104 $ -- $ -- $ 3 $101
==== ==== ===== === ====
1994:
CONSUMER PRODUCTS:
Allowance for discounts.................................. $ 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 discounts .................................. $ 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
==== ==== ===== ==== ====
</TABLE>
- -----------
Notes:
(a) Related to divestitures, acquisitions and currency translation.
(b) Represents charges for which allowances were created.
S-2
Exhibit 3.1
RESTATED
ARTICLES OF INCORPORATION
of
PHILIP MORRIS COMPANIES INC.
ARTICLE I
The name of the Corporation is "Philip Morris Companies Inc."
ARTICLE II
The purpose for which the Corporation is organized is to transact any
lawful business not required to be specifically stated in the Articles of
Incorporation.
ARTICLE III
The Corporation shall have authority to issue four billion (4,000,000,000)
shares of Common Stock, $1 par value, and ten million (10,000,000) shares of
Serial Preferred Stock, $1 par value.
A. Serial Preferred Stock
1. Issuance in Series. The Board of Directors is hereby empowered to cause
the Serial Preferred Stock of the Corporation to be issued in series with such
of the variations permitted by clauses (a) - (h), both inclusive, of this
Section 1 as shall have been fixed and determined by the Board of Directors
with respect to any series prior to the issue of any shares of such series.
The shares of the Serial Preferred Stock of different series may vary as
to:
(a) the number of shares constituting such series, and the
designation of such series, which shall be such as to distinguish the
shares thereof from the shares of all other series and classes;
(b) the rate of dividend, the time of payment and, if cumulative, the
dates from which dividends shall be cumulative, and the extent of
participation rights, if any;
(c) any right to vote with holders of shares of any other series or
class and any right to vote as a class, either generally or as a condition
to specified corporate action;
(d) the price at and the terms and conditions on which shares may be
redeemed;
(e) the amount payable upon shares in event of involuntary
liquidation;
(f) the amount payable upon shares in event of voluntary liquidation;
(g) any sinking fund provisions for the redemption or purchase of
shares; and
(h) the terms and conditions on which shares may be converted, if the
shares of any series are issued with the privilege of conversion.
The shares of all series of Serial Preferred Stock shall be identical
except as, within the limitations set forth above in this Section 1, shall have
been fixed and determined by the Board of Directors prior to the issuance
thereof.
<PAGE>
2. Dividends. The holders of the Serial Preferred Stock of each series
shall be entitled to receive, if and when declared payable by the Board of
Directors, dividends at the dividend rate for such series, and not exceeding
such rate except to the extent of any participation right. Such dividends shall
be payable on such dates as shall be fixed for such series. Dividends, if
cumulative and in arrears, shall not bear interest.
No dividends shall be declared or paid upon or set apart for the Common
Stock or for stock of any other class hereafter created ranking junior to the
Serial Preferred Stock in respect of dividends or assets (hereinafter called
Junior Stock), and no shares of Serial Preferred Stock, Common Stock or Junior
Stock shall be purchased, redeemed or otherwise reacquired for a consideration,
nor shall any funds be set aside for or paid to any sinking fund therefor,
unless and until (i) full dividends on the outstanding Serial Preferred Stock
at the dividend rate or rates therefor, together with the full additional
amount required by any participation right, shall have been paid or declared
and set apart for payment with respect to all past dividend periods, to the
extent that the holders of the Serial Preferred Stock are entitled to dividends
with respect to any past dividend period, and the current dividend period, and
(ii) all mandatory sinking fund payments that shall have become due in respect
of any series of the Serial Preferred Stock shall have been made. Unless full
dividends with respect to all past dividend periods on the outstanding Serial
Preferred Stock at the dividend rate or rates therefor, to the extent that
holders of the Serial Preferred Stock are entitled to dividends with respect to
any particular past dividend period, together with the full additional amount
required by any participation right, shall have been paid or declared and set
apart for payment and all mandatory sinking fund payments that shall have
become due in respect of any series of the Serial Preferred Stock shall have
been made, no distributions shall be made to the holders of the Serial
Preferred Stock of any series unless distributions are made to the holders of
the Serial Preferred Stock of all series then outstanding in proportion to the
aggregate amounts of the deficiencies in payments due to the respective series,
and all payments shall be applied, first, to dividends accrued and in arrears,
next, to any amount required by any participation right, and, finally, to
mandatory sinking fund payments. The terms "current dividend period" and "past
dividend period" mean, if two or more series of Serial Preferred Stock having
different dividend periods are at the time outstanding, the current dividend
period or any past dividend period, as the case may be, with respect to each
such series.
3. Preference on Liquidation. In the event of any liquidation, dissolution
or winding up of the Corporation, the holders of the Serial Preferred Stock of
each series shall be entitled to receive, for each share thereof, the fixed
liquidation price for such series, plus, in case such liquidation, dissolution
or winding up shall have been voluntary, the fixed liquidation premium for such
series, if any, together in all cases with a sum equal to all dividends accrued
or in arrears thereon and the full additional amount required by any
participation right, before any distribution of the assets shall be made to
holders of the Common Stock or Junior Stock; but the holders of the Serial
Preferred Stock shall be entitled to no further participation in such
distribution. If, upon any such liquidation, dissolution or winding up, the
assets distributable among the holders of the Serial Preferred Stock shall be
insufficient to permit the payment of the full preferential amounts aforesaid,
then such assets shall be distributed among the holders of the Serial Preferred
Stock then outstanding ratably in proportion to the full preferential amounts
to which they are respectively entitled. For the purposes of this Section 3,
the expression "dividends accrued or in arrears" means, in respect of each
share of the Serial Preferred Stock of any series at a particular time, an
amount equal to the product of the rate of dividend per annum applicable to the
shares of such series multiplied by the number of years and any fractional part
of a year that shall have elapsed from the date when dividends on such shares
became cumulative to the particular time in question less the total amount of
dividends actually paid on the shares of such series or declared and set apart
for payment thereon; provided, however, that, if the dividends on such shares
shall not be fully cumulative, such expression shall mean the dividends, if
any, cumulative in respect of such shares for the period stated in the articles
of serial designation creating such shares less all dividends paid in or with
respect to such period.
2
<PAGE>
B. Common Stock
1. Subject to the provisions of law and the rights of holders of shares at
the time outstanding of Serial Preferred Stock, the holders of Common Stock at
the time outstanding shall be entitled to receive such dividends at such times
and in such amounts as the Board of Directors may deem advisable.
2. In the event of any liquidation, dissolution or winding up (whether
voluntary or involuntary) of the Corporation, after the payment or provision
for payment in full for all debts and other liabilities of the Corporation and
all preferential amounts to which the holders of shares at the time outstanding
of Serial Preferred Stock shall be entitled, the remaining net assets of the
Corporation shall be distributed ratably among the holders of the shares at the
time outstanding of Common Stock.
3. The holders of Common Stock shall be entitled to one vote per share on
all matters as to which a stockholder vote is taken.
ARTICLE IV
No holder of capital stock of the Corporation of any class shall have any
preemptive right to subscribe to or purchase (i) any shares of capital stock of
the Corporation, (ii) any securities convertible into such shares or (iii) any
options, warrants or rights to purchase such shares or securities convertible
into any such shares.
ARTICLE V
The number of directors shall be fixed by the By-Laws or, in the absence
of a By-Law fixing the number, the number shall be three.
ARTICLE VI
1. In this Article:
(a) "eligible person" means a person who is or was a director,
officer or employee of the Corporation or a person who is or was serving
at the request of the Corporation as a director, trustee, partner, officer
or employee of another corporation, affiliated corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. A person
shall be considered to be serving an employee benefit plan at the
Corporation's request if his duties to the Corporation also impose duties
on, or otherwise involve services by, him to the plan or to participants
in or beneficiaries of the plan;
(b) "expenses" includes, without limitation counsel fees;
(c) "liability" means the obligation to pay a judgment, settlement,
penalty, fine (including any excise tax assessed with respect to an
employee benefit plan), or reasonable expenses incurred with respect to a
proceeding;
(d) "party" includes, without limitation, an individual who was, is,
or is threatened to be made a named defendant or respondent in a
proceeding; and
(e) "proceeding" means any threatened, pending, or completed action,
suit, or proceeding whether civil, criminal, administrative, or
investigative and whether formal or informal.
2. To the full extent that the Virginia Stock Corporation Act, as it
exists on the date hereof or as hereafter amended, permits the limitation or
elimination of the liability of directors, officers or other eligible persons,
no director or officer of the corporation or other eligible person made a party
to any
3
<PAGE>
proceeding shall be liable to the Corporation or its stockholders for monetary
damages arising out of any transaction, occurrence or course of conduct,
whether occurring prior or subsequent to the effective date of this Article.
3. To the full extent permitted by the Virginia Stock Corporation Act, as
it exists on the date hereof or as hereafter amended, the Corporation shall
indemnify any person who was or is a party to any proceeding, including a
proceeding brought by or in the right of the Corporation or brought by or on
behalf of stockholders of the Corporation, by reason of the fact that such
person is or was an eligible person against any liability incurred by him in
connection with such proceeding. To the same extent, the Corporation is
empowered to enter into a contract to indemnify any eligible person against
liability in respect of any proceeding arising from any act or omission,
whether occurring before or after the execution of such contract.
4. The termination of any proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not of
itself create a presumption that the eligible person did not meet any standard
of conduct that is or may be a prerequisite to the limitation or elimination of
liability provided in Section 2 or to his entitlement to indemnification under
Section 3 of this Article.
5. The Corporation shall indemnify under Section 3 of this Article any
eligible person who prevails in the defense of any proceeding. Any other
indemnification under Section 3 of this Article (unless ordered by a court)
shall be made by the Corporation only as authorized in the specific case upon a
determination that indemnification is proper in the circumstances because the
eligible person has met any standard of conduct that is a prerequisite to his
entitlement under Section 3 of this Article.
The determination shall be made:
(a) by the Board of Directors by a majority vote of a quorum
consisting of directors not at the time parties to the proceeding;
(b) if a quorum cannot be obtained under clause (a) of this Section
5, by majority vote of a committee duly designated by the Board of
Directors (in which designation directors who are parties may
participate), consisting solely of two or more directors not at the time
parties to the proceeding;
(c) by special legal counsel;
(i) selected by the Board of Directors or its committee in the manner
prescribed in clause (a) or (b) of this Section 5; or
(ii) if a quorum of the Board of Directors cannot be obtained under
clause (a) of this Section 5 and a committee cannot be designated under
clause (b) of this Section 5, selected by a majority vote of the full
Board of Directors, in which selection directors who are parties may
participate; or
(d) by the holders of Common Stock, but shares owned by or voted
under the control of directors who are at the time parties to the
proceeding may not be voted on the determination.
Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is appropriate, except that if the determination is made by
special legal counsel, such authorizations and evaluations shall be made by
those entitled under clause (c) of this Section 5 to select counsel.
Notwithstanding the foregoing, in the event there has been a change in the
composition of a majority of the Board of Directors after the date of the
alleged act or omission with respect to which indemnification, an
4
<PAGE>
advance or reimbursement is claimed, any determination as to such
indemnification, an advance or reimbursement is claimed, any determination as
to such indemnification, advance or reimbursement shall be made by special
legal counsel agreed upon by the Board of Directors and the eligible person. If
the Board of Directors and the eligible person are unable to agree upon such
special legal counsel, the Board of Directors and the eligible person each
shall select a nominee, and the nominees shall select such special legal
counsel.
6. The Corporation may pay for or reimburse the reasonable expenses
incurred by any eligible person (and for a person referred to in Section 7 of
this Article) who is a party to a proceeding in advance of final disposition of
the proceeding or the making of any determination under Section 3 if any such
person furnishes the Corporation:
(a) a written statement, executed personally, of his good faith
belief that he has met any standard of conduct that is a prerequisite to
his entitlement to indemnification pursuant to Section 3 or 7 of this
Article; and
(b) a written undertaking, executed personally or on his behalf, to
repay the advance if it is ultimately determined that he did not meet such
standard of conduct.
The undertaking required by clause (b) of this Section 6 shall be an
unlimited general obligation but need not be secured and may be accepted
without reference to financial ability to make repayment.
Authorizations of payments under this Section shall be made by the person
specified in Section 5.
7. The Corporation is empowered to indemnify or contract to indemnify any
person not specified in Section 3 of this Article who was, is or may become a
party to any proceeding, by reason of the fact that he is or was an agent of or
consultant to the Corporation, to the same or a lesser extent as if such person
were specified as one to whom indemnification is granted in Section 3. The
provisions of Sections 4, 5 and 6 of this Article, to the extent set forth
therein, shall be applicable to any indemnification provided hereafter pursuant
to this Section.
8. The provisions of this Article shall be applicable to all proceedings
commenced after it becomes effective, arising from any act or omission, whether
occurring before or after such effective date. No amendment or repeal of this
Article shall impair or otherwise diminish the rights provided under this
Article (including those created by contract) with respect to any act or
omission occurring prior to such amendment or repeal. The Corporation shall
promptly take all such actions and make all such determinations and
authorizations as shall be necessary or appropriate to comply with its
obligation to make any indemnity against liability, or to advance any expenses,
under this Article and shall promptly pay or reimburse all reasonable expenses
incurred by any eligible person or by a person referred to in Section 7 of this
Article in connection with such actions and determinations or proceedings of
any kind arising therefrom.
9. The Corporation may purchase and maintain insurance to indemnify it
against the whole or any portion of the liability assumed by it in accordance
with this Article and may also procure insurance, in such amounts as the Board
of Directors may determine, on behalf of any eligible person (and for a person
referred to in Section 7 of this Article) against any liability asserted
against or incurred by him whether or not the Corporation would have power to
indemnify him against such liability under the provisions of this Article.
10. Every reference herein to directors, officers, trustees, partners,
employees, agents or consultants shall include former directors, officers,
trustees, partners, employees, agents or consultants and their respective
heirs, executors and administrators. The indemnification hereby provided and
provided hereafter pursuant to the power hereby conferred by this Article shall
not be exclusive of any other rights to which any person may be entitled,
including any right under policies of insurance that may be purchased and
maintained by the Corporation or others, with respect to claims, issues or
matters in relation to which the Corporation would not have the power to
indemnify such person under the provisions of this Article.
5
<PAGE>
11. Nothing herein shall prevent or restrict the power of the Corporation
to make or provide for any further indemnity, or provisions for determining
entitlement to indemnity, pursuant to one or more indemnification agreements,
By-Laws, or other arrangements (including without limitation, creation of trust
funds or security interests funded by letters of credit or other means)
approved by the Board of Directors (whether or not any of the directors of the
Corporation shall be a party to or beneficiary of any such agreements, By-Laws
or arrangements); provided, however, that any provision of such agreements,
By-Laws or other arrangements shall not be effective if and to the extent that
it is determined to be contrary to this Article or applicable laws of the
Commonwealth of Virginia, but other provisions of any such agreements, By-Laws
or other arrangements shall not be affected by any such determination.
12. Each provision of this Article shall be severable, and an adverse
determination as to any such provision shall in no way affect the validity of
any other provision.
ARTICLE VII
Except as otherwise required by the Virginia Stock Corporation Act, by the
Articles of Incorporation, or by the Board of Directors acting pursuant to
subsection C of (SS)13.1-707 of the Virginia Stock Corporation Act or
any successor provision, the vote required to approve an amendment or
restatement of these Articles of Incorporation, other than an amendment or
restatement that amends or affects the shareholder vote required by the
Virginia Stock Corporation Act to approve a merger, share exchange, sale of all
or substantially all of the Corporation's property or the dissolution of the
Corporation, shall be a majority of all votes entitled to be cast by each
voting group entitled to vote on the amendment or restatement.
Dated: March 1, 1990
(nycs):\bernstei\annualme\articles.pm
6
EXHIBIT 4.11
EXECUTION COPY
U.S. $8,000,000,000
5-YEAR LOAN AND GUARANTY AGREEMENT
Dated as of October 26, 1995
among
PHILIP MORRIS COMPANIES INC.
and
THE BANKS NAMED HEREIN
and
CITIBANK, N.A.,
as Agent
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
1.01. Certain Defined Terms................................................. 1
1.02. Additional Definitions................................................ 13
1.03. Computation of Time Periods........................................... 13
1.04. Accounting Terms...................................................... 13
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
2.01. The A Advances........................................................ 13
2.02. Making the A Advances................................................. 14
2.03. The B Advances........................................................ 16
2.04. Fees.................................................................. 20
2.05. Reduction of the Commitments.......................................... 20
2.06. Repayment of A Advances............................................... 21
2.07. Interest on A Advances................................................ 21
2.08. Additional Interest on Eurodollar Rate Advances....................... 22
2.09. Interest Rate Determination........................................... 22
2.10. Prepayment of A Advances.............................................. 23
2.11. Increased Costs....................................................... 23
2.12. Payments and Computations............................................. 25
2.13. Taxes................................................................. 26
2.14. Sharing of Payments, Etc.............................................. 27
2.15. Evidence of Debt...................................................... 28
ARTICLE III
CONDITIONS OF LENDING
3.01. Condition Precedent to Initial Advances............................... 28
3.02. Conditions Precedent to Each A Borrowing.............................. 29
3.03. Condition Precedent to Certain A Borrowings........................... 30
3.04. Conditions Precedent to Each B Borrowing.............................. 30
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
(ii)
3.05. Conditions Precedent to Effectiveness of this Agreement............... 31
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.01. Representations and Warranties of PM Companies........................ 32
ARTICLE V
COVENANTS OF PM COMPANIES
5.01. Affirmative Covenants................................................. 33
5.02. Negative Covenants.................................................... 36
ARTICLE VI
EVENTS OF DEFAULT
6.01. Events of Default..................................................... 37
ARTICLE VII
THE AGENT
7.01. Authorization and Action.............................................. 40
7.02. Agent's Reliance, Etc................................................. 40
7.03. Citibank and Affiliates............................................... 41
7.04. Lender Credit Decision................................................ 41
7.05. Indemnification....................................................... 41
7.06. Successor Agent....................................................... 42
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(iii)
ARTICLE VIII
GUARANTY
8.01. Guaranty............................................................. 42
8.02. Guaranty Absolute.................................................... 42
8.03. Waivers.............................................................. 43
8.04. Payments Free and Clear of Taxes, Etc................................ 44
8.05. No Waiver; Remedies.................................................. 44
8.06. Continuing Guaranty.................................................. 45
ARTICLE IX
SUBSIDIARY BORROWER
9.01. Subsidiary Borrower.................................................. 45
ARTICLE X
MISCELLANEOUS
10.01. Amendments, Etc...................................................... 46
10.02. Notices, Etc......................................................... 47
10.03. No Waiver; Remedies.................................................. 47
10.04. Costs, Expenses and Taxes............................................ 48
10.05. Right of Setoff...................................................... 49
10.06. Binding Effect....................................................... 49
10.07. Assignments and Participations....................................... 49
10.08. Governing Law........................................................ 52
10.09. Execution in Counterparts............................................ 52
Schedule I List of Applicable Lending Offices
Exhibit A Form of B Note
Exhibit B-1 Notice of A Borrowing
Exhibit B-2 Notice of B Borrowing
Exhibit C Assignment and Acceptance
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(iv)
Exhibit D Form of Opinion of Counsel for Philip Morris Companies Inc.
Exhibit E Form of Opinion of Special Counsel for the Agent
Exhibit F Notice of Acceptance
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5-YEAR LOAN AND GUARANTY AGREEMENT
Dated as of October 26, 1995
PHILIP MORRIS COMPANIES INC., a Virginia corporation ("PM
Companies"), the banks (the "Banks") listed on the signature pages hereof, and
CITIBANK, N.A. ("Citibank"), as agent (the "Agent") for the Lenders hereunder,
agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"A Advance" means an advance by a Lender to a Borrower as part of an
A Borrowing by such Borrower consisting of A Advances of the same Type from
each of the Lenders pursuant to Section 2.01 and refers to a Base Rate Advance,
an Adjusted CD Rate Advance or a Eurodollar Rate Advance, each of which shall
be a Type of A Advance.
"A Borrowing" means a borrowing consisting of simultaneous A Advances
of the same Type from each of the Lenders to a Borrower pursuant to Section
2.01.
"Adjusted CD Rate" means, for the Interest Period for each Adjusted
CD Rate Advance comprising part of the same A Borrowing, an interest rate per
annum equal to the sum of:
(a) the rate per annum obtained by dividing (i) the rate of interest
determined by the Agent to be the average (rounded upward to the nearest
whole multiple of 1/100 of 1% per annum, if such average is not such a
multiple) of the consensus bid rate determined by each of the Reference
Banks for the bid rates per annum, at 9:00 A.M. (New York City time) (or
as soon thereafter as practicable) on the first day of such Interest
Period, of New York certificate of deposit dealers of recognized standing
selected by such Reference Bank for the purchase at face value of
certificates of deposit of such Reference Bank in an amount approximately
equal to
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such Reference Bank's Adjusted CD Rate Advance comprising part of
such A Borrowing and with a maturity equal to such Interest Period, by
(ii) a percentage equal to 100% minus the Adjusted CD Rate Reserve
Percentage (as defined below) for such Interest Period, plus
(b) the Assessment Rate (as defined below) for such Interest Period.
"Adjusted CD Rate Advance" means an A Advance which bears interest as
provided in Section 2.07(b).
The "Adjusted CD Rate Reserve Percentage" for the Interest Period for
each Adjusted CD Rate Advance comprising part of the same A Borrowing means the
reserve percentage applicable on the first day of such Interest Period under
regulations issued from time to time by the Board of Governors of the Federal
Reserve System (or any successor) for determining the maximum reserve
requirement (including, but not limited to, any emergency, supplemental or
other marginal reserve requirement) for a member bank of the Federal Reserve
System in New York City with deposits exceeding one billion dollars with
respect to liabilities consisting of or including (among other liabilities)
U.S. dollar nonpersonal time deposits in the United States with a maturity
equal to such Interest Period. The "Assessment Rate" for the Interest Period
for such Adjusted CD Rate Advance comprising part of the same A Borrowing means
the annual assessment rate estimated by the Agent on the first day of such
Interest Period for determining the then current annual assessment payable by
Citibank to the Federal Deposit Insurance Corporation (or any successor) for
insuring U.S. dollar deposits of Citibank in the United States. The Adjusted CD
Rate for the Interest Period for each Adjusted CD Rate Advance comprising part
of the same A Borrowing shall be determined by the Agent on the basis of
applicable rates furnished to and received by the Agent from the Reference
Banks on the first day of such Interest Period, subject, however, to the
provisions of Section 2.09.
"Advance" means an A Advance or a B Advance.
"Applicable Facility Fee Rate" means for any period a percentage per
annum equal to the percentage set forth below determined by reference to the
higher of (i) the rating of PM Companies' long-term senior unsecured Debt from
Standard & Poor's Ratings Group and (ii) the rating of PM Companies' long-term
senior unsecured Debt from Moody's Investors Service, in each case in effect
from time to time during such period:
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Long-Term Applicable
Senior Unsecured Facility
Debt Rating Fee Rate
---------------- ----------
AA- and Aa3 (or higher) 0.0600%
A- and A3 or higher,
but lower than AA- and Aa3 0.0750%
BBB and Baa2 or higher,
but lower than A- and A3 0.1000%
Lower than BBB and Baa2 0.1750%;
provided that if no rating is available on any date of determination from
Moody's Investors Service and Standard & Poor's Ratings Group or any other
nationally recognized statistical rating organization designated by PM
Companies and approved in writing by the Majority Lenders, the Applicable
Facility Fee Rate shall be 0.175%.
"Applicable Interest Rate Margin" means for any Interest Period a
percentage per annum equal to the percentage set forth below determined by
reference to the higher of (i) the rating of PM Companies' long-term senior
unsecured Debt from Standard & Poor's Ratings Group and (ii) the rating of PM
Companies' long-term senior unsecured Debt from Moody's Investors Service, in
each case from time to time during such Interest Period:
Long-Term Applicable
Senior Unsecured Interest Rate
Debt Rating Margin
---------------- -------------
AA- and Aa3 (or higher) 0.0900%
A- and A3 or higher
but lower than AA- and Aa3 0.1750%
BBB and Baa2 or higher,
but lower than A- and A3 0.2750%
Lower than BBB and Baa2 0.3250%;
provided that if no rating is available on any date of determination from
Moody's Investors Service and Standard & Poor's Ratings Group or any other
nationally recognized statistical
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rating organization designated by PM Companies and approved in writing by the
Majority Lenders, the Applicable Interest Rate Margin shall be 0.325%.
"Applicable Lending Office" means, with respect to each Lender, such
Lender's Domestic Lending Office in the case of a Base Rate Advance, such
Lender's CD Lending Office in the case of an Adjusted CD Rate Advance, and such
Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance
and, in the case of a B Advance, the office of such Lender notified by such
Lender to the Agent with respect to such B Advance.
"Applicable Usage Fee Rate" means for any period a percentage per
annum equal to 0.1250%.
"Asset Disposition" means any sale, lease, transfer, spin-off or
other disposition ("Disposition") to any Person (including any shareholder of
PM Companies), voluntarily or involuntarily, of any of the Tobacco Assets
(whether now owned or hereafter acquired) of PM Companies and its directly and
indirectly owned subsidiaries, provided that "Asset Disposition" shall not mean
(i) any Disposition of Tobacco Assets to PM Companies or any subsidiary
directly or indirectly wholly-owned by PM Companies, (ii) any sale and
lease-back of Tobacco Assets which, together with all such sale and lease-back
transactions occurring from and after June 30, 1995, does not exceed an
aggregate amount equal to $500,000,000, provided that the lease term related to
such sale and lease-back transaction has a duration approximately equal to the
useful life of such Tobacco Assets, (iii) any Disposition of Tobacco Assets in
the ordinary course of business and (iv) any Disposition which, together with
all such other Dispositions (excluding all Dispositions described in clauses
(i), (ii) and (iii) of this definition) occurring from and after June 30, 1995,
does not exceed an aggregate amount equal to $1,100,000,000 net after-tax
proceeds calculated in accordance with the provisions of Section 2.05(b).
"Assignment and Acceptance" means an assignment and acceptance
entered into by a Lender and an Eligible Assignee, and accepted by the Agent,
in substantially the form of Exhibit C hereto.
"B Advance" means an advance by a Lender to a Borrower as part of a
B Borrowing by such Borrower resulting from the auction bidding procedure
described in Section 2.03(a).
"B Borrowing" means a borrowing consisting of simultaneous B Advances
to a Borrower from each of the Lenders whose offer to make one or more B
Advances as part of such borrowing has been accepted by such Borrower under the
auction bidding procedure described in Section 2.03(a).
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"B Note" means a promissory note of a Borrower payable to the order
of any Lender, in substantially the form of Exhibit A hereto, evidencing the
indebtedness of such Borrower to such Lender resulting from a B Advance to such
Borrower, together with, if such Borrower is a subsidiary of PM Companies, a
guaranty of the Guarantor endorsed thereon, substantially in the form of
Exhibit A hereto.
"B Reduction" has the meaning assigned to that term in Section 2.01.
"Base Rate" means, for any Interest Period or any other period, a
fluctuating interest rate per annum as shall be in effect from time to time
which rate per annum shall at all times be equal to the highest of:
(a) The rate of interest announced publicly by Citibank in New York,
New York, from time to time, as Citibank's base rate;
(b) 1/2 of one percent per annum above the latest three-week moving
average of secondary market morning offering rates in the United States
for three-month certificates of deposit of major United States money
market banks, such three-week moving average being determined weekly on
each Monday (or if such day is not a Business Day, on the next succeeding
Business Day) for the three-week period ending on the previous Friday by
Citibank on the basis of such rates reported by certificate of deposit
dealers to and published by the Federal Reserve Bank of New York or, if
such publication shall be suspended or terminated, on the basis of
quotations for such rates received by Citibank from three New York
certificate of deposit dealers of recognized standing selected by
Citibank, in either case adjusted to the nearest 1/4 of one percent or, if
there is no nearest 1/4 of one percent, to the next higher 1/4 of one
percent; or
(c) for any day 1/2 of one percent per annum above the Federal Funds
Rate.
"Base Rate Advance" means an A Advance which bears interest as
provided in Section 2.07(a).
"Borrower" means PM Companies or any subsidiary of PM Companies with
respect to which a Notice of Acceptance has been given, and whenever in this
Agreement the term "Borrower" is used in the singular, it shall refer to the
appropriate Borrower, or to all Borrowers, as the context may require.
"Borrowing" means an A Borrowing or a B Borrowing.
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"Business Day" means a day of the year on which banks are not
required or authorized to close in New York City and, if the applicable
Business Day relates to any Eurodollar Rate Advance, on which dealings are
carried on in the London interbank market.
"CD Lending Office" means, with respect to any Lender, the office of
such Lender specified as its "CD Lending Office" opposite its name on
Schedule I hereto or in the Assignment and Acceptance pursuant to which it
became a Lender (or, if no such office is specified, its Domestic Lending
Office) or such other office of such Lender as such Lender may from time to
time specify to PM Companies and the Agent.
"Commitment" has the meaning specified in Section 2.01.
"Consolidated Tangible Assets" means all assets properly appearing on
a consolidated balance sheet of PM Companies and its subsidiaries after
deducting goodwill, trademarks, patents, other like intangibles, and the
minority interests of other Persons in such subsidiaries, all as determined in
accordance with generally accepted accounting principles, except that if there
has been a material change in an accounting principle as compared to that
applied in the preparation of the financial statements of PM Companies and its
subsidiaries as at and for the six months ended June 30, 1995, then such new
accounting principle shall not be used in the determination of Consolidated
Tangible Assets. A material change in an accounting principle is one that in
the year of its adoption changes Consolidated Tangible Assets at such year-end
by more than 10%.
"Debt" means (i) indebtedness for borrowed money or for the deferred
purchase price of property or services, or obligations evidenced by bonds,
debentures, notes or similar instruments, (ii) obligations as lessee under
leases which shall have been or should be, in accordance with generally
accepted accounting principles, recorded as capital leases, and (iii)
obligations under direct or indirect guaranties in respect of, and obligations
(contingent or otherwise) to purchase or otherwise acquire, or otherwise to
assure a creditor against loss in respect of, indebtedness or obligations of
others of the kinds referred to in clause (i) or (ii) above.
"Domestic Lending Office" means, with respect to any Lender, the
office of such Lender specified as its "Domestic Lending Office" opposite its
name on Schedule I hereto or in the Assignment and Acceptance pursuant to which
it became a Lender or such other office of such Lender as such Lender may from
time to time specify to PM Companies and the Agent.
"Eligible Assignee" means (i) a commercial bank organized under the
laws of the United States, or any State thereof, and having total assets in
excess of $5,000,000,000; (ii) a commercial bank organized under the laws of
any other country which is a member of the OECD, or a political subdivision of
any such country, and having total assets in excess of
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$5,000,000,000, provided that such bank is acting through a branch or agency
located in the country in which it is organized or another country which is
also a member of the OECD or the Cayman Islands; (iii) the central bank of any
country which is a member of the OECD; (iv) a commercial finance company or
finance subsidiary of a corporation organized under the laws of the United
States, or any State thereof, and having total assets in excess of
$3,000,000,000; (v) an insurance company organized under the laws of the United
States, or any State thereof, and having total assets in excess of
$5,000,000,000; (vi) any Bank; and (vii) an affiliate of any Lender.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time and the regulations promulgated and the rulings
issued thereunder.
"ERISA Affiliate" means any Person who for purposes of Title IV of
ERISA is a member of any Borrower's or PM Companies' controlled group, or under
common control with such Borrower or PM Companies, within the meaning of
Section 414 of the Internal Revenue Code of 1986, as amended from time to time.
"ERISA Event" means (i) (A) the occurrence with respect to a Plan of
a reportable event, within the meaning of Section 4043 of ERISA, unless the
30-day notice requirement with respect thereto has been waived by the PBGC, or
(B) the requirements of subsection (1) of Section 4043(b) of ERISA (without
regard to subsection (2) of such section) are met with respect to a
contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of a Plan,
and an event described in paragraph (9), (10), (11), (12) or (13) of Section
4043(c) of ERISA is reasonably expected to occur with respect to such Plan
within the following 30 days; (ii) the provision by the administrator of any
Plan of a notice of intent to terminate such Plan, pursuant to Section
4041(a)(2) of ERISA (including any such notice with respect to a plan amendment
referred to in Section 4041(e) of ERISA); (iii) the cessation of operations at
a facility of any Borrower or PM Companies or any of their ERISA Affiliates in
the circumstances described in Section 4062(e) of ERISA; (iv) the withdrawal by
any Borrower or PM Companies or any of their ERISA Affiliates from a Multiple
Employer Plan during a plan year for which it was a substantial employer, as
defined in Section 4001(a)(2) of ERISA; (v) the conditions set forth in Section
302(f)(1)(A) and (B) of ERISA to the creation of a lien upon property or rights
to property of any Borrower or PM Companies or any of their ERISA Affiliates
for failure to make a required payment to a Plan are satisfied; (vi) the
adoption of an amendment to a Plan requiring the provision of security to such
Plan, pursuant to Section 307 of ERISA; or (vii) the occurrence of any event or
condition described in Section 4042 of ERISA that constitutes grounds for the
termination of, or the appointment of a trustee to administer, a Plan.
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"Eurocurrency Liabilities" has the meaning assigned to that term in
Regulation D of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
"Eurodollar Lending Office" means, with respect to any Lender, the
office of such Lender specified as its "Eurodollar Lending Office" opposite its
name on Schedule I hereto or in the Assignment and Acceptance pursuant to which
it became a Lender (or, if no such office is specified, its Domestic Lending
Office) or such other office of such Lender as such Lender may from time to
time specify to PM Companies and the Agent.
"Eurodollar Rate" means, for the Interest Period for each Eurodollar
Rate Advance comprising part of the same A Borrowing, an interest rate per
annum equal to the average (rounded upward to the nearest whole multiple of
1/16 of 1% per annum, if such average is not such a multiple) of the rate per
annum at which deposits in U.S. dollars are offered by the principal office of
each of the Reference Banks in London, England to prime banks in the London
interbank market at 11:00 A.M. (London time) two Business Days before the first
day of such Interest Period in an amount approximately equal to such Reference
Bank's Eurodollar Rate Advance comprising part of such A Borrowing and for a
period equal to such Interest Period. The Eurodollar Rate for the Interest
Period for each Eurodollar Rate Advance comprising part of the same A Borrowing
shall be determined by the Agent on the basis of applicable rates furnished to
and received by the Agent from the Reference Banks two Business Days before the
first day of such Interest Period, subject, however, to the provisions of
Section 2.09.
"Eurodollar Rate Advance" means an A Advance which bears interest as
provided in Section 2.07(c).
"Eurodollar Rate Reserve Percentage" of any Lender for the Interest
Period for any Eurodollar Rate Advance means the reserve percentage applicable
during such Interest Period (or if more than one such percentage shall be so
applicable, the daily average of such percentages for those days in such
Interest Period during which any such percentage shall be so applicable) under
regulations issued from time to time by the Board of Governors of the Federal
Reserve System (or any successor) for determining the reserve requirement
(including, without limitation, any emergency, supplemental or other marginal
reserve requirement) for such Lender with respect to liabilities or assets
consisting of or including Eurocurrency Liabilities having a term equal to such
Interest Period.
"Events of Default" has the meaning specified in Section 6.01.
"Federal Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as
amended from time to time.
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"Federal Funds Rate" means, for any period, a fluctuating interest
rate per annum equal for each day during such period to the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day
(or, if such day is not a Business Day, for the next preceding Business Day) by
the Federal Reserve Bank of New York, or, if such rate is not so published for
any day which is a Business Day, the average of the quotations for such day on
such transactions received by the Agent from three Federal funds brokers of
recognized standing selected by it.
"Fixed Charges" means, for any accounting period, the sum of (i)
interest, whether expensed or capitalized, in respect of any Debt outstanding
during such period, plus (ii) amortization of debt expense and discount or
premium relating to any Debt outstanding during such period, whether expensed
or capitalized, plus (iii) such portion of rental expense as can be
demonstrated to be representative of the interest factor in the particular
case, all as to be applicable to continuing operations and determined in
accordance with generally accepted accounting principles, except that if there
has been a material change in an accounting principle as compared to that
applied in the preparation of the financial statements of PM Companies as at
and for the six months ended June 30, 1995, then such new accounting principle
shall not be used in the determination of Fixed Charges. A material change in
an accounting principle is one that, in the year of its adoption, changes Net
Income Before Tax or Fixed Charges for any quarter in such year by more than
10%.
"Guarantor" means PM Companies.
"Guaranty" has the meaning specified in Section 8.01.
"Insufficiency" means, with respect to any Plan, the amount of
"unfunded benefit liabilities" (as defined in Section 4001(a)(18) of ERISA), if
any, for such Plan.
"Interest Period" means, for each A Advance comprising part of the
same A Borrowing, the period commencing on the date of such A Advance and
ending on the last day of the period selected by PM Companies pursuant to the
provisions below. The duration of each such Interest Period shall be (a) in the
case of an Adjusted CD Rate Advance, 30, 60, 90 or 180 days, (b) in the case of
a Base Rate Advance, 1, 2, 3 or 6 months and (c) in the case of a Eurodollar
Rate Advance, 1, 2, 3 or 6 months, in each case as PM Companies may, upon
notice received by the Agent not later than 12:00 Noon (New York City time) on
the third Business Day with respect to a Eurodollar Rate Advance, on the second
Business Day with respect to an Adjusted CD Rate Advance and on the Business
Day with respect to a Base Rate Advance, prior to the first day of such
Interest Period, select; provided, however, that:
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(i) the duration of any Interest Period which commences before the
Termination Date and would otherwise end after the Termination Date shall
end on the Termination Date;
(ii) Interest Periods commencing on the same date for A Advances
comprising part of the same A Borrowing shall be of the same duration; and
(iii) whenever the last day of any Interest Period would otherwise
occur on a day other than a Business Day, the last day of such Interest
Period shall be extended to occur on the next succeeding Business Day,
provided, in the case of any Interest Period for a Eurodollar Rate
Advance, that if such extension would cause the last day of such Interest
Period to occur in the next following calendar month, the last day of such
Interest Period shall occur on the next preceding Business Day.
"Lenders" means the Banks listed on the signature pages hereof and
each Eligible Assignee that shall become a party hereto pursuant to Section
10.07.
"Major Plan" means, at any time, a Plan with an Insufficiency of
$25,000,000 or more.
"Major Subsidiary" means any subsidiary (a) more than 50% of the
voting securities of which is owned directly or indirectly by PM Companies, (b)
which is organized and existing under, or has its principal place of business
in, the United States or any political subdivision thereof, Canada or any
political subdivision thereof, any country which is a member of the European
Economic Community on the date hereof (other than Greece, Portugal or Spain) or
any political subdivision thereof, Sweden, Switzerland, Norway or Australia or
any of their respective political subdivisions, and (c) which has at any time
total assets (after intercompany eliminations) exceeding $500,000,000.
Notwithstanding the foregoing, Mission Viejo Company (a California corporation)
and any of its subsidiaries engaged in the business of community development,
commercial real estate development, real estate investment or related
activities shall not be a Major Subsidiary.
"Majority Lenders" means at any time Lenders holding at least 66-2/3%
of the aggregate unpaid principal amount of the A Advances then outstanding,
or, if no such principal amount is then outstanding, Lenders having at least
66-2/3% of the Commitments (provided that, for purposes hereof, neither PM
Companies or any Borrower, nor any of their respective affiliates, if a Lender,
shall be included in (i) the Lenders holding such amount of the A Advances or
having such amount of the Commitments or (ii) determining the aggregate unpaid
principal amount of the A Advances or the total Commitments).
"Multiemployer Plan" means a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA to which any Borrower or PM Companies or any ERISA
Affiliate is
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making or accruing an obligation to make contributions, or has within any of
the preceding five plan years made or accrued an obligation to make
contributions, such plan being maintained pursuant to one or more collective
bargaining agreements.
"Multiple Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, that (i) is maintained for employees of any
Borrower or PM Companies or any ERISA Affiliate and at least one Person other
than any Borrower or PM Companies and its ERISA Affiliates or (ii) was so
maintained and in respect of which any Borrower or PM Companies or any ERISA
Affiliate could have liability under Section 4064 or 4069 of ERISA in the event
such plan has been or were to be terminated.
"Net Income Before Tax" means, for any accounting period, income or
loss from continuing operations for such period, as determined in accordance
with generally accepted accounting principles, plus total federal, state and
foreign income taxes which have been included in the determination of income or
loss from continuing operations for such period in accordance with generally
accepted accounting principles and amounts which, in the determination of
income or loss from continuing operations for such period, have been deducted
for the items referred to in the definition of Fixed Charges in this Section,
except that if there has been a material change in an accounting principle as
compared to that applied in the preparation of the financial statements of PM
Companies as at and for the six months ended June 30, 1995, then such new
accounting principle shall not be used in the determination of Net Income
Before Tax. A material change in an accounting principle is one that, in the
year of its adoption, changes Net Income Before Tax or Fixed Charges for any
quarter in such year by more than 10%.
"1993 Loan Agreement" has the meaning specified in Section 3.05(a).
"Notice of A Borrowing" has the meaning specified in Section 2.02(a).
"Notice of Acceptance" has the meaning specified in Section 9.01(a).
"Notice of B Borrowing" has the meaning assigned to that term in
Section 2.03(a).
"Notice of Borrowing" means either a Notice of A Borrowing or a
Notice of B Borrowing.
"Obligations" has the meaning specified in Section 8.01.
"OECD" means the Organization for Economic Cooperation and
Development.
"Other Taxes" has the meaning specified in Section 2.13(b).
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"PBGC" means the Pension Benefit Guaranty Corporation or any
successor corporation thereto.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association, joint
venture or other entity, or a government or any political subdivision or agency
thereof.
"Philip Morris" means Philip Morris Incorporated, a Virginia
corporation wholly owned by PM Companies.
"Plan" means a Single Employer Plan or a Multiple Employer Plan.
"Reference Banks" means Citibank, Mellon Bank N.A., Barclays Bank PLC
and Dresdner Bank AG.
"Register" has the meaning specified in Section 10.07(c).
"Significant Plan" means a Plan whose assets have a current value in
excess of $100,000,000.
"Single Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, that (i) is maintained for employees of any
Borrower, PM Companies or an ERISA Affiliate and no Person other than such
Borrower or PM Companies or any of their ERISA Affiliates or (ii) was so
maintained and in respect of which any Borrower or PM Companies or an ERISA
Affiliate could have liability under Section 4069 of ERISA in the event such
plan has been or were to be terminated.
"Termination Date" means October 26, 2000, or the earlier date of
termination in whole of the Commitments pursuant to Section 2.05 or Section
6.01.
"Tobacco Assets" means all assets consisting of tobacco and tobacco
related assets, including, without limitation, all tobacco inventory, aging
warehouses, cigarette manufacturing facilities, distribution warehouses,
trademarks, tradenames and know-how and which relate to the domestic and United
States export business of PM Companies and its subsidiaries.
"Type" means, with reference to an A Advance, an Adjusted CD Rate
Advance, a Base Rate Advance or a Eurodollar Rate Advance.
"Withdrawal Liability" shall have the meaning given such term under
Part I of Subtitle E of Title IV of ERISA.
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SECTION 1.02. Additional Definitions. For purposes of this Agreement,
"subsidiary" means, with respect to any Person, any corporation of which more
than 50% of the outstanding capital stock having voting power to elect a
majority of the Board of Directors of such corporation (irrespective of whether
or not at the time capital stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency) is at the time directly or indirectly owned by such Person, by
such Person and one or more other subsidiaries, or by one or more other
subsidiaries.
SECTION 1.03. Computation of Time Periods. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding".
SECTION 1.04. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with generally accepted
accounting principles, except that if there has been a material change in an
accounting principle affecting the definition of an accounting term as compared
to that applied in the preparation of the financial statements of PM Companies
as at and for the six months ended June 30, 1995, then such new accounting
principle shall not be used in the determination of the amount associated with
that accounting term. A material change in an accounting principle is one that,
in the year of its adoption, changes the amount associated with the relevant
accounting term for such year by more than 10%.
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
SECTION 2.01. The A Advances. Each Lender severally agrees, on the
terms and conditions hereinafter set forth, to make A Advances to any Borrower
from time to time on any Business Day during the period from the date hereof
until the Termination Date in an aggregate amount for all of the Borrowers not
to exceed at any time outstanding the amount set opposite such Lender's name on
the signature pages hereof or, if such Lender has entered into one or more
Assignments and Acceptances, set forth for such Lender in the Register
maintained by the Agent pursuant to Section 10.07(c), as such amount may be
reduced pursuant to Section 2.05 (such Lender's "Commitment"), provided that
the aggregate amount of the Commitments of the Lenders shall be deemed to be
used from time to time to the extent of the aggregate amount of the B Advances
then outstanding and such deemed use of the aggregate amount of the Commitments
shall be applied to the Lenders ratably according to their respective
Commitments (each such deemed use of the aggregate amount of the Commitments
being a "B Reduction"). Each A Borrowing shall be in an aggregate amount not
less than $50,000,000 and shall consist of A Advances of the same Type made to
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the same Borrower on the same day by the Lenders ratably according to their
respective Commitments and one or more A Borrowings may be made on the same
day. Within the limits of each Lender's Commitment, the Borrowers may borrow,
repay pursuant to Section 2.06, prepay pursuant to Section 2.10(b), and
reborrow under this Section 2.01.
SECTION 2.02. Making the A Advances. (a) Each A Borrowing shall be
made on notice, given not later than 12:00 Noon (New York City time) on the
third Business Day prior to the date of the proposed A Borrowing in the case of
Eurodollar Rate Advances, on the second Business Day prior to the date of the
proposed A Borrowing in the case of Adjusted CD Rate Advances, and on the
Business Day prior to the date of the proposed A Borrowing in the case of Base
Rate Advances, by PM Companies to the Agent, which shall give to each Lender
prompt notice thereof by telex or cable. Each such notice of an A Borrowing (a
"Notice of A Borrowing") shall be by telex or cable, confirmed immediately in
writing, in substantially the form of Exhibit B-1 hereto, specifying therein
the requested (i) date of such A Borrowing, (ii) Type of A Advances comprising
such A Borrowing, (iii) aggregate amount of such A Borrowing, (iv) Interest
Period for each such A Advance, and (v) name of the Borrower. In the case of a
proposed A Borrowing comprised of Adjusted CD Rate Advances or Eurodollar Rate
Advances, the Agent shall promptly notify each Lender of the applicable
interest rate under Section 2.07(b) or (c). Each Lender shall, before 11:00
A.M. (New York City time) on the date of such A Borrowing, make available for
the account of its Applicable Lending Office to the Agent at its address
referred to in Section 10.02, in same day funds, such Lender's ratable portion
of such A Borrowing. After the Agent's receipt of such funds and upon
fulfillment of the applicable conditions set forth in Article III, the Agent
will make such funds available to the applicable Borrower at the Agent's
aforesaid address.
(b) Anything in subsection (a) above to the contrary notwithstanding,
(i) if any Lender shall, at least one Business Day before the date of
any requested A Borrowing, notify the Agent that the introduction of or
any change in or in the interpretation of any law or regulation makes it
unlawful, or that any central bank or other governmental authority asserts
that it is unlawful, for such Lender or its Eurodollar Lending Office to
perform its obligations hereunder to make Eurodollar Rate Advances or to
fund or maintain Eurodollar Rate Advances hereunder, the right of PM
Companies to select Eurodollar Rate Advances for such A Borrowing or any
subsequent A Borrowing shall be suspended until such Lender shall notify
the Agent that the circumstances causing such suspension no longer exist,
and each A Advance comprising such requested A Borrowing shall be a Base
Rate Advance. Each Lender agrees that it shall notify the Agent and PM
Companies of any such introduction, change, interpretation or assertion
referred to above promptly after such Lender becomes aware of the
occurrence thereof;
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(ii) if less than two Reference Banks furnish timely information to
the Agent for determining the Adjusted CD Rate for Adjusted CD Rate
Advances, or the Eurodollar Rate for Eurodollar Rate Advances, comprising
any requested A Borrowing, the right of any Borrower to select Adjusted CD
Rate Advances or Eurodollar Rate Advances, as the case may be, for such A
Borrowing or any subsequent A Borrowing shall be suspended until the Agent
shall notify PM Companies and the Lenders that the circumstances causing
such suspension no longer exist, and each A Advance comprising such A
Borrowing shall be a Base Rate Advance; and
(iii) if the Majority Lenders shall, at least one Business Day before
the date of any requested A Borrowing, notify the Agent that the
Eurodollar Rate for Eurodollar Rate Advances comprising such A Borrowing
will not adequately reflect the cost to such Majority Lenders of making or
funding their respective Eurodollar Rate Advances for such A Borrowing,
the right of PM Companies to select Eurodollar Rate Advances for such A
Borrowing or any subsequent A Borrowing shall be suspended until the
Agent, after its receipt of notice from such Majority Lenders that the
circumstances causing such suspension no longer exist, shall notify PM
Companies and the Lenders to such effect, and each A Advance comprising
such A Borrowing shall be a Base Rate Advance.
(c) Each Notice of A Borrowing shall be irrevocable and binding on PM
Companies and, if the Borrower named therein is not PM Companies, such
Borrower. In the case of any A Borrowing which the related Notice of A
Borrowing specifies is to be comprised of Adjusted CD Rate Advances or
Eurodollar Rate Advances, PM Companies and, if the Borrower named therein is
not PM Companies, such Borrower severally agree to indemnify each Lender
against any loss, cost or expense incurred by such Lender as a result of any
failure to fulfill on or before the date specified in such Notice of A
Borrowing for such A Borrowing the applicable conditions set forth in Article
III, including, without limitation, any loss (including loss of anticipated
profits), cost or expense incurred by reason of the liquidation or reemployment
of deposits or other funds acquired by such Lender to fund the Advance to be
made by such Lender as part of such A Borrowing when such A Advance, as a
result of such failure, is not made on such date.
(d) Unless the Agent shall have received notice from a Lender prior
to the date of any A Borrowing that such Lender will not make available to the
Agent such Lender's ratable portion of such A Borrowing, the Agent may assume
that such Lender has made such portion available to the Agent on the date of
such A Borrowing in accordance with subsection (a) of this Section 2.02 and the
Agent may, in reliance upon such assumption, make available to the Borrower
thereof on such date a corresponding amount. If and to the extent that such
Lender shall not have so made such ratable portion available to the Agent, such
Lender and such Borrower severally agree to repay to the Agent forthwith
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on demand such corresponding amount together with interest thereon, for each
day from the date such amount is made available to such Borrower until the date
such amount is repaid to the Agent, at (i) in the case of such Borrower, the
interest rate applicable at the time to the A Advances comprising such A
Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such
Lender shall repay to the Agent such corresponding amount, such amount so
repaid shall constitute such Lender's A Advance as part of such A Borrowing for
purposes of this Agreement.
(e) The failure of any Lender to make the A Advance to be made by it
as part of any A Borrowing shall not relieve any other Lender of its
obligation, if any, hereunder to make its A Advance on the date of such A
Borrowing, but no Lender shall be responsible for the failure of any other
Lender to make the A Advance to be made by such other Lender on the date of any
A Borrowing.
SECTION 2.03. The B Advances. (a) Each Lender severally agrees that
any Borrower may make B Borrowings under this Section 2.03 from time to time on
any Business Day during the period from the date hereof until the date
occurring 7 days prior to the Termination Date in the manner set forth below;
provided that, following the making of each B Borrowing the aggregate amount of
the Advances then outstanding shall not exceed the aggregate amount of the
Commitments of the Lenders (computed without regard to any B Reduction).
(i) PM Companies may request a B Borrowing under this Section 2.03 by
delivering to the Agent, by telex or cable, confirmed immediately in
writing, a notice of a B Borrowing (a "Notice of B Borrowing"), in
substantially the form of Exhibit B-2 hereto, specifying the name of the
Borrower, the date and aggregate amount of the proposed B Borrowing, the
maturity date for repayment of each B Advance to be made as part of such B
Borrowing (which maturity date, in the case of a Notice of B Borrowing
delivered pursuant to clause (A) of this paragraph (i), may not be earlier
than the date occurring 7 days after the date of such B Borrowing or later
than the date occurring 180 days after the date of such B Borrowing and,
in the case of a Notice of B Borrowing delivered pursuant to clause (B) of
this paragraph (i), may not be earlier than the date occurring 14 days
after the date of such B Borrowing or later than the date occurring 180
days after the date of such B Borrowing, and in no event may the maturity
date for any B Borrowing be later than the Termination Date), the interest
payment date or dates relating thereto, the interest rate basis on which
the Lenders may make offers to make B Advances to such Borrower (which
basis may be a fixed or floating rate) and any other terms to be
applicable to such B Borrowing, not later than 10:00 A.M. (New York City
time) (A) at least two Business Days prior to the date of the proposed
B Borrowing, if PM Companies shall specify in the Notice of B Borrowing
that the rates of interest to be offered by the Lenders shall be fixed
rates per annum and (B) at least four Business Days prior to the date of
the proposed
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B Borrowing, if PM Companies shall instead specify in the Notice of B Borrowing
the basis to be used by the Lenders in determining the rates of interest to be
offered by them. The Agent shall in turn promptly notify each Lender of each
request for a B Borrowing received by it by sending such Lender a copy of the
related Notice of B Borrowing.
(ii) Each Lender may, if, in its sole discretion, it elects to do so,
irrevocably offer to make one or more B Advances to the Borrower named in
any such Notice of B Borrowing as part of the proposed B Borrowing at a
rate or rates of interest specified by such Lender in its sole discretion,
by notifying the Agent (which shall give prompt notice thereof to the
Borrower), before 10:00 A.M. (New York City time) (A) on the Business Day
prior to the date of such proposed B Borrowing, in the case of a Notice of
B Borrowing delivered pursuant to clause (A) of paragraph (i) above, and
(B) three Business Days before the date of such proposed B Borrowing, in
the case of a Notice of B Borrowing delivered pursuant to clause (B) of
paragraph (i) above, of the minimum amount and maximum amount of each B
Advance which such Lender would be willing to make as part of such
proposed B Borrowing (which amounts may, subject to the proviso to the
first sentence of this Section 2.03(a), exceed such Lender's Commitment),
the rate or rates of interest therefor and such Lender's Applicable
Lending Office with respect to such B Advance; provided that if the Agent
in its capacity as a Lender shall, in its sole discretion, elect to make
any such offer, it shall notify the Borrower of such offer before 9:00
A.M. (New York City time) on the Business Day prior to the date of such
proposed B Borrowing, in the case referred to in clause (A) of this
paragraph (ii), and three Business Days before the date of such proposed B
Borrowing, in the case referred to in clause (B) of this paragraph (ii).
If any Lender shall elect not to make such an offer, such Lender shall so
notify the Agent before 10:00 A.M. (New York City time) on the Business
Day prior to the date of such proposed B Borrowing, in the case of a
Notice of B Borrowing delivered pursuant to clause (A) of paragraph (i)
above, and three Business Days before the date of such proposed B
Borrowing, in the case of a Notice of B Borrowing delivered pursuant to
clause (B) of paragraph (i) above, and such Lender shall not be obligated
to, and shall not, make any B Advance as part of such B Borrowing;
provided that the failure of any Lender to give such notice shall not
cause such Lender to be obligated to make any B Advance as part of such
proposed B Borrowing.
(iii) The Borrower named in any such Notice of B Borrowing shall, in
turn, (A) before 12:00 Noon (New York City time) on the Business Day prior
to the date of such proposed B Borrowing, in the case of a Notice of B
Borrowing delivered pursuant to clause (A) of paragraph (i) above and (B)
before 12:00 Noon (New York City time) three Business Days before the date
of such proposed B Borrowing, in the
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case of a Notice of B Borrowing delivered pursuant to clause (B) of
paragraph (i) above, either
(A) cancel such B Borrowing by giving the Agent notice to that
effect, or
(B) accept one or more of the offers made by any Lender or
Lenders pursuant to paragraph (ii) above by giving notice to the
Agent of the amount of each B Advance (which amount shall be equal to
or greater than the minimum amount, and equal to or less than the
maximum amount, notified to such Borrower by the Agent on behalf of
such Lender for such B Advance pursuant to paragraph (ii) above) to
be made by each Lender as part of such B Borrowing, and reject any
remaining offers made by Lenders pursuant to paragraph (ii) above by
giving the Agent notice to that effect.
The acceptance of offers by such Borrower pursuant to this clause (B)
shall be on the basis of ascending rates of interest contained in the
offers made by Lenders pursuant to paragraph (ii) above; provided that, in
the event that two or more of such offers contain the same rate of
interest for a greater aggregate principal amount than the amount
specified in such Notice of B Borrowing less the aggregate principal
amount of all such offers containing lower rates of interest that have
been accepted by such Borrower pursuant to this clause (B), such Borrower
shall have sole discretion (subject to any minimum and maximum amount
specified in any such offer) to accept one or more of the offers at such
rate of interest and to reject any remaining offers at such rate of
interest.
(iv) If the Borrower named in any such Notice of B Borrowing notifies
the Agent that such B Borrowing is cancelled pursuant to paragraph
(iii)(A) above, the Agent shall give prompt notice thereof to the Lenders
and such B Borrowing shall not be made.
(v) If the Borrower named in any such Notice of B Borrowing accepts
one or more of the offers made by any Lender or Lenders pursuant to
paragraph (iii)(B) above, the Agent shall in turn promptly notify (A) each
Lender which has made an offer as described in paragraph (ii) above, of
the date and aggregate amount of such B Borrowing and whether or not any
offer or offers made by such Lender pursuant to paragraph (ii) above have
been accepted by such Borrower, (B) each Lender that is to make a B
Advance as part of such B Borrowing, of the amount of each B Advance to be
made by such Lender as part of such B Borrowing, and (C) each Lender that
is to make a B Advance as part of such B Borrowing, upon receipt, that the
Agent has received forms of documents appearing to fulfill the applicable
conditions set forth in Article III. Each Lender that is to make a
B Advance as part of such B Borrowing
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shall, before 12:00 Noon (New York City time) on the date of such B
Borrowing specified in the notice received from the Agent pursuant to
clause (A) of the preceding sentence or any later time when such Lender
shall have received notice from the Agent pursuant to clause (C) of the
preceding sentence, make available for the account of its Applicable
Lending Office to the Agent at its address set forth in Section 10.02 such
Lender's portion of such B Borrowing, in same day funds. Upon fulfillment
of the applicable conditions set forth in Article III and after receipt by
the Agent of such funds, the Agent will make such funds available to such
Borrower as soon as practicable on such date at the Agent's aforesaid
address. Promptly after each B Borrowing the Agent will notify each Lender
of the amount of the B Borrowing, the consequent B Reduction and the dates
upon which such B Reduction commenced and will terminate.
(b) Each B Borrowing shall be in an aggregate amount not less than
$100,000,000 or an integral multiple of $1,000,000 in excess thereof and,
following the making of each B Borrowing, the Borrower thereof shall be in
compliance with the limitation set forth in the proviso to the first sentence
of subsection (a) above.
(c) Within the limits and on the conditions set forth in this Section
2.03, each Borrower may from time to time borrow under this Section 2.03, repay
or prepay pursuant to subsection (d) below, and reborrow under this Section
2.03, provided that a B Borrowing shall not be made within three Business Days
of the date of any other B Borrowing.
(d) Each Borrower shall repay to the Agent for the account of each
Lender which has made a B Advance to such Borrower, or each other holder of a B
Note, on the maturity date of each B Advance made to it (such maturity date
being that specified for repayment of such B Advance in the related Notice of B
Borrowing delivered pursuant to subsection (a)(i) above or as provided in the B
Note evidencing such B Advance) the then unpaid principal amount of such B
Advance. No Borrower shall have the right to prepay any principal amount of any
B Advance unless, and then only on the terms, specified by PM Companies for
such B Advance in the related Notice of B Borrowing delivered pursuant to
subsection (a)(i) above and provided in the B Note evidencing such B Advance.
(e) Each Borrower shall pay interest on the unpaid principal amount
of each B Advance made to it from the date of such B Advance to the date the
principal amount of such B Advance is repaid in full, at the rate of interest
for such B Advance specified by the Lender making such B Advance in its notice
with respect thereto delivered pursuant to subsection (a)(ii) above, payable on
the interest payment date or dates specified by PM Companies for such B Advance
in the related Notice of B Borrowing delivered pursuant to subsection (a)(i)
above, as provided in the B Note evidencing such B Advance.
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(f) The indebtedness of each Borrower resulting from each B Advance
made to such Borrower as part of a B Borrowing shall be evidenced by a separate
B Note of such Borrower payable to the order of the Lender making such B
Advance.
(g) Any notice given to any party under this Section 2.03 shall be in
writing, or may be by telephone or telex, in each case confirmed immediately in
writing.
SECTION 2.04. Fees. (a) PM Companies agrees to pay to each Lender a
facility fee on the principal amount of such Lender's Commitment (whether or
not unused and without giving effect to any B Reduction) from the date hereof
in the case of each Bank (unless otherwise agreed to by PM Companies with such
Bank) and from the effective date specified in the Assignment and Acceptance
pursuant to which it became a Lender in the case of each other Lender until the
Termination Date at the Applicable Facility Fee Rate, in each case payable on
the last day of each March, June, September and December until the Termination
Date and on the Termination Date.
(b) For any period in which the aggregate principal amount of
Advances exceeds an amount equal to 50% of the total Commitments, PM Companies
agrees to pay to each Lender a usage fee on the excess of (i) the average daily
aggregate amount of Advances made by such Lender outstanding during such period
over (ii) 50% of such Lender's Commitment at the Applicable Usage Fee Rate, in
each case payable in arrears on the last day of each March, June, September and
December occurring during such period and on the Termination Date, if
applicable.
(c) PM Companies agrees to pay to the Agent the agency fee,
arrangement fee and competitive bid fee in the amounts and at the times set
forth in the engagement letter dated September 25, 1995 from the Agent to PM
Companies, as amended from time to time.
SECTION 2.05. Reduction of the Commitments. (a) PM Companies shall
have the right, upon five Business Days' notice to the Agent, to terminate in
whole or reduce ratably in part the unused portions of the respective
Commitments of the Lenders, provided that the aggregate amount of the
Commitments of the Lenders shall not be reduced to an amount which is less than
the aggregate principal amount of the B Advances then outstanding and provided
further that each partial reduction shall be in the aggregate amount of at
least $50,000,000.
(b) In the event that there shall be an Asset Disposition, the
respective Commitments of the Lenders shall be reduced ratably by an aggregate
amount equal to 100% of the net after-tax proceeds of such Asset Disposition.
For the purpose of this subsection (b) any net after-tax non-cash proceeds or
spin-off shall be valued at (i) the greater of (x) the book value and (y) the
fair market value (as determined in good faith by the Board of Directors of PM
Companies) of the assets subject to such Asset Disposition, less (ii) the cash
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proceeds, if any, received as a result of such Asset Disposition. In the event
that the purchase price of assets subject to an Asset Disposition is subject to
adjustment, as a result of which PM Companies reasonably believes that the
proceeds ultimately to be received therefrom will be reduced, then until such
time as such adjustment is finalized, for purposes of this subsection (b) the
"net after-tax proceeds" shall include only the amount of those proceeds
actually received by PM Companies or any affiliate of PM Companies, less an
adjustment reserve in an amount reasonably determined by PM Companies to be
equivalent to such adjustment therein. As soon as such adjustment is finalized,
any further reduction in the Commitments shall be made as above provided in
this subsection (b). Any reduction pursuant to this subsection (b) shall be
effective on a date selected by PM Companies but in any event no later than the
last day of the calendar quarter during which the Asset Disposition occurs;
provided that any reduction which would be in amount less than $50,000,000
shall not be made but shall be included in the calculation of the subsequent
reduction or reductions provided for in this subsection (b) until the aggregate
amount of any such subsequent reduction shall be at least equal to $50,000,000,
and such reduction shall then be made as above provided in this subsection (b).
SECTION 2.06. Repayment of A Advances. Each Borrower shall repay the
principal amount of each A Advance made to it by each Lender on the last day of
the Interest Period for such A Advance.
SECTION 2.07. Interest on A Advances. Each Borrower shall pay
interest on the unpaid principal amount of each A Advance made to it by each
Lender from the date of such A Advance until such principal amount shall be
paid in full, at the following rates per annum:
(a) Base Rate Advances. If such A Advance is a Base Rate Advance, a
rate per annum equal at all times to the Base Rate in effect from time to
time, payable monthly on the 20th day of each month, and on the date such
Base Rate Advance shall be paid in full; provided that any amount of
principal which is not paid when due (whether at stated maturity, by
acceleration or otherwise) shall bear interest, from the date on which
such amount is due until such amount is paid in full, payable on demand,
at a rate per annum equal at all times to 1% per annum plus the Base Rate
in effect from time to time.
(b) Adjusted CD Rate Advances. If such A Advance is an Adjusted CD
Rate Advance, a rate per annum equal at all times during the Interest
Period for such A Advance to the sum of the Adjusted CD Rate for such
Interest Period plus the Applicable Interest Rate Margin, payable on the
last day of such Interest Period and, if such Interest Period has a
duration of 180 days, on the 90th day of such Interest Period; provided
that any amount of principal which is not paid when due (whether at stated
maturity, by acceleration or otherwise) shall bear interest, from the date
on
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which such amount is due until such amount is paid in full, payable on
demand, at a rate per annum equal at all times to 1% per annum plus the
Base Rate in effect from time to time.
(c) Eurodollar Rate Advances. If such A Advance is a Eurodollar Rate
Advance, a rate per annum equal at all times during the Interest Period
for such A Advance to the sum of the Eurodollar Rate for such Interest
Period plus the Applicable Interest Rate Margin, payable on the last day
of such Interest Period and, if such Interest Period has a duration of six
months, on the last day of the third month of such Interest Period;
provided that any amount of principal which is not paid when due (whether
at stated maturity, by acceleration or otherwise) shall bear interest,
from the date on which such amount is due until such amount is paid in
full, payable on demand, at a rate per annum equal at all times to 1% per
annum plus the Base Rate in effect from time to time.
SECTION 2.08. Additional Interest on Eurodollar Rate Advances. Each
Borrower shall pay to each Lender, so long as such Lender shall be required
under regulations of the Board of Governors of the Federal Reserve System to
maintain reserves with respect to liabilities or assets consisting of or
including Eurocurrency Liabilities, additional interest on the unpaid principal
amount of each Eurodollar Rate Advance of such Lender to such Borrower, from
the date of such Advance until such principal amount is paid in full, at an
interest rate per annum equal at all times to the remainder obtained by
subtracting (i) the Eurodollar Rate for the Interest Period for such Advance
from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage
equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for
such Interest Period, payable on each date on which interest is payable on such
Advance. Such additional interest shall be determined by such Lender and
notified to PM Companies through the Agent.
SECTION 2.09. Interest Rate Determination. (a) Each Reference Bank
agrees to furnish to the Agent timely information for the purpose of
determining each Adjusted CD Rate or Eurodollar Rate, as applicable. If any one
or more of the Reference Banks shall not furnish such timely information to the
Agent for the purpose of determining any such interest rate, the Agent shall
determine such interest rate on the basis of timely information furnished by
the remaining Reference Banks.
(b) The Agent shall give prompt notice to PM Companies and the
Lenders of the applicable interest rate determined by the Agent for purposes of
Section 2.07(a), (b) or (c), and the applicable rate, if any, furnished by each
Reference Bank for the purpose of determining the applicable interest rate
under Section 2.07(b) or (c).
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SECTION 2.10. Prepayment of A Advances. (a) No Borrower shall have
the right to prepay any principal amount of any A Advances other than as
provided in subsection (b) below.
(b) Any Borrower may, upon at least four Business Days' notice to the
Agent stating the proposed date and aggregate principal amount of the
prepayment, and if such notice is given such Borrower shall, prepay the
outstanding principal amounts of A Advances comprising part of the same A
Borrowing in whole or ratably in part, together with accrued interest to the
date of such prepayment on the principal amount prepaid; provided, however,
that (i) each partial prepayment shall be in an aggregate principal amount not
less than $50,000,000 and (ii) in the event of any such prepayment of an
Adjusted CD Rate Advance or a Eurodollar Rate Advance, such Borrower shall be
obligated to reimburse the Lenders in respect thereof pursuant to Section
10.04(b) hereof.
(c) If any Lender shall notify the Agent of any introduction, change,
interpretation or assertion referred to in Section 2.02(b)(i), or shall claim
payment of increased costs pursuant to Section 2.11(a) or (c) or payment of any
additional amounts payable pursuant to Section 2.13, PM Companies may, upon at
least five Business Days' notice to the Agent stating that the Borrowers intend
to repay the A Advances made by such Lender and terminate such Lender's
Commitment, and if such notice is given the Borrowers shall forthwith, on the
date specified in such notice, prepay in full all A Advances made by such
Lender with accrued interest thereon to the date of such prepayment and all
other amounts payable to such Lender by PM Companies and the other Borrowers
hereunder (including, without limitation, any amounts payable pursuant to
Section 10.04(b)), and upon such notice from PM Companies the Commitment of
such Lender to make further A Advances, and the obligation of PM Companies to
pay facility fees to such Lender, shall terminate.
(d) In the event that there shall be a reduction of the Commitments
pursuant to Section 2.05(b), the Borrowers shall on the date of such reduction
(or as soon thereafter as the Borrowers can do so without incurring liability
to any Lender pursuant to Section 10.04(b)) repay or prepay ratably A Advances
made as part of the same A Borrowings (together with interest accrued thereon
to such date) to the extent necessary so that the aggregate principal amount of
outstanding A Advances made by each Lender shall not exceed such Lender's
Commitment, as reduced on such date.
SECTION 2.11. Increased Costs. (a) If, due to either (i) the
introduction of or any change (other than any change by way of imposition or
increase of reserve requirements, in the case of Adjusted CD Rate Advances,
included in the Adjusted CD Rate Reserve Percentage or, in the case of
Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage)
in or in the interpretation of any law or regulation or (ii) the compliance
with any guideline or request from any central bank or other governmental
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authority (whether or not having the force of law), there shall be any increase
in the cost to any Lender of agreeing to make or making, funding or maintaining
Adjusted CD Rate Advances or Eurodollar Rate Advances, then the Borrower of the
affected Advances shall from time to time, upon demand by such Lender (with a
copy of such demand to the Agent), pay to the Agent for the account of such
Lender additional amounts sufficient to compensate such Lender for such
increased cost, provided that before making any such demand, such Lender shall
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such increased cost and will not, in the
reasonable judgment of such Lender, be otherwise disadvantageous to such
Lender. A certificate as to the amount of such increased cost, submitted to PM
Companies, such Borrower and the Agent by such Lender, shall be conclusive and
binding for all purposes, absent manifest error.
(b) If, in the case of any Adjusted CD Rate Advance, the Assessment
Rate for the Interest Period for such Adjusted CD Rate Advance shall be less
than the annual assessment for such Interest Period actually paid by such
Lender to the Federal Deposit Insurance Corporation (or any successor) for
insuring U.S. dollar deposits of such Lender in the United States, then the
Borrower of the affected Advance shall, upon demand of such Lender (with a copy
of such demand to the Agent), pay to the Agent for the account of such Lender
additional amounts sufficient to compensate such Lender for such increased
assessment. A certificate as to the amounts of such increased assessment,
submitted to PM Companies, such Borrower and the Agent by such Lender, shall be
conclusive and binding for all purposes, absent manifest error.
(c) In the event that after the date hereof the implementation of or
any change in any law or regulation, or any guideline or directive (whether or
not having the force of law) or the interpretation or administration thereof by
any central bank or other authority charged with the administration thereof,
imposes, modifies or deems applicable any capital adequacy or similar
requirement (including, without limitation, a request or requirement which
affects the manner in which any Lender allocates capital resources to its
commitments, including its obligations hereunder) and as a result thereof, in
the sole opinion of such Lender, the rate of return on such Lender's capital as
a consequence of its obligations hereunder is reduced to a level below that
which such Lender could have achieved but for such circumstances, but reduced
to the extent that Borrowings are outstanding from time to time, then in each
such case upon demand from time to time PM Companies shall pay to such Lender
such additional amount or amounts as shall compensate such Lender for such
reduction in rate of return, provided that, in the case of each Lender, such
additional amount or amounts shall not exceed 0.15 of 1% per annum on such
Lender's Commitment. A certificate of such Lender as to any such additional
amount or amounts shall be conclusive and binding for all purposes, absent
manifest error. Except as provided below, in determining any such amount or
amounts each Lender may use any reasonable averaging and attribution methods.
Notwithstanding the foregoing, each Lender shall take all
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reasonable actions to avoid the imposition of, or reduce the amounts of, such
increased costs, provided that such actions, in the reasonable judgment of such
Lender, will not be otherwise disadvantageous to such Lender, and, to the
extent possible, each Lender will calculate such increased costs based upon the
capital requirements for its commitment hereunder and not upon the average or
general capital requirements imposed upon such Lender.
SECTION 2.12. Payments and Computations. (a) PM Companies and each
Borrower shall make each payment hereunder not later than 11:00 A.M. (New York
City time) on the day when due in U.S. dollars to the Agent at its address
referred to in Section 10.02 in same day funds. The Agent will promptly
thereafter cause to be distributed like funds relating to the payment of
principal or interest or fees ratably (other than amounts payable pursuant to
Section 2.02(c), 2.03, 2.08, 2.10(b)(ii) or (c), 2.11, 2.13 or 10.04(b)) to the
Lenders for the account of their respective Applicable Lending Offices, and
like funds relating to the payment of any other amount payable to any Lender to
such Lender for the account of its Applicable Lending Office, in each case to
be applied in accordance with the terms of this Agreement. Upon its acceptance
of an Assignment and Acceptance and recording of the information contained
therein in the Register pursuant to Section 10.07(d), from and after the
effective date specified in such Assignment and Acceptance, the Agent shall
make all payments hereunder and under the B Notes in respect of the interest
assigned thereby to the Lender assignee thereunder, and the parties to such
Assignment and Acceptance shall make all appropriate adjustments in such
payments for periods prior to such effective date directly between themselves.
(b) Each Borrower hereby authorizes each Lender, if and to the extent
payment owed to such Lender is not made to the Agent for the account of such
Lender when due hereunder, to charge from time to time against any or all of
such Borrower's accounts with such Lender any amount so due.
(c) All computations of interest based on the Base Rate shall be made
by the Agent on the basis of a year of 365 or 366 days, as the case may be, and
all computations of interest based on the Adjusted CD Rate, the Eurodollar Rate
or the Federal Funds Rate and of fees shall be made by the Agent, and all
computations of interest pursuant to Section 2.08 shall be made by a Lender, on
the basis of a year of 360 days, in each case for the actual number of days
(including the first day but excluding the last day) occurring in the period
for which such interest or fees are payable. Each determination by the Agent
(or, in the case of Section 2.08, by a Lender) of an interest rate hereunder
shall be conclusive and binding for all purposes, absent manifest error.
(d) Whenever any payment hereunder shall be stated to be due on a day
other than a Business Day, such payment shall be made on the next succeeding
Business Day, and such extension of time shall in such case be included in the
computation of payment of interest or fees, as the case may be; provided,
however, if such extension would
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cause payment of interest on or principal of Eurodollar Rate Advances to be
made in the next following calendar month, such payment shall be made on the
next preceding Business Day.
(e) Unless the Agent shall have received notice from any Borrower
prior to the date on which any payment is due from such Borrower to the Lenders
hereunder that such Borrower will not make such payment in full, the Agent may
assume that such Borrower has made such payment in full to the Agent on such
date and the Agent may, in reliance upon such assumption, cause to be
distributed to each Lender on such date an amount equal to the amount then due
such Lender. If and to the extent that such Borrower shall not have so made
such payment in full to the Agent, each Lender shall repay to the Agent
forthwith on demand such amount distributed to such Lender together with
interest thereon, for each day from the date such amount is distributed to such
Lender until the date such Lender repays such amount to the Agent, at the
Federal Funds Rate.
SECTION 2.13. Taxes. (a) Any and all payments by each Borrower and PM
Companies hereunder shall be made, in accordance with Section 2.12, free and
clear of and without deductions for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, excluding, (i) in the case of each Lender and the Agent, taxes
imposed on its income, and franchise taxes imposed on it, by the jurisdiction
under the laws of which such Lender or the Agent (as the case may be) is
organized or any political subdivision thereof, (ii) in the case of each
Lender, taxes imposed on its income, and franchise taxes imposed on it, by the
jurisdiction of such Lender's Applicable Lending Office or any political
subdivision thereof, and (iii) in the case of each Lender and the Agent, taxes
imposed by the United States by means of withholding tax if and to the extent
that such taxes shall be in effect and shall be applicable on the date hereof,
to payments to be made to such Lender's Applicable Lending Office or to the
Agent (all such non-excluded taxes, levies, imposts, deductions, charges,
withholdings and liabilities being hereinafter referred to as "Taxes"). If any
Borrower or PM Companies shall be required by law to deduct any Taxes from or
in respect of any sum payable hereunder to any Lender or the Agent, (A) the sum
payable shall be increased as may be necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this Section 2.13) such Lender or the Agent (as the case may be) receives
an amount equal to the sum it would have received had no such deductions been
made, (B) such Borrower and PM Companies shall make such deductions and (C)
such Borrower and PM Companies shall pay the full amount deducted to the
relevant taxation authority or other authority in accordance with applicable
law.
(b) In addition, each Borrower and PM Companies agrees to pay any
present or future stamp or documentary taxes or any other excise or property
taxes, charges or similar levies which arise from any payment made hereunder or
from the execution, delivery or registration of, or otherwise with respect to,
this Agreement (hereinafter referred to as "Other Taxes").
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(c) Each Borrower and PM Companies will indemnify each Lender and the
Agent for the full amount of Taxes or Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this Section 2.13) paid by such Lender or the Agent (as the case
may be) and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes
were correctly or legally asserted. This indemnification shall be made within
30 days from the date such Lender or the Agent (as the case may be) makes
written demand therefor.
(d) Within 30 days after the date of any payment of Taxes, each
Borrower and PM Companies will furnish to the Agent, at its address referred to
in Section 10.02, the original or a certified copy of a receipt evidencing
payment thereof by such Borrower or PM Companies.
(e) Without prejudice to the survival of any other agreement of any
Borrower or PM Companies hereunder, the agreements and obligations of each
Borrower and PM Companies contained in this Section 2.13 shall survive the
payment in full of principal and interest hereunder.
(f) Prior to the date of the initial Borrowing hereunder, and from
time to time thereafter if requested by any Borrower, PM Companies or the
Agent, each Lender organized under the laws of a jurisdiction outside the
United States shall provide the Agent, PM Companies and such Borrower with the
forms prescribed by the Internal Revenue Service of the United States
certifying such Lender's exemption from United States withholding taxes with
respect to all payments to be made to such Lender hereunder. Unless the
Borrower, PM Companies and the Agent have received forms or other documents
satisfactory to them indicating that payments hereunder are not subject to
United States withholding tax or are subject to such tax at a rate reduced by
an applicable tax treaty, such Borrower, PM Companies or the Agent shall
withhold taxes from such payments at the applicable statutory rate in the case
of payments to or for any Lender organized under the laws of a jurisdiction
outside the United States.
(g) Any Lender claiming any additional amounts payable pursuant to
this Section 2.13 shall use its best efforts (consistent with its internal
policy and legal and regulatory restrictions) to change the jurisdiction of its
Applicable Lending Office so as to eliminate the amount of any such costs or
additional amounts which may thereafter accrue; provided that no such change
shall be made if, in the reasonable judgment of such Lender, such change would
be disadvantageous to such Lender.
SECTION 2.14. Sharing of Payments, Etc. If any Lender shall obtain
any payment (whether voluntary, involuntary, through the exercise of any right
of setoff, or otherwise) on account of the A Advances made by it (other than
pursuant to Section 2.02(c),
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2.08, 2.10(b)(ii) or (c), 2.11, 2.13 or 10.04(b)) in excess of its ratable
share of payments on account of the A Advances obtained by all the Lenders,
such Lender shall forthwith purchase from the other Lenders such participations
in the A Advances made by them as shall be necessary to cause such purchasing
Lender to share the excess payment ratably with each of them; provided,
however, that if all or any portion of such excess payment is thereafter
recovered from such purchasing Lender, such purchase from each Lender shall be
rescinded and such Lender shall repay to the purchasing Lender the purchase
price to the extent of such recovery together with an amount equal to such
Lender's ratable share (according to the proportion of (i) the amount of such
Lender's required repayment to (ii) the total amount so recovered from the
purchasing Lender) of any interest or other amount paid or payable by the
purchasing Lender in respect of the total amount so recovered. Each Borrower
agrees that any Lender so purchasing a participation from another Lender
pursuant to this Section 2.14 may, to the fullest extent permitted by law,
exercise all its rights of payment (including the right of setoff) with respect
to such participation as fully as if such Lender were the direct creditor of
such Borrower in the amount of such participation.
SECTION 2.15. Evidence of Debt. (a) Each Lender shall maintain in
accordance with its usual practice an account or accounts evidencing the
indebtedness of each Borrower to such Lender resulting from each A Advance made
to such Borrower owing to such Lender from time to time, including the amounts
of principal thereof and interest thereon payable and paid to such Lender from
time to time hereunder.
(b) The Register maintained by the Agent pursuant to Section 10.07(c)
shall include a control account, and a subsidiary account for each Lender, in
which accounts (taken together) shall be recorded (i) the date and amount of
each A Borrowing made hereunder, the Type of Advances comprising such Borrowing
and the Interest Period applicable thereto, (ii) the terms of each Assignment
and Acceptance delivered to and accepted by it, (iii) the amount of any
principal or interest due and payable or to become due and payable from each
Borrower to each Lender hereunder, and (iv) the amount of any sum received by
the Agent from such Borrower hereunder and each Lender's share thereof.
(c) The entries made in the Register shall be conclusive and binding
for all purposes, absent manifest error.
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. Condition Precedent to Initial Advances. The obligation
of each Lender to make an Advance on the occasion of the initial Borrowing by
each Borrower is subject to the condition precedent that the Agent shall have
received on or before the day
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of such initial Borrowing the following, each dated such day, in form and
substance satisfactory to the Agent and in sufficient copies for each Lender:
(a) Certified copies of the resolutions of each of the Board of
Directors of such Borrower and (unless PM Companies is the Borrower) the
Guarantor approving this Agreement, and of all documents evidencing other
necessary corporate action and governmental approvals, if any, on behalf
of such company or companies with respect to this Agreement.
(b) A certificate of the Secretary or an Assistant Secretary of each
of such Borrower and (unless PM Companies is the Borrower) the Guarantor
certifying the names and true signatures of the officers of such company
or companies authorized to sign this Agreement and the other documents to
be delivered on behalf of such company or companies hereunder.
(c) A favorable opinion of Hunton & Williams, counsel for PM
Companies, substantially in the form of Exhibit D hereto and as to such
other matters as any Lender through the Agent may reasonably request.
(d) A favorable opinion of Shearman & Sterling, special counsel for
the Agent, substantially in the form of Exhibit E hereto.
(e) A certificate of the chief financial officer of PM Companies
certifying that as of June 30, 1995 (i) the aggregate amount of Debt,
payment of which is secured by any lien, security interest or other charge
or encumbrance referred to in clause (iii) of Section 5.02(a) hereof, does
not exceed $400,000,000 and (ii) the aggregate amount of Debt included in
clause (i) of this subsection (e), payment of which is secured by any
lien, security interest or other charge or encumbrance referred to in
clause (iv) of Section 5.02(a), does not exceed $200,000,000.
SECTION 3.02. Conditions Precedent to Each A Borrowing. The
obligation of each Lender to make an A Advance on the occasion of each A
Borrowing (including the initial A Borrowing) shall be subject to the further
conditions precedent that on the date of such A Borrowing, before and after
giving effect thereto and to the application of the proceeds therefrom (a) the
following statements shall be true (and each of the giving of the applicable
Notice of A Borrowing and the acceptance by the Borrower named therein of the
proceeds of such A Borrowing shall constitute a representation and warranty by
such Borrower and (unless PM Companies is the Borrower) the Guarantor that on
the date of such A Borrowing, before and after giving effect thereto and to the
application of the proceeds therefrom, such statements are true):
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(i) The representations and warranties contained in Section 4.01
(excluding those contained in subsections (e) and (f) thereof) are correct
on and as of the date of such Borrowing as though made on and as of such
date;
(ii) No event has occurred and is continuing, or would result from
such A Borrowing, which constitutes an Event of Default; and
(iii) If such A Borrowing is in an aggregate principal amount equal
to or greater than $500,000,000 and is being made in connection with any
purchase of shares of such Borrower's or the Guarantor's capital stock or
the capital stock of any other Person, or any purchase of all or
substantially all of the assets of any Person (whether in one transaction
or a series of transactions) or any transaction of the type referred to in
Section 5.02(b), the statements in (i) and (ii) above shall also be true
on a pro forma basis as if such transaction or purchase shall have been
completed;
and (b) the Agent shall have received such other approvals, opinions or
documents as any Lender through the Agent may reasonably request.
SECTION 3.03. Condition Precedent to Certain A Borrowings. The
obligation of each Lender to make that portion of an A Advance on the occasion
of any A Borrowing (including the initial A Borrowing) which would increase the
aggregate outstanding amount of A Advances owing to such Lender over the
aggregate amount of such A Advances outstanding immediately prior to the making
of such A Advance shall be subject to the further condition precedent that on
the date of such A Borrowing, before and after giving effect thereto and to the
application of the proceeds therefrom, the following statement shall be true
(and each of the giving of the applicable Notice of A Borrowing and the
acceptance by the Borrower named therein of the proceeds of such A Borrowing
shall constitute a representation and warranty by such Borrower and (unless PM
Companies is the Borrower) the Guarantor that on the date of such A Borrowing,
before and after giving effect thereto and to the application of the proceeds
therefrom, such statement is true): no event has occurred and is continuing, or
would result from such A Borrowing, which would constitute an Event of Default
but for the requirement that notice be given or time elapse or both.
SECTION 3.04. Conditions Precedent to Each B Borrowing. The
obligation of each Lender which is to make a B Advance on the occasion of a B
Borrowing (including the initial B Borrowing) to make such B Advance as part of
such B Borrowing is subject to the conditions precedent that (i) at least two
Business Days before the date of such B Borrowing in the case of a B Borrowing
under subsection (a)(i)(A) of Section 2.03 and at least four Business Days
before the date of such B Borrowing in the case of a B Borrowing under
subsection (a)(i)(B) of Section 2.03, the Agent shall have received the written
confirmatory Notice of B Borrowing with respect thereto, (ii) on or before the
date of such B
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Borrowing, but prior to such B Borrowing, the Agent shall have received a B
Note of the Borrower thereof payable to the order of such Lender for each of
the one or more B Advances to be made by such Lender as part of such B
Borrowing, in a principal amount equal to the principal amount to be evidenced
thereby and otherwise on such terms as were agreed to for such B Advance by
such Borrower and such Lender in accordance with Section 2.03, and (iii) on the
date of such B Borrowing, before and after giving effect thereto and to the
application of the proceeds therefrom, the following statements shall be true
(and each of the giving of the applicable Notice of B Borrowing and the
acceptance by such Borrower of the proceeds of such B Borrowing shall
constitute a representation and warranty by such Borrower and (unless PM
Companies is the Borrower) the Guarantor that on the date of such B Borrowing,
before and after giving effect thereto and to the application of the proceeds
therefrom, such statements are true):
(a) The representations and warranties contained in Section 4.01 are
correct on and as of the date of such B Borrowing as though made on and as
of such date; and
(b) No event has occurred and is continuing, or would result from
such B Borrowing, which constitutes an Event of Default or which would
constitute an Event of Default but for the requirement that notice be
given or time elapse or both.
SECTION 3.05. Conditions Precedent to Effectiveness of this
Agreement. This Agreement shall not become effective until:
(a) The Agent shall have received on or before the date of
effectiveness a letter from PM Companies dated on or before such day,
terminating in whole the commitments of the banks parties to the Loan and
Guaranty Agreement dated as of December 17, 1993 (the "1993 Loan
Agreement") among PM Companies, the banks named therein and Citibank, as
agent, and each of the Banks that is a party to the 1993 Loan Agreement
hereby waives, upon execution of this Agreement, the five Business Days'
notice required by Section 2.05(a) of the 1993 Loan Agreement relating to
the termination of the commitments under the 1993 Loan Agreement; and
(b) PM Companies and its subsidiaries shall have satisfied all of
their respective obligations under the 1993 Loan Agreement including,
without limitation, the payment of all fees under such agreement.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of PM Companies. PM
Companies represents and warrants as follows:
(a) It is a corporation duly organized, validly existing and in good
standing under the laws of Virginia.
(b) The execution, delivery and performance of this Agreement and the
B Notes (including the guaranties hereunder and under the B Notes) are
within its corporate powers, have been duly authorized by all necessary
corporate action, and do not contravene (i) its charter or by-laws or (ii)
any law, rule, regulation or order of any court or governmental agency or
any contractual restriction binding on or affecting it.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required
for the due execution, delivery and performance by it of this Agreement or
the B Notes (including the guaranties hereunder and under the B Notes).
(d) This Agreement (including the guaranty hereunder) is, and each of
the B Notes (including the guaranties under the B Notes) when delivered
hereunder will be, a legal, valid and binding obligation of PM Companies
enforceable against PM Companies in accordance with its terms, subject to
the effect of any applicable bankruptcy, insolvency, reorganization,
moratorium or similar law affecting creditors' rights generally and to the
effect of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(e) The consolidated balance sheet of PM Companies and its
consolidated subsidiaries as at June 30, 1995 and the consolidated
statements of earnings of PM Companies and its consolidated subsidiaries
for the six months then ended fairly present, subject to year-end audit
adjustments, the consolidated financial condition of PM Companies and its
consolidated subsidiaries as at such date and the consolidated results of
the operations of PM Companies and its consolidated subsidiaries for the
period ended on such date, all in accordance with generally accepted
accounting principles consistently applied, and, except as disclosed in PM
Companies' quarterly report on Form 10-Q for the quarter ended June 30,
1995, since June 30, 1995, there has been no material adverse change in
such condition or operations.
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(f) Except as disclosed in PM Companies' quarterly report on Form
10-Q for the quarter ended June 30, 1995, and its annual report on Form
10-K for the year ended December 31, 1994, there is no pending or
threatened action or proceeding affecting it or any of its subsidiaries
before any court, governmental agency or arbitrator, which may materially
adversely affect the financial condition or operations of PM Companies and
its subsidiaries taken as a whole or which purports to affect the
legality, validity or enforceability of this Agreement (including the
guaranties hereunder and under the B Notes).
(g) It owns directly or indirectly 100% of the capital stock of each
other Borrower and 100% of the capital stock of Philip Morris.
(h) No ERISA Event has occurred nor is any ERISA Event reasonably
expected to occur with respect to any Major Plan.
(i) Schedule B (Actuarial Information) to the most recently completed
annual report (Form 5500 Series) with respect to each Plan which is a
Major Plan or a Significant Plan, copies of which have been filed with the
Internal Revenue Service and furnished to each Bank, is complete and
accurate and fairly presents the funding status of such Plan, and since
the date of such Schedule B there has been no material adverse change in
such funding status; provided that no change in the funding status of any
such Plan shall be deemed to be materially adverse from that disclosed on
such Schedule B unless there is an Insufficiency which, when aggregated
with the Insufficiency of each other Plan, exceeds $100,000,000.
(j) Neither any Borrower nor PM Companies nor any of their ERISA
Affiliates has incurred or reasonably expects to incur any Withdrawal
Liability under ERISA to any Multiemployer Plan requiring payments to such
Multiemployer Plan in an annual amount which, when aggregated together
with all other payments required to be made to Multiemployer Plans as a
result of Withdrawal Liabilities incurred or reasonably expected to be
incurred by the Borrowers, PM Companies and their ERISA Affiliates,
exceeds $25,000,000.
ARTICLE V
COVENANTS OF PM COMPANIES
SECTION 5.01. Affirmative Covenants. So long as any Advance shall
remain unpaid or any Lender shall have any Commitment hereunder, PM Companies
will, unless the Majority Lenders shall otherwise consent in writing:
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(a) Compliance with Laws, Etc. Comply, and cause each Major
Subsidiary to comply, in all material respects with all applicable laws,
rules, regulations and orders (such compliance to include, without
limitation, paying before the same become delinquent all taxes,
assessments and governmental charges imposed upon it or upon its property
except to the extent contested in good faith), noncompliance with which
would materially adversely affect its business or credit.
(b) Maintenance of Ratio of Net Income Before Tax to Fixed Charges.
Maintain a ratio of aggregate consolidated Net Income Before Tax for the
four most recent fiscal quarters for which consolidated statements of
earnings have been delivered pursuant to Section 5.01(c)(i) or (ii) hereof
to consolidated Fixed Charges for such four most recent fiscal quarters of
not less than 2.5 to 1.0.
(c) Reporting Requirements. Furnish to the Lenders:
(i) as soon as available and in any event within 60 days after
the end of each of the first three quarters of each fiscal year of PM
Companies, a consolidated balance sheet of PM Companies and its
consolidated subsidiaries as of the end of such quarter and
consolidated statements of earnings of PM Companies and its
consolidated subsidiaries for the period commencing at the end of the
previous fiscal year and ending with the end of such quarter,
certified by the chief financial officer of PM Companies;
(ii) as soon as available and in any event within 90 days after
the end of each fiscal year of PM Companies, a copy of the financial
statements for such year for PM Companies and its consolidated
subsidiaries, audited by Coopers & Lybrand L.L.P. (or other
independent accountants which, as of the date of this Agreement, are
one of the "big six" accounting firms);
(iii) as soon as possible and in any event within five days
after the occurrence of each Event of Default and each event which,
with the giving of notice or lapse of time, or both, would constitute
an Event of Default, continuing on the date of such statement, a
statement of the chief financial officer of PM Companies setting
forth details of such Event of Default or event and the action which
PM Companies has taken and proposes to take with respect thereto;
(iv) promptly after the sending or filing thereof, copies of all
reports which PM Companies sends to any of its shareholders, and
copies of all periodic reports on Forms 10-K, 10-Q and 8-K (or any
successor forms adopted by the Securities and Exchange Commission)
which PM Companies files with the Securities and Exchange Commission;
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(v) as soon as possible and in any event (A) within 30 days
after any Borrower or PM Companies or any of their ERISA Affiliates
knows or has reason to know that any ERISA Event described in clause
(i) of the definition of ERISA Event with respect to any Major Plan
or any Significant Plan (other than a Significant Plan that has no
Insufficiency) has occurred and (B) within 10 days after any Borrower
or PM Companies or any of their ERISA Affiliates knows or has reason
to know that any other ERISA Event with respect to any Major Plan or
any Significant Plan has occurred, a statement of the chief financial
officer of PM Companies describing such ERISA Event and the action,
if any, which such Borrower or PM Companies or such ERISA Affiliate
proposes to take with respect thereto;
(vi) promptly and in any event within two Business Days after
receipt thereof by any Borrower or PM Companies or any of their ERISA
Affiliates from the PBGC, copies of each notice received by such
Borrower or PM Companies or any such ERISA Affiliate of the PBGC's
intention to terminate any Plan or to have a trustee appointed to
administer any Plan;
(vii) promptly and in any event within 30 days after the filing
thereof with the Internal Revenue Service, copies of each Schedule B
(Actuarial Information) to the annual report (Form 5500 Series) with
respect to each Major Plan and each Significant Plan;
(viii) on the date any records, documents or other information
must be furnished to the PBGC with respect to any Plan pursuant to
Section 4010 of ERISA, a copy of such records, documents and
information (to the extent they have not previously been furnished to
the Lenders).
(ix) promptly and in any event within five Business Days after
receipt thereof by any Borrower or PM Companies or any of their ERISA
Affiliates from a Multiemployer Plan sponsor, a copy of each notice
received by such Borrower or PM Companies or any of their ERISA
Affiliates concerning the imposition of Withdrawal Liability where
the aggregate annual payments for such Withdrawal Liability exceeds
$10,000,000;
(x) promptly and in any event within 60 days after the date on
which a Plan which is not a Major Plan or a Significant Plan on the
date hereof becomes a Major Plan or Significant Plan, copies of each
Schedule B (Actuarial Information) to the most recent Annual Report
(Form 5500 Series) filed with the Internal Revenue Service with
respect to such Plan, together with a statement of the chief
financial officer of PM Companies describing any
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material adverse change in the funding status of such Plan since
the date of such Schedule B; and
(xi) such other information respecting the condition or
operations, financial or otherwise, of PM Companies or any Major
Subsidiary as any Lender through the Agent may from time to time
reasonably request.
SECTION 5.02. Negative Covenants. So long as any Advance shall remain
unpaid or any Lender shall have any Commitment hereunder, PM Companies will
not, without the written consent of the Majority Lenders:
(a) Liens, Etc. Create or suffer to exist, or permit any Major
Subsidiary to create or suffer to exist, any lien, security interest or
other charge or encumbrance, or any other type of preferential
arrangement, upon or with respect to any of its properties, whether now
owned or hereafter acquired, or assign, or permit any Major Subsidiary to
assign, any right to receive income, in each case to secure or provide for
the payment of any Debt of any Person, other than (i) purchase money liens
or purchase money security interests upon or in any property acquired or
held by it or any Major Subsidiary in the ordinary course of business to
secure the purchase price of such property or to secure indebtedness
incurred solely for the purpose of financing the acquisition of such
property, (ii) liens or security interests existing on such property at
the time of its acquisition (other than any such lien or security interest
created in contemplation of such acquisition), (iii) liens or security
interests existing on the date hereof securing Debt, (iv) liens or
security interests on property financed through the issuance of industrial
revenue bonds in favor of the holders of such bonds or any agent or
trustee therefor, (v) liens or security interests existing on property of
any Person acquired by it or any Major Subsidiary, (vi) liens or security
interests securing Debt in an aggregate amount not in excess of 5% of PM
Companies' Consolidated Tangible Assets, or (vii) liens or security
interests upon or with respect to "margin stock" as that term is defined
in Regulation U issued by the Board of Governors of the Federal Reserve
System.
(b) Mergers, Etc. Merge or consolidate with or into, or convey,
transfer, lease or otherwise dispose of (whether in one transaction or in
a series of transactions) all or substantially all of its assets (whether
now owned or hereafter acquired) to, or acquire all or substantially all
of the assets of, any Person, or permit any subsidiary directly or
indirectly owned by it to do so, unless, immediately after giving effect
thereto, no Event of Default or event which, with the giving of notice or
lapse of time, or both, would constitute an Event of Default would exist
and, in the case of any merger or consolidation to which it is a party, it
is the surviving corporation and, in the case of any merger or
consolidation to which a Borrower other than PM Companies is a party, the
corporation formed by such consolidation or into which
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such Borrower shall be merged shall be a corporation organized and
existing under the laws of the United States of America or any State
thereof, or the District of Columbia, and shall assume such Borrower's
obligations under this Agreement by the execution and delivery of an
instrument in form and substance satisfactory to the Majority Lenders and
a Notice of Acceptance.
(c) Compliance with ERISA. Permit to exist any occurrence of any
Reportable Event (as defined in Title IV of ERISA), or any other event or
condition, which presents a material risk of termination by the PBGC of
any Major Plan.
(d) Maintenance of Ownership of Philip Morris. Sell or otherwise
dispose of any shares of capital stock of Philip Morris.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default. If any of the following events
("Events of Default") shall occur and be continuing:
(a) Any Borrower or PM Companies shall fail to pay any principal of,
or interest on, any Advance, or PM Companies shall fail to pay any fees
payable under Section 2.04, when the same become due and payable; or
(b) Any representation or warranty made or deemed to have been made
by any Borrower or PM Companies herein or by any Borrower or PM Companies
(or any of their respective officers) in connection with this Agreement
shall prove to have been incorrect in any material respect when made or
deemed to have been made; or
(c) Any Borrower or PM Companies shall fail to perform or observe (i)
any term, covenant or agreement contained in Section 5.01(b) or 5.02, or
(ii) any other term, covenant or agreement contained in this Agreement on
its part to be performed or observed if such failure shall remain
unremedied for 10 days after written notice thereof shall have been given
to PM Companies by the Agent or any Lender; or
(d) Any Borrower or PM Companies or any Major Subsidiary shall fail
to pay any principal of or premium or interest on any Debt which is
outstanding in a principal amount of at least $50,000,000 in the aggregate
(but excluding Debt arising under this Agreement) of such Borrower or PM
Companies or such Major Subsidiary (as the case may be), when the same
becomes due and payable (whether by scheduled
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maturity, required prepayment, acceleration, demand or otherwise),
and such failure shall continue after the applicable grace period, if any,
specified in the agreement or instrument relating to such Debt unless
adequate provision for any such payment has been made in form and
substance satisfactory to the Majority Lenders; or any other event shall
occur or condition shall exist under any agreement or instrument relating
to any such Debt which is outstanding in a principal amount of at least
$100,000,000 in the aggregate and shall continue after the applicable
grace period, if any, specified in such agreement or instrument, if the
effect of such event or condition is to accelerate, or to permit the
acceleration of, the maturity of such Debt (other than any such Debt owed
to a Lender or an affiliate of a Lender if such event or condition shall
relate solely to a restriction on margin stock, as that term is defined in
Regulation U issued by the Board of Governors of the Federal Reserve
System) unless adequate provision for the payment of such Debt has been
made in form and substance satisfactory to the Majority Lenders; or any
Debt of any Borrower or PM Companies or any Major Subsidiary which is
outstanding in a principal amount of at least $50,000,000 in the aggregate
(but excluding Debt arising under this Agreement) shall be declared to be
due and payable, or required to be prepaid (other than by a scheduled
required prepayment), redeemed, purchased or defeased, or an offer to
prepay, redeem, purchase or defease such Debt shall be required to be
made, in each case prior to the stated maturity thereof unless adequate
provision for the payment of such Debt has been made in form and substance
satisfactory to the Majority Lenders; or
(e) Any Borrower or PM Companies or any Major Subsidiary shall
generally not pay its debts as such debts become due, or shall admit in
writing its inability to pay its debts generally, or shall make a general
assignment for the benefit of creditors; or any proceeding shall be
instituted by or against any Borrower or PM Companies or any Major
Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of debtors,
or seeking the entry of an order for relief or the appointment of a
receiver, trustee, or other similar official for it or for any substantial
part of its property, and, in the case of any such proceeding instituted
against it (but not instituted by it), either such proceeding shall remain
undismissed or unstayed for a period of 45 days or any of the actions
sought in such proceeding (including, without limitation, the entry of an
order for relief against it or the appointment of a receiver, trustee,
custodian or other similar official for it or for any substantial part of
its property) shall occur; or any Borrower or PM Companies or any Major
Subsidiary shall take any corporate action to authorize any of the actions
set forth above in this subsection (e); or
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(f) Any judgment or order for the payment of money in excess of
$50,000,000 shall be rendered against any Borrower or PM Companies or any
Major Subsidiary and either (i) enforcement proceedings shall have been
commenced by any creditor upon such judgment or order or (ii) there shall
be any period of 10 consecutive days during which a stay of enforcement of
such judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect; or
(g) Any ERISA Event with respect to Plan (a "Subject ERISA Event")
shall have occurred and the Insufficiency of any such Plan, when
aggregated with the Insufficiencies (determined as of the date of the
Subject ERISA Event) of all other Plans, if any, which were Plans on or
after the date hereof and with respect to which an ERISA Event has
occurred, exceeds $500,000,000; or
(h) Any Borrower or PM Companies or any of their ERISA Affiliates
shall have made a complete or partial withdrawal from a Multiemployer Plan
and the plan sponsor of such Multiemployer Plan shall have notified such
withdrawing employer that such employer has incurred a Withdrawal
Liability in an annual amount which, when aggregated together with all
other payments required to be made to Multiemployer Plans whose plan
sponsors have notified such Borrower, PM Companies or any of their ERISA
Affiliates that a Withdrawal Liability has been incurred by such Borrower,
PM Companies or any of their ERISA Affiliates under such Multiemployer
Plans, exceeds $25,000,000; or
(i) The guaranty provided by PM Companies under Article VIII hereof
or any guaranty endorsed by PM Companies on any B Note after delivery
thereof under Section 3.04 shall for any reason cease to be valid and
binding on PM Companies or PM Companies shall so state in writing;
then, and in any such event, the Agent (i) shall at the request, or may with
the consent, of the Majority Lenders, by notice to PM Companies and the
Borrowers, declare the obligation of each Lender to make Advances to be
terminated, whereupon the same shall forthwith terminate, and (ii) shall at the
request, or may with the consent, of the Majority Lenders, by notice to PM
Companies and the Borrowers, declare all the Advances then outstanding, all
interest thereon and all other amounts payable under this Agreement to be
forthwith due and payable, whereupon the Advances then outstanding, all such
interest and all such amounts shall become and be forthwith due and payable,
without presentment, demand, protest or further notice of any kind, all of
which are hereby expressly waived by the Borrowers; provided, however, that in
the event of an actual or deemed entry of an order for relief with respect to
any Borrower, PM Companies or any Major Subsidiary under the Federal Bankruptcy
Code, (A) the obligation of each Lender to make Advances shall automatically be
terminated and (B) the Advances then outstanding, all such interest and all
such amounts
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shall automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Borrowers.
ARTICLE VII
THE AGENT
SECTION 7.01. Authorization and Action. Each Lender hereby appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to the Agent by the
terms hereof, together with such powers as are reasonably incidental thereto.
As to any matters not expressly provided for by this Agreement (including,
without limitation, enforcement or collection of the Debt resulting from the
Advances), the Agent shall not be required to exercise any discretion or take
any action, but shall be required to act or to refrain from acting (and shall
be fully protected in so acting or refraining from acting) upon the
instructions of the Majority Lenders, and such instructions shall be binding
upon all Lenders; provided, however, that the Agent shall not be required to
take any action which exposes the Agent to personal liability or which is
contrary to this Agreement or applicable law. The Agent agrees to give to each
Lender prompt notice of each notice given to it by PM Companies or any Borrower
pursuant to the terms of this Agreement.
SECTION 7.02. Agent's Reliance, Etc. Neither the Agent nor any of its
directors, officers, agents or employees shall be liable for any action taken
or omitted to be taken by it or them under or in connection with this
Agreement, except for its or their own gross negligence or wilful misconduct.
Without limitation of the generality of the foregoing, the Agent: (i) may treat
the Lender that made any Advance as the holder of the Debt resulting therefrom
until the Agent receives and accepts an Assignment and Acceptance entered into
by such Lender, as assignor, and an Eligible Assignee, as assignee, as provided
in Section 10.07; (ii) may consult with legal counsel (including counsel for
the Borrowers and PM Companies), independent accountants and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (iii) makes no warranty or representation to any Lender
and shall not be responsible to any Lender for any statements, warranties or
representations made in or in connection with this Agreement; (iv) shall not
have any duty to ascertain or to inquire as to the performance or observance of
any of the terms, covenants or conditions of this Agreement on the part of any
Borrower or PM Companies or to inspect the property (including the books and
records) of any Borrower or PM Companies; (v) shall not be responsible to any
Lender for the due execution, legality, validity, enforceability, genuineness,
sufficiency or value of this Agreement or any other instrument or document
furnished pursuant hereto; and (vi) shall incur no liability under or in
respect of this Agreement by acting upon any notice, consent, certificate or,
other instrument or writing
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(which may be by telegram, cable or telex) believed by it to be genuine and
signed or sent by the proper party or parties.
SECTION 7.03. Citibank and Affiliates. With respect to any Commitment
of, or any Advance made by, Citibank or any of its affiliates, Citibank shall
have the same rights and powers under this Agreement as any other Lender and
may exercise the same as though it were not the Agent; and the term "Lender" or
"Lenders" shall, unless otherwise expressly indicated, include Citibank in its
individual capacity. Citibank and its affiliates may accept deposits from, lend
money to, act as trustee under indentures of, and generally engage in any kind
of business with, any Borrower, PM Companies, any of their respective
subsidiaries and any Person who may do business with or own securities of any
Borrower or PM Companies or any such subsidiary, all as if Citibank were not
the Agent and without any duty to account therefor to the Lenders.
SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that
it has, independently and without reliance upon the Agent or any other Lender
and based on the financial statements referred to in Section 4.01 and such
other documents and information as it has deemed appropriate, made its own
credit analysis, and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the Agent or
any other Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.
SECTION 7.05. Indemnification. The Lenders agree to indemnify the
Agent (to the extent not reimbursed by PM Companies or any Borrower), ratably
according to the respective principal amounts of Advances then owing to each of
them (or if no such Advances are at the time outstanding or if any such
Advances are then owing to Persons which are not Lenders, ratably according to
the respective amounts of their Commitments), from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever which
may be imposed on, incurred by, or asserted against the Agent in any way
relating to or arising out of this Agreement or any action taken or omitted by
the Agent under this Agreement, provided that no Lender shall be liable for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from the Agent's
gross negligence or wilful misconduct. Without limitation of the foregoing,
each Lender agrees to reimburse the Agent promptly upon demand for its ratable
share of any out-of-pocket expenses (including counsel fees and expenses)
incurred by the Agent in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement, to the extent that the Agent
is not reimbursed for such expenses by PM Companies or any Borrower.
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SECTION 7.06. Successor Agent. The Agent may resign at any time by
giving written notice thereof to the Lenders and PM Companies and may be
removed at any time with or without cause by the Majority Lenders. Upon any
such resignation or removal, the Majority Lenders shall have the right to
appoint a successor Agent. If no successor Agent shall have been so appointed
by the Majority Lenders, and shall have accepted such appointment, within 30
days after the retiring Agent's giving of notice of resignation or the Majority
Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf
of the Lenders, appoint a successor Agent, which shall be a Lender having and
acting through a New York office, or a commercial bank organized under the laws
of the United States of America or of any State thereof and having a combined
capital and surplus of at least $500,000,000 which is not a Lender. Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations under this Agreement.
After any retiring Agent's resignation or removal hereunder as Agent, the
provisions of this Article VII shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent under this Agreement.
ARTICLE VIII
GUARANTY
SECTION 8.01. Guaranty. The Guarantor hereby unconditionally and
irrevocably guarantees (the undertaking of the Guarantor contained in this
Article VIII being the "Guaranty") the punctual payment when due, whether at
stated maturity, by acceleration or otherwise, of all obligations of each
Borrower now or hereafter existing under this Agreement (other than such
obligations under Section 2.03(d) and (e) which are covered by the guaranty
under the B Notes), whether for principal, interest, fees, expenses or
otherwise (such obligations being the "Obligations"), and any and all expenses
(including counsel fees and expenses) incurred by the Agent or the Lenders in
enforcing any rights under the Guaranty.
SECTION 8.02. Guaranty Absolute. The Guarantor guarantees that the
Obligations will be paid strictly in accordance with the terms of this
Agreement, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the rights of the
Agent or the Lenders with respect thereto. The liability of the Guarantor under
this Guaranty shall be absolute and unconditional irrespective of:
(i) any lack of validity, enforceability or genuineness of any
provision of this Agreement or any other agreement or instrument relating
thereto;
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(ii) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other amendment or
waiver of or any consent to departure from this Agreement;
(iii) any exchange, release or non-perfection of any collateral, or
any release or amendment or waiver of or consent to departure from any
other guaranty, for all or any of the Obligations; or
(iv) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, a Borrower or the Guarantor.
This Guaranty shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of any of the Obligations is rescinded or must
otherwise be returned by the Agent or any Lender upon the insolvency,
bankruptcy or reorganization of a Borrower or otherwise, all as though such
payment had not been made.
SECTION 8.03. Waivers. (a) The Guarantor hereby waives promptness,
diligence, notice of acceptance and any other notice with respect to any of the
Obligations and this Guaranty and any requirement that the Agent or any Lender
protect, secure, perfect or insure any security interest or lien or any
property subject thereto or exhaust any right or take any action against a
Borrower or any other Person or any collateral.
(b) The Guarantor hereby irrevocably waives any claims or other
rights that it may now or hereafter acquire against any Borrower that arise
from the existence, payment, performance or enforcement of the Guarantor's
obligations under this Guaranty or this Agreement, including, without
limitation, any right of subrogation, reimbursement, exoneration, contribution
or indemnification and any right to participate in any claim or remedy of the
Agent or any Lender against such Borrower or any collateral, whether or not
such claim, remedy or right arises in equity or under contract, statute or
common law, including, without limitation, the right to take or receive from
such Borrower, directly or indirectly, in cash or other property or by set-off
or in any other manner, payment or security on account of such claim, remedy or
right. If any amount shall be paid to the Guarantor in violation of the
preceding sentence at any time prior to the later of the cash payment in full
of the Obligations and all other amounts payable under this Guaranty and the
Termination Date, such amount shall be held in trust for the benefit of the
Agent and the Lenders and shall forthwith be paid to the Agent to be credited
and applied to the Obligations and all other amounts payable under this
Guaranty, whether matured or unmatured, in accordance with the terms of this
Agreement and this Guaranty, or to be held as collateral for any Obligations or
other amounts payable under this Guaranty thereafter arising. The Guarantor
acknowledges that it will receive direct and indirect benefits from the
financing arrangements contemplated by this Agreement and this Guaranty and
that the waiver set forth in this subsection is knowingly made in contemplation
of such benefits.
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SECTION 8.04. Payments Free and Clear of Taxes, Etc. (a) Any and all
payments made by the Guarantor hereunder shall be made in accordance with
Section 2.12 (concerning payments) of this Agreement free and clear of and
without deduction for any and all present or future Taxes. If the Guarantor
shall be required by law to deduct any Taxes from or in respect of any sum
payable hereunder to any Lender or the Agent, (i) the sum payable shall be
increased as may be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section)
such Lender or the Agent (as the case may be) receives an amount equal to the
sum it would have received had no such deductions been made, (ii) the Guarantor
shall make such deductions and (iii) the Guarantor shall pay the full amount
deducted to the relevant taxation authority or other authority in accordance
with applicable law.
(b) In addition, the Guarantor agrees to pay any present or future
Other Taxes which arise from any payment made under this Guaranty or from the
execution, delivery or registration of, or otherwise with respect to, this
Guaranty.
(c) The Guarantor will indemnify each Lender and the Agent for the
full amount of Taxes or Other Taxes (including, without limitation, any Taxes
or Other Taxes imposed by any jurisdiction on amounts payable under this
Section) paid by such Lender or the Agent (as the case may be) and any
liability (including penalties, interest and expenses) arising therefrom or
with respect thereto, whether or not such Taxes or Other Taxes were correctly
or legally asserted. This indemnification shall be made within 30 days from the
date such Lender or the Agent (as the case may be) makes written demand
therefor.
(d) Within 30 days after the date of any payment of Taxes, the
Guarantor will furnish to the Agent, at its address referred to in Section
10.02, the original or a certified copy of a receipt evidencing payment
thereof.
(e) Without prejudice to the survival of any other agreement of the
Guarantor hereunder, the agreements and obligations of the Guarantor contained
in this Section 8.04 shall survive the payment in full of the principal of and
interest on the Advances.
(f) Unless in accordance with Section 2.13(f) a Borrower, PM
Companies and the Agent have received forms and other documents satisfactory to
them indicating that payments hereunder are not subject to United States
withholding tax or are subject to such tax at a rate reduced by an applicable
tax treaty, the Guarantor or the Agent shall withhold taxes from such payments
at the applicable statutory rate in the case of payments to or for any Lender
organized under the laws of a jurisdiction outside the United States.
SECTION 8.05. No Waiver; Remedies. No failure on the part of the
Agent or any Lender to exercise, and no delay in exercising, any right
hereunder shall operate as a
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waiver thereof; nor shall any single or partial exercise of any right
hereunder, preclude any other or further exercise thereof or the exercise of
any other right. The remedies herein provided are cumulative and not exclusive
of any remedies provided by law.
SECTION 8.06. Continuing Guaranty. This Guaranty is a continuing
guaranty and shall (i) remain in full force and effect until payment in full
(after the Termination Date) of the Obligations and all other amounts payable
under this Guaranty, (ii) be binding upon the Guarantor, its successors and
assigns, and (iii) inure to the benefit of and be enforceable by the Lenders,
the Agents and their respective successors, transferees and assigns.
ARTICLE IX
SUBSIDIARY BORROWER
SECTION 9.01. Subsidiary Borrower. Any domestic or foreign subsidiary
of the Guarantor shall have the right to become a "Borrower" hereunder, and to
borrow any unused Commitments under this Agreement subject to the terms and
conditions hereof applicable to a Borrower and to the following additional
conditions:
(a) PM Companies shall deliver a notice in the form of Exhibit F
hereto (a "Notice of Acceptance") signed by such subsidiary and
countersigned by the Guarantor to the Agent stating that such subsidiary
desires to become a "Borrower" under this Agreement and agrees to be bound
by the terms hereof. From the time of receipt of such Notice of Acceptance
by the Agent, such subsidiary shall be a "Borrower" hereunder with all of
the rights and obligations of a Borrower hereunder. No Notice of
Acceptance relating to a subsidiary may be revoked as to amounts owed by
such subsidiary to the Lenders under this Agreement or when a Notice of
Borrowing naming such subsidiary has been given by PM Companies and is
effective.
(b) Each Notice of Acceptance shall be accompanied by an opinion of
counsel for PM Companies to the effect of clause (iv) below and shall
contain the following representations and warranties with respect to such
subsidiary:
(i) The subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation.
(ii) The execution, delivery and performance by the subsidiary
of any B Notes executed and delivered and to be executed and
delivered by it, this Agreement and such Notice of Acceptance are
within the subsidiary's corporate powers, have been duly authorized
by all necessary corporate action,
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
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46
and do not contravene (i) the subsidiary's charter or by-laws or
(ii) any law, rule, regulation or order of any court or governmental
agency or any contractual restriction binding on or affecting the
subsidiary.
(iii) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory
body is required for the due execution, delivery and performance by
the subsidiary of any B Notes executed and delivered and to be
executed and delivered by it, this Agreement or such Notice of
Acceptance.
(iv) This Agreement is, and any B Notes of such subsidiary when
delivered under this Agreement will be, the legal, valid and binding
obligation of the subsidiary enforceable against the subsidiary in
accordance with their respective terms, subject to the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium or
similar law affecting creditors rights generally and to the effect of
general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(v) There is no pending or threatened action or proceeding
affecting the subsidiary or any of its subsidiaries before any court,
governmental agency or arbitrator which purports to affect the
legality, validity or enforceability of this Agreement or any B Note.
(vi) PM Companies owns directly or indirectly 100% of the
capital stock of the subsidiary.
(c) For the purposes of Sections 3.02, 3.03 and 3.04, each of
the representations and warranties in the foregoing Section 9.01(b)
shall be deemed to be a representation and warranty contained in
Section 4.01.
ARTICLE X
MISCELLANEOUS
SECTION 10.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement, nor consent to any departure by any Borrower or
the Guarantor therefrom, shall in any event be effective unless the same shall
be in writing and signed by the Majority Lenders, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given; provided, however, that no amendment, waiver or
consent shall, unless in writing and signed by all the Lenders, do any of the
following: (a) waive any of the conditions specified in Section 3.01, 3.02 (if
and to
Philip Morris $8 billion, 5 year Facility
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47
the extent that the Borrowing which is the subject of such waiver would involve
an increase in the aggregate outstanding amount of Advances over the aggregate
amount of Advances outstanding immediately prior to such Borrowing) or 3.03,
(b) increase the Commitments of the Lenders or subject the Lenders to any
additional obligations, (c) reduce the principal of, or interest on, the A
Advances or any fees or other amounts payable hereunder, (d) postpone any date
fixed for any payment of principal of, or interest on, the A Advances or any
fees or other amounts payable hereunder, (e) change the percentage of the
Commitments or of the aggregate unpaid principal amount of A Advances, or the
number of Lenders which shall be required for the Lenders or any of them to
take any action hereunder, (f) release the Guarantor from any of its
obligations under Article VIII or (g) amend this Section 10.01; provided
further that no waiver of the conditions specified in Section 3.04 in
connection with any B Borrowing shall be effective unless consented to by all
Lenders making B Advances as part of such B Borrowing; and provided further
that no amendment, waiver or consent shall, unless in writing and signed by the
Agent in addition to the Lenders required above to take such action, affect the
rights or duties of the Agent under this Agreement or any A Advance.
SECTION 10.02. Notices, Etc. Except as provided in Section 2.03(a) or
(g), all notices and other communications provided for hereunder shall be in
writing (including telegraphic, telecopy, telex or cable communication) and
mailed, telegraphed, telecopied, telexed, cabled or delivered, if to any
Borrower, at its address at c/o Philip Morris Companies Inc., 120 Park Avenue,
New York, New York 10017, Attention: Treasurer; if to the Guarantor, at its
address at 120 Park Avenue, New York, New York 10017, Attention: Secretary; if
to any Bank, at its Domestic Lending Office specified opposite its name on
Schedule I hereto; if to any other Lender, at its Domestic Lending Office
specified in the Assignment and Acceptance pursuant to which it became a
Lender; and if to the Agent, at its address at One Court Square, Long Island
City, New York 11120, Attention: John Sahr; or, as to each party, at such other
address as shall be designated by such party in a written notice to PM
Companies or the Agent and, in the case of any such notice by any Borrower, PM
Companies or the Agent, to each other party hereto. All such notices and
communications shall, when mailed, telegraphed, telecopied, telexed or cabled,
be effective when deposited in the mails, delivered to the telegraph company,
transmitted by telecopier, confirmed by telex answerback or delivered to the
cable company, respectively, except that notices and communications to the
Agent pursuant to Article II or VII shall not be effective until received by
the Agent.
SECTION 10.03. No Waiver; Remedies. No failure on the part of any
Lender or the Agent to exercise, and no delay in exercising, any right
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right preclude any other or further exercise thereof or
the exercise of any other right. The remedies herein provided are cumulative
and not exclusive of any remedies provided by law.
Philip Morris $8 billion, 5 year Facility
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SECTION 10.04. Costs, Expenses and Taxes. (a) PM Companies agrees to
pay on demand all costs and expenses in connection with the preparation,
execution, delivery, administration (excluding any cost or expenses for
administration related to the Agent's overhead), modification and amendment of
this Agreement and the other documents to be delivered hereunder, including,
without limitation, the reasonable fees and out-of-pocket expenses of counsel
for the Agent with respect thereto and with respect to advising the Agent as to
its rights and responsibilities under this Agreement, and all costs and
expenses of the Lenders and the Agent, if any (including, without limitation,
reasonable counsel fees and expenses of the Lenders and the Agent), in
connection with the enforcement (whether through negotiations, legal
proceedings or otherwise) of this Agreement and the other documents to be
delivered hereunder.
(b) If any payment of principal of any Adjusted CD Rate Advance or
Eurodollar Rate Advance is made other than on the last day of the Interest
Period for such Advance, as a result of a payment pursuant to Section 2.10,
acceleration of the maturity of the Advances pursuant to Section 6.01, an
assignment made as a result of a demand by PM Companies pursuant to Section
10.07(a) or for any other reason, PM Companies shall, upon demand by any Lender
(with a copy of such demand to the Agent), pay to the Agent for the account of
such Lender any amounts required to compensate such Lender for any additional
losses, costs or expenses which it may reasonably incur as a result of such
payment, including, without limitation, any loss (including loss of anticipated
profits), cost or expense incurred by reason of the liquidation or reemployment
of deposits or other funds acquired by any Lender to fund or maintain such
Advance. Without prejudice to the survival of any other agreement of any
Borrower or PM Companies hereunder, the agreements and obligations of each
Borrower and PM Companies contained in Section 2.02(c), 2.08, 2.10(b)(ii) or
(c), 2.11 or this Section 10.04(b) shall survive the payment in full of
principal and interest hereunder.
(c) Each Borrower and the Guarantor jointly and severally agree to
indemnify and hold harmless the Agent and each Lender and each of their
respective affiliates, control persons, directors, officers, employees,
attorneys and agents (each, an "Indemnified Party") from and against any and
all claims, damages, losses, liabilities and expenses (including, without
limitation, reasonable fees and disbursements of counsel) which may be incurred
by or asserted against any Indemnified Party, in each case in connection with
or arising out of, or in connection with the preparation for or defense of, any
investigation, litigation, or proceeding (i) related to any transaction or
proposed transaction (whether or not consummated) in which any proceeds of any
Borrowing are applied or proposed to be applied, directly or indirectly, by any
Borrower, whether or not such Indemnified Party is a party to such transaction
or (ii) related to any Borrower's or the Guarantor's entering into this
Agreement, or to any actions or omissions of any Borrower or the Guarantor, any
of their respective subsidiaries or affiliates or any of its or their
respective officers, directors, employees or agents in connection therewith, in
each case
Philip Morris $8 billion, 5 year Facility
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<PAGE>
49
whether or not an Indemnified Party is a party thereto and whether or not such
investigation, litigation or proceeding is brought by the Guarantor or any
Borrower or any other Person; provided, however, that neither any Borrower nor
the Guarantor shall be required to indemnify any such Indemnified Party from or
against any portion of such claims, damages, losses, liabilities or expenses
that is found in a final, non-appealable judgment by a court of competent
jurisdiction to have resulted from the gross negligence or wilful misconduct of
such Indemnified Party.
SECTION 10.05. Right of Setoff. Upon (i) the occurrence and during
the continuance of any Event of Default and (ii) the making of the request or
the granting of the consent specified by Section 6.01 to authorize the Agent to
declare the Advances due and payable pursuant to the provisions of Section
6.01, each Lender is hereby authorized at any time and from time to time, to
the fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by such Lender to or for the credit or the
account of any Borrower or the Guarantor against any and all of the obligations
of such Borrower or the Guarantor now or hereafter existing under this
Agreement, irrespective of whether or not such Lender shall have made any
demand under this Agreement and although such obligations may be unmatured.
Each Lender agrees promptly to notify the appropriate Borrower or the
Guarantor, as the case may be, after any such setoff and application made by
such Lender, provided that the failure to give such notice shall not affect the
validity of such setoff and application. The rights of each Lender under this
Section are in addition to other rights and remedies (including, without
limitation, other rights of setoff) which such Lender may have.
SECTION 10.06. Binding Effect. This Agreement shall become effective
when it shall have been executed by PM Companies and the Agent and when the
Agent shall have been notified by each Bank that such Bank has executed it and
thereafter shall be binding upon and inure to the benefit of each Borrower, the
Guarantor, the Agent and each Lender and their respective successors and
assigns, except that neither any Borrower nor the Guarantor shall have the
right to assign its rights hereunder or any interest herein without prior
written consent of the Lenders.
SECTION 10.07. Assignments and Participations. (a) Each Lender may
and, if demanded by PM Companies upon at least 5 Business Days' notice to such
Lender and the Agent, will assign to one or more banks or other entities all or
a portion of its rights and obligations under this Agreement (including,
without limitation, all or a portion of its Commitment and the A Advances owing
to it); provided, however, that (i) each such assignment shall be of a
constant, and not a varying, percentage of all of the assigning Lender's rights
and obligations under this Agreement (other than, except in the case of an
assignment made as a result of a demand by PM Companies pursuant to this
Section 10.07(a), any B Advances owing to such Bank or any B Notes held by it),
(ii) the amount of
Philip Morris $8 billion, 5 year Facility
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50
the Commitment of the assigning Lender being assigned pursuant to each such
assignment (determined as of the date of the Assignment and Acceptance with
respect to such assignment) shall in no event be less than $25,000,000 (subject
to reduction at the sole discretion of PM Companies ) and shall be an integral
multiple of $1,000,000, (iii) each such assignment shall be to an Eligible
Assignee, (iv) each such assignment made as a result of a demand by PM
Companies pursuant to this Section 10.07(a) shall be arranged by PM Companies
after consultation with the Agent and shall be either an assignment of all of
the rights and obligations of the assigning Lender under this Agreement or an
assignment of a portion of such rights and obligations made concurrently with
another such assignment or other such assignments which together cover all of
the rights and obligations of the assigning Lender under this Agreement, (v) no
Lender shall be obligated to make any such assignment as a result of a demand
by PM Companies pursuant to this Section 10.07(a) unless and until such Lender
shall have received one or more payments from either the Borrowers to which it
has outstanding Advances or one or more Eligible Assignees in an aggregate
amount at least equal to the aggregate outstanding principal amount of the
Advances owing to such Lender, together with accrued interest thereon to the
date of payment of such principal amount and all other amounts payable to such
Lender under this Agreement and (vi) the parties to each such assignment shall
execute and deliver to the Agent, for its acceptance and recording in the
Register, an Assignment and Acceptance, together with a processing and
recordation fee of $3,000, provided that, if such assignment is made as a
result of a demand by PM Companies under this Section 10.07(a), PM Companies
shall pay or cause to be paid such $3,000 fee; provided further that nothing in
this Section 10.07 shall prevent or prohibit any Lender from pledging its
Advances hereunder or any B Notes held by it to a Federal Reserve Bank in
support of borrowings by such Lender from such Federal Reserve Bank. Upon such
execution, delivery, acceptance and recording, from and after the effective
date specified in each Assignment and Acceptance, (x) the assignee thereunder
shall be a party hereto and, to the extent that rights and obligations
hereunder have been assigned to it pursuant to such Assignment and Acceptance,
have the rights and obligations of a Lender hereunder and (y) the Lender
assignor thereunder shall, to the extent that rights and obligations hereunder
have been assigned by it pursuant to such Assignment and Acceptance, relinquish
its rights (other than those provided under Section 10.04) and be released from
its obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning Lender's
rights and obligations under this Agreement, such Lender shall cease to be a
party hereto).
(b) By executing and delivering an Assignment and Acceptance, the
Lender assignor thereunder and the assignee thereunder confirm to and agree
with each other and the other parties hereto as follows: (i) other than as
provided in such Assignment and Acceptance, such assigning Lender makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency or value of this Agreement or any other instrument or document
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
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51
furnished pursuant hereto; (ii) such assigning Lender makes no representation
or warranty and assumes no responsibility with respect to the financial
condition of any Borrower or PM Companies or the performance or observance by
any Borrower or PM Companies of any of their respective obligations under this
Agreement or any other instrument or document furnished pursuant hereto; (iii)
such assignee confirms that it has received a copy of this Agreement, together
with copies of the financial statements referred to in Section 4.01 and such
other documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into such Assignment and Acceptance; (iv)
such assignee will, independently and without reliance upon the Agent, such
assigning Lender or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under this Agreement; (v) such
assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to the Agent by the
terms hereof, together with such powers as are reasonably incidental thereto;
and (vii) such assignee agrees that it will perform in accordance with their
terms all of the obligations which by the terms of this Agreement are required
to be performed by it as a Lender.
(c) The Agent shall maintain at its address referred to in Section
10.02 a copy of each Assignment and Acceptance delivered to and accepted by it
and a register for the recordation of the names and addresses of the Lenders
and the Commitment of, and principal amount of the Advances owing to, each
Lender from time to time (the "Register"). The entries in the Register shall be
conclusive and binding for all purposes, absent manifest error, and PM
Companies, the Borrowers, the Agent and the Lenders may treat each Person whose
name is recorded in the Register as a Lender hereunder for all purposes of this
Agreement. The Register shall be available for inspection by PM Companies or
any Lender at any reasonable time and from time to time upon reasonable prior
notice.
(d) Upon its receipt of an Assignment and Acceptance executed by an
assigning Lender and an assignee representing that it is an Eligible Assignee,
the Agent shall, if such Assignment and Acceptance has been completed and is in
substantially the form of Exhibit C hereto, (i) accept such Assignment and
Acceptance, (ii) record the information contained therein in the Register and
(iii) give prompt notice thereof to PM Companies.
(e) Each Lender may sell participations to one or more banks or other
entities in or to all or a portion of its rights and obligations under this
Agreement (including, without limitation, all or a portion of its Commitment
and the Advances owing to it and any B Note or Notes held by it); provided,
however, that (i) such Lender's obligations under this Agreement (including,
without limitation, its Commitment to PM Companies hereunder) shall remain
unchanged, (ii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, (iii) such Lender shall
remain the holder of any such B Note for all purposes of this Agreement, and
(iv) PM Companies, the other Borrowers, the
Philip Morris $8 billion, 5 year Facility
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52
Agent and the other Lenders shall continue to deal solely and directly with
such Lender in connection with such Lender's rights and obligations under this
Agreement.
(f) Any Lender may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
10.07, disclose to the assignee or participant or proposed assignee or
participant, any information relating to PM Companies or any Borrower furnished
to such Lender by or on behalf of PM Companies or any Borrower; provided that,
prior to any such disclosure, the assignee or participant or proposed assignee
or participant shall agree to preserve the confidentiality of any confidential
information relating to PM Companies received by it from such Lender.
SECTION 10.08. Governing Law. This Agreement and any B Notes shall be
governed by, and construed in accordance with, the laws of the State of New
York.
SECTION 10.09. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Agreement by telecopier shall be effective as delivery of a manually executed
counterpart of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
PHILIP MORRIS COMPANIES INC.
By:
-------------------------
George R. Lewis
Vice President and
Treasurer
CITIBANK, N.A., as Agent
By:
-------------------------
Paolo de Alessandrini
Managing Director
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
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53
THE BANKS
Commitment:
U.S. $416,666,666.67 CITIBANK, N.A.
By:
-------------------------
Paolo de Alessandrini
Managing Director
U.S. $290,000,000.00 ABN AMRO BANK NV, NEW YORK
BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $290,000,000.00 CHEMICAL BANK
By:
-------------------------
Title:
U.S. $290,000,000.00 CREDIT SUISSE
By:
-------------------------
Title:
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
54
U.S. $290,000,000.00 THE DAI-ICHI KANGYO BANK,
LTD. - NEW YORK BRANCH
By:
-------------------------
Title:
U.S. $290,000,000.00 DEUTSCHE BANK AG NEW YORK
BRANCH AND/OR CAYMAN
ISLAND BRANCHES
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $290,000,000.00 THE FUJI BANK, LIMITED
By:
-------------------------
Title:
U.S. $290,000,000.00 SANWA BANK LIMITED
By:
-------------------------
Title:
U.S. $290,000,000.00 SOCIETE GENERALE
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
55
U.S. $193,333,333.33 BANQUE NATIONALE DE PARIS
NEW YORK BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
BANQUE NATIONALE DE PARIS
GEORGETOWN BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $193,333,333.33 MIDLAND BANK PLC
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
56
U.S. $193,333,333.33 THE MITSUBISHI TRUST AND
BANKING CORPORATION, LOS
ANGELES AGENCY
By:
-------------------------
Title:
U.S. $193,333,333.33 NATIONSBANK, N.A.
By:
-------------------------
Title:
U.S. $193,333,333.33 THE SAKURA BANK, LTD.
By:
-------------------------
Title:
U.S. $193,333,333.33 THE SUMITOMO BANK, LIMITED
NEW YORK BRANCH
By:
-------------------------
Title:
U.S. $193,333,333.33 THE TOKAI BANK, LIMITED
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
57
U.S. $193,333,333.33 UNION BANK OF SWITZERLAND
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $176,666,666.67 DRESDNER BANK AG NEW YORK
AND GRAND CAYMAN BRANCHES
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $140,000,000.00 MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By:
-------------------------
Title:
U.S. $116,666,666.67 THE BANK OF TOKYO TRUST
CO.
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
58
U.S. $110,000,000.00 ROYAL BANK OF CANADA
By:
-------------------------
Title:
U.S. $110,000,000.00 THE TORONTO-DOMINION BANK
By:
-------------------------
Title:
U.S. $100,000,000.00 COOPERATIEVE CENTRALE
RAIFFEISEN-BOERENLEENBANK,
B.A., "RABOBANK NEDERLAND"
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 96,666,666.67 SWISS BANK CORPORATION,
NEW YORK AND CAYMAN
ISLANDS BRANCHES
By:
-------------------------
Title:
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
59
U.S. $ 93,333,333.33 BANK OF AMERICA NT & SA
By:
-------------------------
Title:
U.S. $ 86,666,666.67 THE BANK OF NEW YORK
By:
-------------------------
Title:
U.S. $ 83,333,333.33 CANADIAN IMPERIAL BANK OF
COMMERCE
By:
-------------------------
Title:
U.S. $ 83,333,333.33 BAYERISCHE HYPOTHEKEN - UND
WECHSEL-BANK,
AKTIENGESSELSCHAFT NEW
YORK BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
60
U.S. $ 76,666,666.67 BANCO BILBAO VIZCAYA, S.A.
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 73,333,333.33 DAIWA BANK LIMITED
By:
-------------------------
Title:
U.S. $ 70,000,000.00 BANCA COMMERCIALE
ITALIANA-NEW YORK BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 70,000,000.00 BANCA NAZIONALE DEL LAVORO
S.P.A. - NEW YORK BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
61
U.S. $ 70,000,000.00 BAYERISCHE LANDESBANK
GIROZENTRALE, CAYMAN
ISLANDS BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 70,000,000.00 DEUTSCHE
GENOSSENSCHAFTSBANK
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 70,000,000.00 FIRST INTERSTATE BANK OF
CALIFORNIA
By:
-------------------------
Title:
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
62
U.S. $ 70,000,000.00 ISTITUTO BANCARIO SAN
PAOLO DI TORINO S.P.A.
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 70,000,000.00 WACHOVIA BANK OF GEORGIA,
N.A.
By:
-------------------------
Title:
U.S. $ 66,666,666.67 NATIONAL AUSTRALIA BANK
LIMITED
By:
-------------------------
Title:
U.S. $ 63,333,333.33 BANQUE PARIBAS
By:
-------------------------
Title:
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
63
U.S. $ 63,333,333.33 NORDDEUTSCHE LANDESBANK
GIROZENTRALE NEW YORK
BRANCH AND/OR CAYMAN
ISLAND BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 60,000,000.00 THE CHASE MANHATTAN BANK,
N.A.
By:
-------------------------
Title:
U.S. $ 53,333,333.33 BANCA DI ROMA, NEW YORK
BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
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U.S. $ 53,333,333.33 BANCA POPOLARE DI MILANO,
NEW YORK BRANCH
By:
-------------------------
Title: Anthony Franco
By:
-------------------------
Title: Fulvio Montanari
U.S. $ 53,333,333.33 BANK BRUSSELS LAMBERT,
NEW YORK BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 53,333,333.33 BERLINER BANK AG
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 53,333,333.33 CARIPLO - CASSA DI
RISPARMIO DELLE PROVINCIE
LOMBARDE S.P.A.
By:
-------------------------
Title:
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
65
U.S. $ 53,333,333.33 DEN DANSKE BANK
AKTIESELSKAB
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 53,333,333.33 THE FIRST NATIONAL BANK OF
CHICAGO
By:
-------------------------
Title:
U.S. $ 53,333,333.33 LLOYDS BANK PLC.
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 53,333,333.33 MELLON BANK N.A.
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
66
U.S. $ 53,333,333.33 THE MITSUBISHI BANK, LIMITED
NEW YORK BRANCH
By:
-------------------------
Title:
U.S. $ 53,333,333.33 THE NORINCHUKIN BANK, NEW
YORK BRANCH
By:
-------------------------
Title:
U.S. $ 53,333,333.33 SHAWMUT BANK CONNECTICUT,
N.A.
By:
-------------------------
Title:
U.S. $ 53,333,333.33 SKANDINAVISKA ENSKILDA
BANKEN CORPORATION
By:
-------------------------
Title:
U.S. $ 53,333,333.33 SUNTRUST BANK, ATLANTA
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
67
U.S. $ 53,333,333.33 THE YASUDA TRUST AND
BANKING COMPANY, LIMITED
NEW YORK BRANCH
By:
-------------------------
Title:
U.S. $ 49,333,333.33 PNC BANK, NATIONAL
ASSOCIATION
By:
-------------------------
Title:
U.S. $ 40,000,000.00 CREDIT LYONNAIS
CAYMAN ISLAND BRANCH
By:
-------------------------
Title:
CREDIT LYONNAIS
NEW YORK BRANCH
By:
-------------------------
Title:
U.S. $ 40,000,000.00 THE FIRST NATIONAL BANK OF
BOSTON
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
68
U.S. $ 36,666,666.67 COMPAGNIE FINANCIERE DE CIC
ET DE L'UNION EUROPEENNE
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 36,666,666.67 INTERNATIONALE NEDERLANDEN
BANK N.V., DUBLIN BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 33,333,333.33 BANKERS TRUST COMPANY
By:
-------------------------
Title:
U.S. $ 33,333,333.33 FIRST BANK NATIONAL
ASSOCIATION
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
69
U.S. $ 33,333,333.33 FIRST HAWAIIAN BANK
By:
-------------------------
Title:
U.S. $ 33,333,333.33 GENERALE BANK, NEW YORK
BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 33,333,333.33 THE INDUSTRIAL BANK OF
JAPAN, LIMITED, NEW YORK
BRANCH
By:
-------------------------
Title:
U.S. $ 33,333,333.33 THE LONG-TERM CREDIT BANK
OF JAPAN, LIMITED
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
70
U.S. $ 33,333,333.33 BANCA MONTE DEI PASCHI DI
SIENA, NEW YORK BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 33,333,333.33 THE SUMITOMO TRUST &
BANKING CO., LTD., LOS
ANGELES AGENCY
By:
-------------------------
Title:
U.S. $ 33,333,333.33 UNIBANK A/S, NEW YORK
BRANCH
By:
-------------------------
Title:
U.S. $ 33,333,333.33 WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK
BRANCH
By:
-------------------------
Title:
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
71
U.S. $ 26,666,666.67 THE BANK OF NOVA SCOTIA
By:
-------------------------
Title:
U.S. $ 23,333,333.33 THE MITSUI TRUST & BANKING
COMPANY LIMITED, NEW YORK
BRANCH
By:
-------------------------
Title:
U.S. $ 20,000,000.00 SVENSKA HANDELSBANKEN
By:
-------------------------
Title:
By:
-------------------------
Title:
U.S. $ 16,666,666.67 BANCO EXTERIOR DE ESPANA
By:
-------------------------
Title:
U.S. $ 16,666,666.67 BANK AUSTRIA
AKTIENGESELLSCHAFT
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
72
U.S. $ 16,666,666.67 CHRISTIANIA BANK NEW YORK
BRANCH
By:
-------------------------
Title:
U.S. $ 16,666,666.67 CREDIT COMMERCIAL DE FRANCE
By:
-------------------------
Title:
U.S. $ 16,666,666.67 CREDITANSTALT CORPORATE
FINANCE, INC.
By:
-------------------------
Title:
U.S. $ 16,666,666.67 DEN NORSKE BANK AS
By:
-------------------------
Title:
U.S. $ 16,666,666.67 THE NORTHERN TRUST COMPANY
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
73
U.S. $ 16,666,666.67 RAIFFEISEN ZENTRALBANK
OSTERREICH
AKTIENGESELLSCHAFT
By:
-------------------------
Title:
U.S. $ 16,666,666.67 STANDARD CHARTERED BANK
By:
-------------------------
Title:
U.S. $ 16,666,666.67 THE TOYO TRUST & BANKING CO.,
LTD.
By:
-------------------------
Title:
U.S. $ 16,000,000.00 CRESTAR BANK
By:
-------------------------
Title:
U.S. $ 13,333,333.33 STATE STREET BANK & TRUST CO.
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
74
U.S. $ 10,000,000.00 FIRSTAR BANK MILWAUKEE, N.A.
By:
-------------------------
Title:
U.S. $ 7,333,333.33 CENTRAL FIDELITY NATIONAL
BANK
By:
-------------------------
Title:
U.S. $ 7,333,333.33 M&I MARSHALL & ILSLEY BANK
By:
-------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
EXHIBIT A
FORM OF B NOTE
$_____________ Dated: ____________, 19__
FOR VALUE RECEIVED, the undersigned, [Name of Borrower] (the
"Borrower"), HEREBY PROMISES TO PAY to the order of [Name of Lender] (the
Lender"), on __________, 19__ the principal amount of ________________________
Dollars ($________________).
The Borrower promises to pay interest on the unpaid principal amount
thereof from the date hereof until such principal amount is repaid in full, at
the interest rate and payable on the interest payment date or dates provided
below:
Interest Rate: _____% per annum (calculated on the basis of a year of
360 days for the actual number of days elapsed).
Interest Payment Date or Dates: __________________.
Both principal and interest are payable in lawful money of the United
States of America to Citibank, N.A. for the account of the Lender at the office
of Citibank, N.A. at One Court Square, Long Island City, New York 11120, United
States of America, in same day funds, free and clear of and without any
deduction, with respect to the payee named above, for any and all present and
future taxes, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, excluding any taxes imposed by the United
States by means of withholding tax if and to the extent that such taxes shall
be in effect and shall be applicable, on the date hereof, to payments to be
made by the Borrower hereon.
This Promissory Note is one of the B Notes referred to in, and is
entitled to the benefits of, the 5-Year Loan and Guaranty Agreement dated as of
October 26, 1995 (the "5-Year Agreement") among PM Companies, the Lender and
certain other lenders parties thereto, and Citibank, N.A., as Agent for the
Lender and such other lenders. The 5-Year Agreement, among other things,
contains provisions for acceleration of the maturity hereof upon the happening
of certain stated events.
The Borrower hereby waives presentment, demand, protest and notice of
any kind. No failure to exercise, and no delay in exercising, any rights
hereunder on the part of the holder hereof shall operate as a waiver of such
rights.
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
2
This Promissory Note shall be governed by, and construed in
accordance with, the laws of the State of New York, United States.
[Name of Borrower]
By:
--------------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
GUARANTY
(Only for B Notes issues by a Borrower other than
PM Companies)
SECTION 1. Guaranty. The undersigned, PHILIP MORRIS COMPANIES INC., a
Virginia corporation (the "Guarantor"), hereby unconditionally and irrevocably
guarantees the punctual payment when due of all obligations of the Borrower
under the above Promissory Note (the "Note") (such obligations being the
"Obligations"), and any and all expenses (including counsel fees and expenses)
incurred by the holder of the Note in enforcing any rights under the Note or
this Guaranty.
SECTION 2. Guaranty Absolute. The Guarantor guarantees that the
Obligations will be paid strictly in accordance with the terms of the Note,
regardless of any law, rule, regulation or order now or hereafter in effect in
any jurisdiction affecting any of such terms or the rights of the holder of the
Note with respect thereto. The liability of the Guarantor under this Guaranty
shall be absolute and unconditional irrespective of (i) any law of validity,
enforceability or genuineness of the Note or any other agreement or instrument
relating thereto; (ii) any change in the time, manner or place of payment of,
or in any other term of, all or any of the Obligations, or any other amendment
or waiver of or any consent to departure from the Note; (iii) any exchange,
release or non-perfection of any collateral, or any release or amendment or
waiver of or consent to departure from any other guaranty, for all or any of
the Obligations; or (iv) any other circumstance which might otherwise
constitute a defense available to, or a discharge of, the Borrower or a
guarantor.
This Guaranty shall continue to be effective or be reinstated, as the
case may be, if at any time any payment of any of the Obligations is rescinded
or must otherwise be returned by the Lender upon the insolvency, bankruptcy or
reorganization of the Borrower or otherwise, all as though such payment has not
been made.
SECTION 3. Waiver. (a) The Guarantor hereby waives promptness,
diligence, notice of acceptance and any other notice with respect to any of the
Obligations and this Guaranty and any requirement that the holder of the Note
protect, secure, perfect or insure any security interest or lien or any
property subject thereto or exhaust any right or take any action against the
Borrower or any other person or entity or any collateral.
(b) The Guarantor hereby irrevocably waives any claims or other
rights that it may now or hereafter acquire against the Borrower that arise
from the existence, payment, performance or enforcement of the Guarantor's
obligations under this Guaranty or this Note; including, without limitation,
the right to take or receive from the Borrower, directly or indirectly, in cash
or other property or by set-off or in any other manner, payment or security on
account of such claim, remedy or right. If any amount shall be paid to the
Guarantor in violation of the preceding sentence at any time prior to the cash
payment
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
2
in full of the Obligations, such amount shall be held in trust for the benefit
of the holder of this Note and shall forthwith be paid to the holder of this
Note to be credited and applied to the Obligations and all other amounts
payable under this Guaranty, whether matured or unmatured, in accordance with
the terms of this Note and this Guaranty, or to be held as collateral for any
Obligations or other amounts payable under this Guaranty thereafter arising.
The Guarantor acknowledges that it will receive direct and indirect benefits
from the financing arrangements contemplated by this Note and this Guaranty and
that the waiver set forth in this subsection is knowingly made in contemplation
of such benefits.
SECTION 4. Payments Free and Clear of Taxes, Etc. Any and all
payments made by the Guarantor hereunder to the payee named in the Note shall
be made in accordance with the Note free and clear of and without deduction for
any and all present or future taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, excluding taxes imposed
by the United States by means of withholding tax if and to the extent that such
taxes shall be in effect and shall be applicable, on the date hereof, to
payments to be made by the Guarantor herein.
SECTION 5. No Waiver. No failure to exercise, and no delay in
exercising, any right hereunder on the part of the holder of the Note shall
operate as a waiver of such rights; nor shall any single or partial exercise of
any right hereunder, preclude any other or further exercise thereof or the
exercise of any other right. The remedies herein provided are cumulative and
not exclusive of any remedies provided by law.
SECTION 6. Continuous Guaranty; Transfer of Note. This Guaranty is a
continuing guaranty and shall (i) remain in full force and effect until payment
in full of the Obligations and all other amounts payable under this Guaranty,
(ii) be binding upon the Guarantor, its successors and assigns, and (iii) inure
to the benefit of and be enforceable by the Lender and its successors,
transferees and assigns. Without limiting the generality of the foregoing
clause (iii), the Lender may assign or otherwise transfer the Note to any other
person or entity, and such other person or entity shall thereupon become vested
with all the rights in respect thereof granted to the Lender herein or
otherwise.
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
3
This Guaranty shall be governed by, and construed in accordance with,
the laws of the State of New York, United States.
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be
executed by its officer thereunto duly authorized on the date first above
written.
PHILIP MORRIS COMPANIES INC.
By:
--------------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
EXHIBIT B-1
NOTICE OF A BORROWING
Citibank, N.A., as Agent
for the Lenders parties
to the 5-Year Agreement
referred to below
One Court Square
Long Island City, New York 11120
[Date]
Attention:
Gentlemen:
The undersigned, Philip Morris Companies Inc., refers to the 5-Year
Loan and Guaranty Agreement, dated as of October 26, 1995 (the "5-Year
Agreement", the terms defined therein being used herein as therein defined),
among Philip Morris Companies Inc., certain lenders parties thereto and
Citibank, N.A., as Agent for said Lenders, and hereby gives you notice,
irrevocably, pursuant to Section 2.02 of the 5-Year Agreement that the
undersigned hereby requests an A Borrowing under the 5-Year Agreement, and in
that connection sets forth below the information relating to such A Borrowing
(the "Proposed A Borrowing") as required by Section 2.02(a) of the 5-Year
Agreement:
(i) The Business Day of the Proposed A Borrowing is ________________,
199__.
(ii) The Type of A Advances comprising the Proposed A Borrowing is
[Adjusted CD Rate Advances] [Base Rate Advances] [Eurodollar Rate
Advances].
(iii) The aggregate amount of the Proposed A Borrowing is
$______________.
(iv) The Interest Period for each A Advance made as part of the
Proposed A Borrowing is [________ days] [______ month[s]].
(v) The name of the Borrower is _________________.
The undersigned hereby certifies that the following statements will
be true on the date of the Proposed A Borrowing, before and after giving effect
thereto and to the
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
2
application of the proceeds therefrom: (a) the representations and warranties
contained in Section 4.01 of the 5-Year Agreement (excluding those contained in
subsections (e) and (f) thereof) and, if the Borrower is a subsidiary of PM
Companies, Section 9.01(b) of the 5-Year Agreement are correct on and as of
such date as though made on and as of such date, (b) no event has occurred and
is continuing, or would result from the Proposed A Borrowing, which constitutes
an Event of Default or would constitute an Event of Default but for the
requirement that notice be given or time elapse or both, (c) if such Proposed A
Borrowing is in an aggregate principal amount equal to or greater than
$500,000,000 and is being made in connection with any purchase of shares of the
Borrower's or the Guarantor's capital stock or the capital stock of any other
Person, or any purchase of all or substantially all of the assets of any Person
(whether in one transaction or a series of transactions) or any transaction of
the type referred to in Section 5.02(b) of the 5-Year Agreement, the statements
in (a) and (b) above will be true and correct after giving effect to such
transaction or purchase, and (d) the aggregate principal amount of the Proposed
A Borrowing and all other Borrowings to be made on the same day under the
5-Year Agreement is within the applicable unused Commitments of the Lenders.
Very truly yours,
PHILIP MORRIS COMPANIES INC.
By:
--------------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
EXHIBIT B-2
FORM OF NOTICE OF B BORROWING
Citibank, N.A., as Agent
for the Lenders parties
to the 5-Year Agreement
referred to below
One Court Square
Long Island City, New York 11120
Attention:
Gentlemen:
The undersigned, Philip Morris Companies Inc., refers to the 5-Year
Loan and Guaranty Agreement, dated as of October 26, 1995 (the "5-Year
Agreement"; the terms defined therein being used herein as therein defined),
among PM Companies, certain lenders parties thereto (the "Lenders") and
Citibank, N.A., as Agent for the Lenders, and hereby gives you notice pursuant
to Section 2.03 of the 5-Year Agreement that the undersigned hereby requests a
B Borrowing under the 5-Year Agreement, and in that connection sets forth the
terms on which such B Borrowing (the "Proposed B Borrowing") is requested to be
made:
(A) Date of B Borrowing __________________
(B) Amount of B Borrowing __________________
(C) Maturity Date __________________
(D) Interest Rate Basis __________________
(E) Interest Payment Date(s) __________________
(F) Name of Borrower __________________
The undersigned hereby certifies that the following statements will
be true on the date of the Proposed B Borrowing, before and after giving effect
thereto and to the application of the proceeds therefrom: (a) the
representations and warranties contained in Section 4.01 of the 5-Year
Agreement and, if the Borrower is a subsidiary of PM Companies, Section 9.01(b)
of the 5-Year Agreement are correct on and as of such date as though made on
and as of such date, (b) no event has occurred and is continuing, or would
result from the Proposed B Borrowing, which constitutes an Event of Default or
would constitute an Event of Default but for the requirement that notice be
given or time elapse or both, and (c) the aggregate principal amount of the
Proposed B Borrowing and all other Borrowings to be made on the same day under
the 5-Year Agreement is within the applicable unused Commitments of the
Lenders.
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
2
The undersigned hereby confirms that you are to make the Proposed B
Borrowing available to us in accordance with Section 2.03(a)(v) of the 5-Year
Agreement by crediting the amount of the Proposed B Borrowing to [be provided].
Dated: ___________________, 19__
Very truly yours,
PHILIP MORRIS COMPANIES INC.
By:
--------------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
EXHIBIT C
ASSIGNMENT AND ACCEPTANCE
Dated ________, 199
Reference is made to the 5-Year Loan and Guaranty Agreement dated as
of October 26, 1995 (the "5-Year Agreement") among Philip Morris Companies
Inc., a Virginia corporation, the Lenders (as defined in the 5-Year Agreement)
and Citibank, N.A., as Agent for the Lenders (the "Agent"). Terms defined in
the 5-Year Agreement are used herein with the same meaning.
__________________ (the "Assignor") and ____________ (the "Assignee")
agree as follows:
1. The Assignor hereby sells and assigns to the Assignee, and the
Assignee hereby purchases and assumes from the Assignor, the percentage
interest specified on Schedule 1 hereto in and to all (other than any B
Advances owing to the Assignor or any B Notes held by it) of the
Assignor's rights and obligations under the 5-Year Agreement as of the
date hereof (after giving effect to any other assignments thereof made
prior to the date hereof, whether or not such assignments have become
effective, but without giving effect to any other assignments thereof also
made on the date hereof), including, without limitation, such percentage
interest in the Assignor's Commitment and the A Advances owing to the
Assignor.
2. The Assignor (i) represents and warrants that as of the date
hereof its Commitment (after giving effect to other assignments thereof
made prior to the date hereof, whether or not such assignments have become
effective, but without giving effect to any other assignments thereof also
made on the date hereof) is in the dollar amount specified as the
Assignor's Commitment on Schedule 1 hereto and the aggregate outstanding
principal amount of Advances owing to it (after giving effect to any other
assignments thereof made prior to the date hereof, whether or not such
assignments have become effective, but without giving effect to any other
assignments thereof also made on the date hereof) is in the dollar amount
specified as the aggregate outstanding principal amount of Advances owing
to the Assignor on Schedule 1 hereto; (ii) represents and warrants that it
is the legal and beneficial owner of the interest being assigned by it
hereunder and that such interest is free and clear of any adverse claim;
(iii) makes no representation or warranty and assumes no responsibility
with respect to any statements, warranties or representations made in or
in connection with the 5-Year Agreement or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of the 5-Year
Agreement or any other instrument or document furnished pursuant thereto;
and (iv) makes no representation or warranty and assumes no responsibility
with respect to the financial
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
2
condition of PM Companies or any Borrower or the performance or
observance by PM Companies or any Borrower of any of their obligations
under the 5-Year Agreement or any other instrument or document furnished
pursuant thereto.
3. The Assignee (i) confirms that it has received a copy of the
5-Year Agreement, together with copies of the financial statements
referred to in Section 4.01 thereof and such other documents and
information as it has deemed appropriate to make its own credit analysis
and decision to enter into this Agreement and Acceptance; (ii) agrees that
it will, independently and without reliance upon the Agent, the Assignor
or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under the 5-Year Agreement; (iii)
confirms that it is an Eligible Assignee; (iv) appoints and authorizes the
Agent to take such action as agent on its behalf and to exercise such
powers under the 5-Year Agreement as are delegated to the Agent by the
terms thereof, together with such powers as are reasonably incidental
thereto; (v) agrees that it will perform in accordance with their terms
all of the obligations which by the terms of the 5-Year Agreement are
required to be performed by it as a Lender; [and] (vi) specifies as its CD
Lending Office, Domestic Lending Office (and address for notices) and
Eurodollar Lending Office the offices set forth beneath its name on the
signature pages hereof [and (vii) attaches the forms prescribed by the
Internal Revenue Service of the United States certifying as to the
Assignee's status for purposes of determining exemption from United States
withholding taxes with respect to all payments to be made to the Assignee
under the 5-Year Agreement or such other documents as are necessary to
indicate that all such payments are subject to such rates at a rate
reduced by an applicable tax treaty].*
4. Following the execution of this Assignment and Acceptance by the
Assignor and the Assignee, it will be delivered to the Agent for
acceptance and recording by the Agent. The effective date for this
Assignment and Acceptance shall be the date of acceptance thereof by the
Agent, unless otherwise specified on Schedule 1 hereto (the "Effective
Date").
5. Upon such acceptance and recording by the Agent, as of the
Effective Date, (i) the Assignee shall be a party to the 5-Year Agreement
and, to the extent provided in this Assignment and Acceptance, have the
rights and obligations of a Lender thereunder and (ii) the Assignor shall,
to the extent provided in this Assignment and Acceptance, relinquish its
rights and be released from its obligations under the 5-Year Agreement.
- --------
* If the Assignee is organized under the laws of a jurisdiction outside the
United States.
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
3
6. Upon such acceptance and recording by the Agent, from and after
the Effective Date, the Agent shall make all payments under the 5-Year
Agreement in respect of the interest assigned hereby (including, without
limitation, all payments of principal, interest and fees with respect
thereto) to the Assignee. The Assignor and the Assignee shall make all
appropriate adjustments in payments under the 5-Year Agreement for periods
prior to the Effective Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and construed
in accordance with, the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment
and Acceptance to be executed by their respective officers thereunto duly
authorized, as of the date first above written, such execution being made on
Schedule 1 hereto.
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
Schedule I
to
Assignment and Acceptance
Dated ____________ 19__
Section 1.
Percentage Interest ________%
Section 2.
Assignor's Commitment: $________
Aggregate Outstanding Principal
Amount of Advances owing to the Assignor: $________
Section 3.
Effective Date*: ____________, 19__
[NAME OF ASSIGNOR]
By:
--------------------------------
Title:
[NAME OF ASSIGNEE]
By:
--------------------------------
Title:
CD Lending Office:
[Address]
Domestic Lending Office
(and address for notices):
[Address]
- --------
* This date should be no earlier than the date of acceptance by the Agent.
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
2
Eurodollar Lending Office:
[Address]
Accepted this ____ day
of __________________________, 19__
CITIBANK, N.A.
By:
---------------------------------
Title:
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
EXHIBIT D
[Form of Opinion of Counsel for Philip Morris Companies Inc.]
[Date of initial Borrowing]
To each of the Lenders parties
to the 5-Year Loan and Guaranty
Agreement dated as of
October 26, 1995 among
Philip Morris Companies Inc.,
said Lenders and Citibank, N.A.,
as Agent, and to Citibank, N.A.,
as Agent
Philip Morris Companies Inc.
Gentlemen:
This opinion is furnished to you pursuant to Section 3.01(c) of the
5-Year Loan and Guaranty Agreement dated as of October 26, 1995 (the "5-Year
Agreement") among Philip Morris Companies Inc. ("PM Companies"), the Lenders
parties thereto and Citibank, N.A., as Agent for said Lenders. Unless otherwise
defined herein, terms defined in the 5-Year Agreement are used herein as
therein defined.
We have acted as counsel for PM Companies and its subsidiaries [,
including ________ (the "Borrower"),] in connection with the preparation,
execution and delivery of, and the initial Borrowing made under, the 5-Year
Agreement.
In that connection we have examined:
(1) The 5-Year Agreement.
(2) The documents furnished by PM Companies [and the Borrower]
pursuant to Article III of the 5-Year Agreement.
(3) The [Articles] [Certificate] of Incorporation of PM Companies
[and the Borrower] and all amendments thereto (the "Charter[s]").
(4) The by-laws of PM Companies [and the Borrower] and all amendments
thereto (the "By-laws").
Philip Morris $8 billion, 5 year Facility
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2
We have also examined the originals, or copies certified to our satisfaction,
of such corporate records of PM Companies [and the Borrower], certificates of
public officials and of officers of PM Companies [and the Borrower], and
agreements, instruments and documents, as we have deemed necessary as a basis
for the opinions hereinafter expressed. As to questions of fact material to
such opinions, we have, when relevant facts were not independently established
by us, relied upon certificates of PM Companies [and the Borrower] or their
[respective] officers or of public officials. We have assumed the due execution
and delivery, pursuant to due authorization, of the 5-Year Agreement by the
Lenders parties thereto and the Agent.
Based upon the foregoing and upon such investigation as we have
deemed necessary, we are of the following opinion:
1. PM Companies is a corporation duly organized, validly existing and
in good standing under the laws of Virginia. [The Borrower is a
corporation duly organized, validly existing and in good standing under
the laws of __________________.]
2. The execution, delivery and performance by PM Companies of the
5-Year Agreement [and the B Notes] are within PM Companies' corporate
powers,* have been duly authorized by all necessary corporate action, and
do not contravene (i) the Charter[s] or the By-laws or (ii) any law, rule
or regulation applicable to PM Companies [or the Borrower] (including,
without limitation, Regulation X of the Federal Reserve Board) or (iii) to
the best of our knowledge, any contractual or legal restriction binding on
or affecting PM Companies [or the Borrower]. The B Notes have been duly
executed and delivered on behalf of [PM Companies] [the Borrower] [,]
[and] the 5-Year Agreement [has] [and the guaranties endorsed on the B
Notes have] been duly executed and delivered on behalf of PM Companies
[and the Notice of Acceptance of the Borrower has been duly executed and
delivered on behalf of the Borrower].
3. No authorization, approval, or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required
for the due execution, delivery and performance by PM Companies of the
5-Year Agreement [or the B Notes] [or the guaranties endorsed on the B
Notes] [or by the Borrower of its Notice of Acceptance or the B Notes to
be executed and delivered on its behalf].
- --------
* If a subsidiary is the Borrower, "The execution, delivery and performance by
PM Companies of the 5-Year Agreement [and the guaranties endorsed on the B
Notes], and by the Borrower of its Notice of Acceptance [and the B Notes], are
within PM Companies' and the Borrower's corporate powers".
Philip Morris $8 billion, 5 year Facility
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3
4. The 5-Year Agreement is the legal, valid and binding obligation of
PM Companies enforceable against PM Companies in accordance with its
terms. [The B Notes issued on the date hereof [and the guaranties endorsed
thereon] are the legal, valid and binding obligations of [PM Companies]
[the Borrower] [the Borrower and PM Companies, respectively,] enforceable
against [PM Companies] [the Borrower] [the Borrower and PM Companies,
respectively,] in accordance with their respective terms.]
5. Except as disclosed in the Form 10-K of Philip Morris for the
fiscal year ended December 31, 1994, and in its quarterly report on Form
10-Q for the quarter ended June 30, 1995, there is, to the best of our
knowledge, no pending or threatened action or proceeding against PM
Companies [or the Borrower] or any of [its] [their] subsidiaries before
any court, governmental agency or arbitrator which is likely to have a
material adverse effect upon the financial condition or operations of PM
Companies and its subsidiaries taken as a whole.
6. PM Companies directly or indirectly owns 100% of the capital stock
of [the Borrower and of] Philip Morris.
The opinions set forth above are subject to the following qualifications:
(a) Our opinion in paragraph 4 above is subject to the effect of any
applicable bankruptcy, insolvency, reorganization, moratorium or similar
law affecting creditors' rights generally.
(b) Our opinion in paragraph 4 above is subject to the effect of
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
Very truly yours,
Philip Morris $8 billion, 5 year Facility
107900.5/NYL3
<PAGE>
EXHIBIT E
[Form of Opinion of Special Counsel for the Agent]
[Date of initial Borrowing]
To the Banks listed on
Exhibit A hereto and
to Citibank, N.A.,
as Agent
Philip Morris Companies Inc.
Gentlemen:
We have acted as special New York counsel to Citibank, N.A., acting
for itself and as Agent, in connection with the preparation, execution and
delivery of, and the initial Borrowing made under, the 5-Year Loan and Guaranty
Agreement dated as of October 26, 1995 (the "5-Year Agreement") among Philip
Morris Companies Inc. and each of you. Unless otherwise defined herein, terms
defined in the 5-Year Agreement are used herein as therein defined.
In that connection, we have examined the following documents:
(1) A counterpart of the 5-Year Agreement, executed by each of the
parties thereto.
(2) The documents furnished pursuant to Article III of the 5-Year
Agreement and listed on Exhibit B hereto, including the opinion of Hunton
& Williams, counsel for PM Companies and its subsidiaries.
In our examination of the documents referred to above, we have assumed the
authenticity of all such documents submitted to us as originals, the
genuineness of all signatures, the due authority of the parties executing such
documents, and the conformity to the originals of all such documents submitted
to us as copies. We have also assumed that each of the Banks parties to the
5-Year Agreement and the Agent has duly executed and delivered, with all
necessary power and authority (corporate and otherwise), the 5-Year Agreement.
To the extent that our opinions expressed below involve conclusions
as to the matters set forth in paragraphs 1, 2, 3 and 6 of the above-mentioned
opinion of Hunton & Williams, we have assumed without independent investigation
the correctness of the matters set forth in such paragraphs, our opinion being
subject to the assumptions, qualifications and limitations set forth in such
opinion of Hunton & Williams with respect thereto.
Philip Morris $8 billion, 5 year Facility
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<PAGE>
2
Based upon the foregoing examination of documents and assumptions and
upon such other investigation as we have deemed necessary, we are of the
following opinion:
1. The 5-Year Agreement is, and the guaranties endorsed on the B
Notes when delivered under the Loan Agreement will be, the legal, valid
and binding obligation of PM Companies enforceable against PM Companies in
accordance with its terms.
2. The B Notes of [PM Companies] [__________] (the "Borrower"), if
any, issued on the date hereof are the legal, valid and binding
obligations of [PM Companies] [the Borrower] enforceable against [PM
Companies] [the Borrower] in accordance with their respective terms.
Our opinions in paragraphs 1 and 2 above are subject to the following
qualifications:
(a) Our opinions in paragraphs 1 and 2 above are subject to the
effect of general principles of equity including (without limitation)
concepts of materiality, reasonableness, good faith and fair dealing
(regardless of whether considered in a proceeding in equity or at law).
Further, pursuant to such equitable principles, (i) Section 8.02 of the
5-Year Agreement, which Section provides that the Guarantor's liability
thereunder shall not be affected by changes in or amendments to the 5-Year
Agreement, and (ii) Section 2 of the guaranty endorsed on the B Notes,
which Section provides that the Guarantor's liability thereunder shall not
be affected by changes in or amendments to the B Notes, might be
enforceable only to the extent that such changes or amendments were not so
material as to constitute a new contract among the parties.
(b) Our opinions in paragraphs 1 and 2 above are also subject to the
effect of any applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally.
(c) Our opinions expressed above are limited to the law of the State
of New York and the Federal law of the United States, and we do not
express any opinion herein concerning any other law. Without limiting the
generality of the foregoing, we express no opinion as to the effect of the
law of any jurisdiction other
Philip Morris $8 billion, 5 year Facility
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<PAGE>
3
than the State of New York wherein any Lender may be located or
wherein enforcement of the 5-Year Agreement or the B Notes may be sought
which limits the rates of interest legally chargeable or collectible.
Very truly yours,
SHEARMAN & STERLING
Philip Morris $8 billion, 5 year Facility
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<PAGE>
EXHIBIT A
to the Opinion dated _________________, 1995
of Shearman & Sterling
Banks
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<PAGE>
EXHIBIT B
to the Opinion dated _________________, 1995
of Shearman & Sterling
Documents
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<PAGE>
EXHIBIT F
NOTICE OF ACCEPTANCE
Dated ___________, 199__
The undersigned, ________________, a ____________________________
corporation and a subsidiary of PM Companies (as defined below) (the
"Subsidiary"), hereby:
1. Confirms that this Notice of Acceptance is being delivered
pursuant to Section 9.01 of that certain 5-Year Loan and Guaranty
Agreement dated as of October 26, 1995 (the "5-Year Agreement", terms
defined therein being used herein with the same meaning), among Philip
Morris Companies Inc. ("PM Companies"), the lenders parties thereto (the
"Lenders") and Citibank, N.A., as agent for the Lenders (the "Agent").
2. States that the Subsidiary desires to become a "Borrower" under
the Agreement and agrees to be bound by the terms and provisions of the
5-Year Agreement as a "Borrower" thereunder.
3. Represents and warrants as follows:
(a) The Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of ____________________.
(b) The execution, delivery and performance by the Subsidiary of
the B Notes, if any, executed and delivered and to be executed and
delivered by it, the 5-Year Agreement and this Notice of Acceptance
are within the Subsidiary's corporate powers, have been duly
authorized by all necessary corporate action, and do not contravene
(i) the Subsidiary's charter or by-laws or (ii) any law, rule,
regulation or order of any court or governmental agency or any
contractual restriction binding on or affecting the Subsidiary.
(c) No authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory
body is required for the due execution, delivery and performance by
the Subsidiary of the B Notes executed and delivered and to be
executed and delivered by it, the 5-Year Agreement or this Notice of
Acceptance.
(d) The 5-Year Agreement is, and the B Notes of such Subsidiary
if delivered under the 5-Year Agreement will be, the legal, valid and
binding obligations of the Subsidiary enforceable against the
Subsidiary in accordance with their terms, subject to the effect of
any applicable bankruptcy,
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2
insolvency, reorganization, moratorium or similar law affecting
creditors' rights generally and to the effect of general principles
of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
(e) There is no pending or threatened action or proceeding
affecting the Subsidiary or any of its subsidiaries before any court,
governmental agency or arbitrator which purports to affect the
legality, validity or enforceability of the 5-Year Agreement or any
Note.
(f) PM Companies owns directly or indirectly 100% of the capital
stock of the Subsidiary.
4. Delivers with this Notice of Acceptance an opinion of counsel for
PM Companies, pursuant to Section 9.01(b) of the Agreement, in the form of
Schedule 1 hereto.
[(Name of Borrower)]
By
--------------------------------
Title:
The undersigned, as Guarantor under the Agreement, hereby confirms
and agrees to the foregoing Notice of Acceptance pursuant to Section 9.01(a) of
the Agreement.
PHILIP MORRIS COMPANIES INC.
By:
--------------------------------
Title:
Philip Morris $8 billion, 5 year Facility
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<PAGE>
Schedule 1
to
Notice of Acceptance
[OPINION OF COUNSEL FOR PM COMPANIES]
[Date of Notice of Acceptance]
To each of the Lenders parties
to the 5-Year Loan and Guaranty
Agreement dated as of October 26,
1995 among Philip Morris Companies
Inc., said Lenders and Citibank, N.A.,
as Agent, and to Citibank, N.A., as
Agent
Philip Morris Companies Inc.
Gentlemen:
This opinion is furnished to you pursuant to Section 9.01(b) of the
5-Year Loan and Guaranty Agreement, dated as of October 26, 1995 (the "5-Year
Agreement"), among Philip Morris Companies Inc. ("PM Companies"), the Lenders
parties thereto and Citibank, N.A., as Agent for said Lenders. Unless otherwise
defined herein, terms defined in the 5-Year Agreement are used herein as
therein defined.
We have acted as counsel for PM Companies and its subsidiary, _______
(the "Subsidiary"), in connection with the preparation, execution and delivery
of the Notice of Acceptance by the Subsidiary delivered pursuant to Section
9.01 of the 5-Year Agreement.
In that connection, we have examined the 5-Year Agreement, the B
Notes, if any, to be executed and delivered by the Subsidiary and such other
agreements, instruments and documents as we have deemed necessary as a basis
for the opinion expressed below. As to questions of fact material to such
opinion, we have, when relevant facts were not independently established by us,
relied upon certificates of PM Companies and the Subsidiary or their respective
officers or of public officials. We have assumed the due execution and
delivery, pursuant to due authorization, of the 5-Year Agreement by the Lenders
parties thereto and the Agent.
<PAGE>
2
Based upon the foregoing and upon such investigation as we have
deemed necessary, we are of the opinion that the 5-Year Agrement is, and the B
Notes of the Subsidiary if delivered under the 5-Year Agreement will be, the
legal, valid and binding obligations of the Subsidiary enforceable against the
Subsidiary in accordance with their respective terms, subject to the effect of
any applicable bankruptcy, insolvency, reorganization, moratorium or similar
law affecting creditors' rights generally and to the effect of general
principles of equity, including (without limitation) concepts of materiality,
reasonableness, good faith and fair dealing (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
Very truly yours,
EXHIBIT 10.24
Philip Morris Companies Inc.
1992 Compensation Plan For Non-Employee Directors
(as amended, and in effect, November 29, 1995)
SECTION 1. Purposes; Definitions.
The purposes of the Plan are (i) to assist the Company in promoting a greater
identity of interest between the Company's non-employee directors and its
shareholders; and (ii) to assist the Company in attracting and retaining
non-employee directors by affording Participants an opportunity to share in the
future successes of the Company. In addition, in accordance with Revenue Ruling
71-419, 1971-2 C.B. 220, the Plan is intended to afford any or all non-employee
directors of the Company the option to defer the receipt of all or part of
their Compensation until such future date as they may elect pursuant to the
terms and conditions of the Plan.
For purposes of the Plan, the following terms are defined as set forth below:
a. "Account" means an unfunded deferred compensation account established by
the Company pursuant to the Deferred Fee Program, consisting of one or
more Subaccounts established in accordance with Section 3.2.2.
b. "Allocation Date" means any date on which an amount representing all or a
part of a Participant's Compensation is to be credited to his or her
Account pursuant to an effective deferral election. The Allocation Date
for the Retainer Fee shall be the first day of each calendar quarter and
for Meeting Fees shall be the first day of the month following the
meeting.
c. "Beneficiary" means any person or entity designated as such in a current
Election Form. If there is no valid designation or if no designated
Beneficiary survives the Participant, the Beneficiary is the Participant's
estate.
d. "Board" means the Board of Directors of the Company.
e. "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
f. "Common Stock" means the common stock, $1 par value, of the Company.
g. "Company" means Philip Morris Companies Inc., a corporation organized
under the laws of the Commonwealth of Virginia, or any successor
corporation.
h. "Compensation" means the sum of the Retainer Fee and the Meeting Fees
payable by the Company to each Participant but shall not include any
additional amount paid to a chairman of a committee for additional
services.
<PAGE>
i. "Date of Grant" means May 1 of each year (beginning May 1, 1992 and ending
May 1, 2001) on which dates shares of Common Stock will be awarded in
accordance with Section 4.
j. "Deferred Amount" means the amount (determined as a percentage of the
Retainer Fee and the Meeting Fees) subject to a current deferral election.
k. "Deferred Fee Program" means the provisions of the Plan that permit
Participants to defer all or part of their Compensation.
l. "Disability" means permanent and total disability as determined under
procedures established by the Board for purposes of the Plan.
m. "Distribution Date" means the date designated by a Participant in
accordance with Sections 3.4.1 and 3.4.2 for the commencement of payment
of amounts credited to his or her Account.
n. "Election Date" means the date an Election Form is received by the
Secretary of the Company.
o. "Election Form" means a valid Deferred Fee Program Initial Election Form
or Modified Election Form properly completed and signed.
p. "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the rules and regulations thereunder.
q. "Exchange Act" means the Securities Exchange Act of 1934, as from time to
time amended.
r. "Extraordinary Distribution Request Date" means the date an Extraordinary
Distribution Request Form is received by the Secretary of the Company.
s. "Extraordinary Distribution Request Form" means the Deferred Fee Program
Extraordinary Distribution Request Form properly completed and executed by
a Participant or Beneficiary who wishes to request an extraordinary
distribution of amounts credited to his or her Account in accordance with
Section 3.4.3.
t. "Fair Market Value" means, as of any given date, the mean of the highest
and lowest reported sales prices of the Common Stock as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on The New York Stock Exchange.
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<PAGE>
u. "Fund" means any one of the investment vehicles in which the trust fund
established under the trust agreement, as amended from time to time,
entered into by the Company in connection with the Profit-Sharing Plan, is
invested.
v. "Meeting Fees" means the portion of a Participant's Compensation that is
based upon his or her attendance at Board meetings and meetings of
committees of the Board.
w. "Participant" means a member of the Board who satisfies the requirements
of Section 2 and a Director Emeritus. For purposes of the Deferred Fee
Program only, a Participant shall also include a person who was, but is no
longer, a member of the Board as long as an Account is being maintained
for his or her benefit.
aa. "Plan" means the Philip Morris Companies Inc. 1992 Compensation Plan for
Non- Employee Directors.
bb. "Profit-Sharing Plan" means the Philip Morris Deferred Profit-Sharing
Plan, effective as of January 1, 1956, as amended from time to time.
cc. "Retainer Fee" means the portion of a Participant's Compensation that is
fixed and paid without regard to his or her attendance at meetings, but
shall not include amounts credited to a Participant's account under the
Philip Morris Companies Inc. Stock Unit Plan for Non-Employee Directors.
dd. "Retired Participant" means a person who is not a Participant who had
amounts credited to his or her account under the Former Plan as of April
1, 1992.
ee. "Subaccount" means one of the bookkeeping accounts established within each
Participant's Account in accordance with Section 3.2.2.
ff. "Transfer Election Date" means the date set forth on a Transfer Form.
gg. "Transfer Form" means a valid Deferred Fee Program Transfer Election Form
completed and signed by a Participant or Beneficiary.
hh. "Trustee" means the trustee administering the Fund.
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<PAGE>
SECTION 2. Eligibility.
Each member of the Board who is not a full-time employee of the Company (or any
corporation in which the Company owns, directly or indirectly, stock possessing
at least (50%) of the total combined voting power of all classes of stock
entitled to vote in the election of directors in such corporation) shall be
eligible to receive an award in accordance with Section 4. In addition, each
Participant shall be eligible to participate in the Deferred Fee Program.
SECTION 3. Deferred Fee Program.
3.1 Participation.
3.1.1 Deferral Elections.
A Participant may make a deferral election with respect to all or a
part of his or her Compensation to be earned and payable thereafter by
completing and executing an Election Form and submitting it to the Secretary of
the Company. Any deferral election relating to Retainer Fees shall be in
integral multiples of twenty-five percent (25%) of the Retainer Fee. Any
deferral elections relating to Meeting Fees shall be one hundred percent (100%)
of each Meeting Fee.
In accordance with the terms of the Plan, the Participant shall
indicate on the Election Form:
a. the percentage of the Retainer Fee that he or she wishes to
defer and whether Meeting Fees are to be deferred;
b. the Distribution Date;
c. whether distributions are to be in a lump sum, in installments
or a combination thereof;
d. the Participant's Beneficiary or Beneficiaries; and
e. the Subaccounts to which the Deferred Amount is to be allocated.
A deferral election shall become effective with respect to a
Participant's Retainer Fee accruing on and after the first day of the calendar
quarter (and payable on the first day of the second calendar quarter) following
the Election Date. A deferral election shall become effective with respect to a
Participant's Meeting Fees accruing on and after the first day of the calendar
month following the Election Date. A deferral election shall remain
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<PAGE>
in effect with respect to all future Compensation until a new deferral election
made by the Participant in accordance with Section 3.1.2 or Section 3.1.3
becomes effective.
3.1.2 Change of Deferral Election.
A Participant may change his or her deferral election with respect to
Compensation to be earned and payable thereafter by completing and executing a
Modified Election Form and submitting it to the Secretary of the Company. A
change to increase the amount of future Compensation to be deferred shall
become effective with respect to a Participant's Retainer Fee accruing on and
after the first day of the calendar quarter (and payable on the first day of
the second calendar quarter) following the Election Date. A change to defer
Meeting Fees shall become effective with respect to a Participant's Meeting
Fees accruing on and after the first day of the calendar month following the
Election Date. Subject to Section 3.1.3, a change to decrease the amount of
future Compensation to be deferred shall become effective with respect to
Compensation accruing on and after the later of (i) January 1 (and, with
respect to Retainer Fees, payable on April 1) of the year following the
Election Date or (ii) the first day of the second calendar quarter (and, with
respect to Retainer Fees, payable on the first day of the third calendar
quarter) following the Election Date. Notwithstanding the foregoing, to the
extent any such change of a deferral election affects Subaccount D, it shall
not become effective until the first day of the calendar month that is at least
six months after the Election Date. Any amount credited to a Participant's
Account prior to such effective date will continue to be subject to the
provisions of the Participant's last valid Election Form.
3.1.3 Cessation of Deferrals.
A Participant may cease to defer future Compensation in the Deferred
Fee Program by completing and executing a Modified Election Form, and
submitting it to the Secretary of the Company. An election by a Participant to
cease deferrals in the Deferred Fee Program shall become effective with respect
to Compensation accruing on or after the later of (i) January 1 (and, with
respect to Retainer Fees, payable on April 1) of the year following the
Election Date or (ii) the first day of the second calendar quarter (and, with
respect to Retainer Fees, payable on the first day of the third calendar
quarter) following the Election Date; provided, however that to the extent such
election affects Subaccount D, it shall not become effective until the first
day of the calendar month that is at least six months after the Election Date.
Any amounts credited to a Participant's Account prior to such effective date
will continue to be subject to the provisions of the Participant's last valid
Election Form.
3.1.4 Beneficiary Election Modification.
A Participant shall be permitted at any time to modify his or her
Beneficiary election, effective as of the Election Date, by completing and
executing a Modified Election Form and submitting it to the Secretary of the
Company.
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<PAGE>
3.2 Investments.
3.2.1 Accounts.
The Company shall establish an Account for each Participant and for
each Beneficiary to whom installment distributions are being made. On each
Allocation Date, the Company shall allocate to each Participant's Account an
amount equal to his or her Deferred Amount.
3.2.2 Subaccounts.
The Company shall establish within each Account one or more
Subaccounts, which shall be credited with earnings and charged with losses, if
any, on the same basis as the corresponding Fund, as the same may change from
time to time, under the Profit-Sharing Plan; as of the date hereof, the
Subaccounts are, respectively:
Subaccount A - a bookkeeping account whose value shall be based on a
theoretical investment in the U.S. Obligations Fund of the
Profit-Sharing Plan.
Subaccount B - a bookkeeping account whose value shall be based on a
theoretical investment in the Equity Index Fund of the Profit-Sharing
Plan.
Subaccount C - a bookkeeping account whose value shall be based on a
theoretical investment in the Interest Income Fund of the
Profit-Sharing Plan.
Subaccount D - a bookkeeping account whose value shall be based on a
theoretical investment in the Philip Morris Stock Fund of the
Profit-Sharing Plan.
Subaccount E - effective January 1, 1996, a bookkeeping account whose
value shall be based on a theoretical investment in the Balanced Fund
of the Profit- Sharing Plan.
Subaccount F - effective January 1, 1996, a bookkeeping account whose
value shall be based on a theoretical investment in the International
Equity Fund of the Profit-Sharing Plan.
Subaccount G - effective January 1, 1996 a bookkeeping account whose
value shall be based on a theoretical investment in the Growth Equity
Fund of the Profit-Sharing Plan.
To the extent additional funds are provided under the Profit-Sharing Plan, the
Senior Vice President - Human Resources and Administration of the Company is
authorized to establish corresponding Subaccounts under the Plan.
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<PAGE>
Subject to the provisions of Sections 3.2.3 and 3.2.4, on each
Allocation Date, each Participant's Subaccounts shall be credited with an
amount equal to the Deferred Amount designated by the Participant for
allocation to such Subaccounts. Each Subaccount shall be credited with earnings
and charged with losses as if the amounts allocated thereto had been invested
in the corresponding Fund.
The value of any Subaccount at any relevant time shall be determined
as if all amounts credited thereto had been invested in the corresponding Fund.
3.2.3 Investment Directions.
In connection with his or her initial deferral election, each
Participant shall make an investment direction on his or her Initial Election
Form with respect to the portion of such Participant's Deferred Amount that is
to be allocated to a Subaccount. Any apportionment of Deferred Amounts (and of
increases or decreases in Deferred Amounts) among the Subaccounts shall be in
integral multiples of one percent (1%). An investment direction shall become
effective with respect to any Subaccount, other than Subaccount D, on the first
day of the calendar month following the Election Date. An investment direction
shall become effective with respect to Subaccount D on the first day of the
calendar month that occurs six months after the relevant Election Date. All
investment directions shall be irrevocable and shall remain in effect with
respect to all future Deferred Amounts until a new irrevocable investment
direction made by the Participant in accordance with Section 3.2.4 becomes
effective.
3.2.4 New Investment Directions.
A Participant may make a new investment direction with respect to his
or her Deferred Amount only by completing and executing a Modified Election
Form and submitting it to the Secretary of the Company. A new investment
direction shall become effective with respect to any Subaccount, other than
Subaccount D on the first day of the calendar month following the Election
Date. A new investment direction shall become effective with respect to
Subaccount D on the first day of the calendar month that is at least six months
after the Election Date.
3.2.5 Investment Transfers.
A Participant or a Beneficiary (after the death of the Participant
may transfer to one or more different Subaccounts all or a part (not less than
one percent (1%)) of the amounts credited to a Subaccount by completing and
executing a Transfer Form and submitting it to the Secretary of the Company.
Any transfer of amounts among Subaccounts, other than a transfer to or from
Subaccount D by a Participant who, at the time of requesting the transfer, is
subject to Section 16 of the Exchange Act, shall become effective on the first
day of the calendar month following the Transfer Election Date.
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<PAGE>
Any transfer to or from Subaccount D requested by a person who, at
the time of requesting the transfer, is subject to Section 16 of the Exchange
Act shall become effective on the first day of the calendar month that is at
least six months after the Transfer Election Date.
3.3 [Intentionally Omitted]
3.4 Distributions.
3.4.1 Distribution Elections.
Each Participant shall designate on his or her Election Form one of
the following dates as a Distribution Date with respect to amounts credited to
his or her Account thereafter:
a. the first day of the calendar month following the date of the
Participant's death;
b. the first day of the calendar month following the date of the
Participant's Disability;
c. the first day of the calendar month following the date of
termination of the Participant's service as a member of the
Board;
d. the first day of a calendar month specified by the Participant
which is at least six months after the Election Date; or
e. the earliest to occur of a, b, c or d.
A Distribution Date election shall become effective on the
Election Date.
A Participant may request on his or her Election Form that
distributions from his or her Account be made in (i) a lump sum, (ii) no more
than one-hundred eighty (180) monthly, sixty (60) quarterly or fifteen (15)
annual installments or (iii) a combination of (i) and (ii). Each installment
shall be determined by dividing the Account balance by the number of remaining
installments. If a Participant receives a distribution from a Subaccount on an
installment basis, amounts remaining in such Subaccount before payment shall
continue to accrue earnings and incur losses in accordance with the terms of
Section 3.2.2. Except as stated in the next paragraph, all distributions shall
be made to the Participant.
If the Distribution Date is the first day of the month following the
Participant's death or a fixed date which in fact occurs after the
Participant's death or if at the time of death the Participant was receiving
distributions in installments, the balance remaining in the Participant's
Account shall be payable to his or her Beneficiaries as set forth on the
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March 5, 1996
<PAGE>
Participant's current Election Form or Forms. Upon the death of a Beneficiary
who is receiving distributions in installments, the balance remaining in the
Account of the Beneficiary shall be payable to his or her estate without
interest.
All distributions to Beneficiaries shall be in a lump sum, without
interest, except when the Distribution Date is the first day of the month
following the Participant's death and the current Election Form or Forms
specify installment payments.
All distributions shall be paid in cash and, except as provided in
Section 3.4.3, shall be deemed to have been made from each Subaccount pro rata.
3.4.2 Modified Distribution Elections.
A Participant may modify his or her election as to Distribution Date
and distribution form with respect to Compensation to be earned and payable
thereafter by completing and executing a modified Election Form and submitting
it to the Secretary of the Company. No more than one such modification shall be
permitted. Any modified Distribution Date or distribution form election shall
become effective on the Election Date.
3.4.3 Extraordinary Distributions.
Notwithstanding the foregoing, a Participant or Beneficiary (after
the death of the Participant) may request an extraordinary distribution of all
or part of the amount credited to his or her Account because of hardship. A
distribution shall be deemed to be "because of hardship" if such distribution
is necessary to alleviate or satisfy an immediate and heavy financial need of
the Participant.
A request for an extraordinary distribution shall be made by
completing and executing an Extraordinary Distribution Request Form and
submitting it to the Secretary of the Company. All extraordinary distributions
shall be subject to approval by the Board.
The Extraordinary Distribution Request Form shall indicate:
a. the amount to be distributed from the Account;
b. the Subaccount(s) from which the distribution is to be made; and
c. the "hardship" requiring the distribution.
The amount of any extraordinary distribution shall not exceed the
amount determined by the Board to be required to meet the immediate financial
need of the applicant.
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<PAGE>
An extraordinary distribution shall be made with respect to amounts
credited to each Subaccount, other than Subaccount D if the recipient is then
subject to Section 16 of the Exchange Act and the extraordinary distribution is
not incident to the recipient's ceasing to be a member of the Board, on the
first day of the calendar month next following approval of the extraordinary
distribution request by the Board. An extraordinary distribution, not incident
to the Participant's ceasing to be a member of the Board, requested by a
Participant who is then subject to Section 16 of the Exchange Act shall
commence with respect to amounts credited to Subaccount D on the first day of
the calendar month that is at least six months following the Extraordinary
Distribution Request Date or, if later, the first day of the calendar month
following approval of the extraordinary distribution request by the Board.
SECTION 4. Share Distribution.
4.1 Awards.
Each Participant who is not a Director Emeritus and who was not on January 1,
1990 a full- time employee of the Company or any corporation in which the
Company owned, directly or indirectly, stock possessing at least (50%) of the
total outstanding voting power of all classes of stock entitled to vote in the
election of directors of such corporation shall be awarded on each Date of
Grant that number of full shares of Common Stock equal to the lesser of (i)
four hundred (400) or (ii) that number having an aggregate Fair Market Value on
such Date of Grant nearest to but not exceeding one hundred percent (100%) of
the Retainer Fee payable for the twelve-month period ending on the preceding
April 30 (exclusive of the value of the Common Stock received by such
Participant pursuant to the Plan).
4.2 Vesting of Shares.
The shares of Common Stock awarded pursuant to the Plan will be immediately
vested and nonforfeitable. Subject to the requirements of Section 4.5, the
shares awarded under the Plan may not be sold or transferred until six months
after the Date of Grant.
4.3 Shareholder Rights.
On each Date of Grant, a Participant shall have all the rights of a shareholder
with respect to shares of Common Stock awarded under the Plan on such date.
Accordingly, the Participant will be entitled to vote the shares and receive
dividends.
4.4 Shares Authorized.
Up to 200,000 shares of Common Stock may be awarded under the Plan. In the
event of any merger, share exchange, reorganization, consolidation,
recapitalization, stock dividend, stock split or other change in corporate
structure affecting the Common Stock, appropriate
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March 5, 1996
<PAGE>
substitutions or adjustments shall be made to item (i) of Section 4.1 and in
the aggregate number and kind of shares reserved for issuance under the Plan.
4.5 Regulatory Restrictions.
All certificates for shares of Common Stock or other securities delivered under
the Plan shall be subject to such stock transfer orders and other restrictions
as the Company may deem advisable under the rules, regulations and other
requirements of the Company, any stock exchange upon which the Common Stock is
then listed and any applicable Federal, state or foreign securities law, and
the Company may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.
SECTION 5. General Provisions.
5.1 Unfunded Plan.
It is intended that the Plan constitute an "unfunded" plan for deferred
compensation. The Company may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan; provided, however,
that, unless the Company otherwise determines, the existence of such trusts or
other arrangements is consistent with the "unfunded" status of the Plan. Any
liability of the Company to any person with respect to any grant under the Plan
shall be based solely upon any contractual obligations that may be created
pursuant to the Plan. No such obligation of the Company shall be deemed to be
secured by any pledge of, or other encumbrance on, any property of the Company.
5.2 Rules of Construction.
Headings are given to the sections of the Plan solely as a convenience to
facilitate reference. The reference to any statute, regulation, or other
provision of law shall be construed to refer to any amendment to or successor
of such provision of law.
5.3 Withholding.
No later than the date as of which an amount first becomes includible in the
gross income of the Participant for Federal income tax purposes with respect to
any participation under the Plan, the Participant shall pay to the Company, or
make arrangements satisfactory to the Company regarding the payment of, any
Federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount.
5.4 Amendment.
The Plan may be amended by the Board, but no amendment shall be made that would
impair prior Common Stock awards or the rights of a Participant to his or her
Account without his
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March 5, 1996
<PAGE>
or her consent. Notwithstanding the foregoing, Section 4.1 shall not be amended
more than once every six months, unless such amendment is required because of
changes in the Code or ERISA. In addition, no amendment may become effective
until shareholder approval is obtained if the amendment (i) except as expressly
provided in the Plan, increases the aggregate number of shares of Common Stock
that may be awarded under the Plan, (ii) materially increases the benefits
accruing to Participants under the Plan or (iii) modifies the eligibility
requirements for participation in the Plan.
5.5 Duration of Plan.
No Common Stock awards will be made pursuant to Section 4 after May 1, 2001 or
at any time at which there are insufficient shares of Common Stock authorized
under the Plan for such awards. There shall be no time limitation with respect
to the Deferred Fee Program. The Board may terminate the Plan at any time, by
appropriate action. Upon termination of the Plan, amounts then credited to each
Account shall be paid in accordance with the Distribution Election then
governing such Account or as otherwise provided in Section 3.4.1.
5.6 Assignability.
No Participant or Beneficiary shall have the right to assign, pledge or
otherwise transfer any payments to which such Participant or Beneficiary may be
entitled under the Plan other than by will or by the laws of descent and
distribution or pursuant to a "qualified domestic relations order" (as defined
by Title I of ERISA).
5.7 Construction.
The Plan shall be construed and interpreted in accordance with Virginia law.
The Plan is intended to be construed so that participation in the Plan will be
exempt from Section 16(b) of the Exchange Act pursuant to regulations and
interpretations issued from time to time by the Securities and Exchange
Commission.
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March 5, 1996
EXHIBIT 10.25
Philip Morris Companies Inc.
Unit Plan For Incumbent Non-Employee Directors
(November 29, l995)
SECTION 1. Introduction
The Philip Morris Companies Inc. Unit Plan for Incumbent Non-Employee
Directors provides for a Stock Unit Account, an Equity Index Account and an
Interest Income Account for each Incumbent Director, the value of which will be
paid to the Incumbent Director or, in the case of his or her death, a
Beneficiary, upon such Incumbent Director's ceasing to be a Director after
January 1, 1996.
SECTION 2. Definitions
For purposes of the Plan, the following terms are defined as set
forth below:
a. "Account" means the Stock Unit Account, the Equity Index Account or the
Interest Income Account, and "Accounts" means more than one of the
Accounts.
b. "Beneficiary" means any person or entity designated as such in a current
Beneficiary Designation Form on file with the Corporate Secretary of the
Company. If there is no valid designation or if no designated Beneficiary
survives the Participant, the Beneficiary is the Participant's estate.
c. "Beneficiary Designation Form" means a Plan Beneficiary Designation Form
properly completed and signed.
d. "Board" means the Board of Directors of the Company.
e. "Common Stock" means the common stock, $1 par value, of the Company.
f. "Company" means Philip Morris Companies Inc., a corporation organized
under the laws of the Commonwealth of Virginia, or any successor
corporation.
g. "Director" means a person serving on the Board.
h. "Distribution Election Form" means a Plan Distribution and Special
Transfer Election Form properly completed and signed.
i. "Equity Index Account" means the unfunded deferred compensation account
established by the Company in accordance with Section 3 of the Plan.
j. "Equity Index Fund" means the Equity Index Fund of the Profit-Sharing
Plan.
<PAGE>
k. "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the rules and regulations thereunder.
l. "Interest Income Account" means the unfunded deferred compensation account
established by the Company in accordance with Section 3 of the Plan.
m. "Interest Income Fund" means the Interest Income Fund of the
Profit-Sharing Plan.
n. "Incumbent Director" means a Director on January 1, 1996 who is not
entitled to receive a pension or similar benefit from the Company or any
corporation in which the Company owns, or at any time owned, directly or
indirectly, stock possessing at least fifty percent (50%) of the total
combined voting power of all classes of stock entitled to vote; provided,
however, if an Incumbent Director is eligible for a Pension Allowance (as
defined in the Pension Plan) if he or she ceases to be a Director, he or
she waives, before December 20, 1995, his or her right to such Pension
Allowance.
O. "Participant" means an Incumbent Director, and a person who was, but is no
longer, serving on the Board as long as an Account is being maintained for
his or her benefit.
p. "Pension Plan" means the Pension Plan for Directors of Philip Morris
Companies Inc.
q. "Philip Morris Stock Fund" means the Philip Morris Stock Fund of the
Profit-Sharing Plan.
r. "Plan" means the Philip Morris Companies Inc. Unit Plan for Incumbent Non-
Employee Directors.
s. "Profit-Sharing Plan" means the Philip Morris Deferred Profit-Sharing
Plan, effective as of January 1, 1956, as amended from time to time.
t. "Stock Unit" means a notional entry that is the equivalent of one share of
Common Stock.
u. "Stock Unit Account" means the unfunded deferred compensation account
established by the Company in accordance with Section 3 of the Plan.
SECTION 3. Accounts
On January 1, 1996, the Company shall establish a Stock Unit Account
for each Incumbent Director and shall credit thereto a number of Stock Units
equal to that resulting from a theoretical investment of $_________ on December
29, 1995 in the Philip Morris Stock Fund; provided, however, if, before
December 20, 1995, a Director shall have
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<PAGE>
elected to credit an amount, not in excess of $________ in the aggregate, to one
or both of the Equity Index Account and the Interest Income Account, the
Company shall establish for each such Incumbent Director on January 1, 1996
such Accounts in the amounts specified and shall credit to a Stock Unit
Account for such Incumbent Director that number of Stock Units equal to that
resulting from a theoretical investment on December 29, 1995 in the Philip
Morris Stock Fund of $________, less the amounts credited to such other
Accounts.
The Stock Unit Account shall be a bookkeeping account whose value
shall be based on a theoretical investment in the Philip Morris Stock Fund.
The Equity Index Account shall be a bookkeeping account whose value
shall be based on a theoretical investment in the Equity Index Fund of the
Profit-Sharing Plan.
The Interest Income Account shall be a bookkeeping account whose
value shall be based on a theoretical investment in the Interest Income Fund of
the Profit-Sharing Plan.
Each Account shall be credited with earnings and charged with losses,
if any, on the same basis as the corresponding Fund, as the same may be changed
from time to time, under the Profit-Sharing Plan. The value of any Account at
any relevant time shall be determined as if all amounts credited thereto had
been invested in the corresponding Fund.
Except as provided in Section 4 below, no transfer shall be permitted
among Accounts.
SECTION 4. Distribution and Special Transfer Election
Unless the Participant has filed a Distribution Election Form with
the Corporate Secretary of the Company no later than one year and one day
preceding the date he or she ceases to be a Director, the Participant's
Accounts shall be distributed in a lump sum on the first day of the second
month following the date the Participant ceases to be a Director.
A Participant may file a Distribution Election Form, which shall be
irrevocable, providing that distribution from his or her Accounts may be made
(i) in no more than one-hundred eighty (180) monthly, sixty (60) quarterly or
fifteen (15) annual installments or (ii) in a combination of a lump sum and
installments. The first such payment shall be made on the first day of the
second month following the date the participant ceases to be a Director. Each
installment shall be determined by dividing the sum of the Account balances by
the number of remaining installments. If a Participant is receiving
distributions in installments, the Accounts shall continue to accrue earnings
and incur losses in accordance with Section 3.
A Participant who elects a distribution in installments shall be
entitled to make a special investment election on his or her Distribution
Election Form pursuant to which
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<PAGE>
transfers from the Participant's Stock Unit Account will be made, effective the
first day of the second month following the date the Participant ceases to be a
Director, to an Equity Index Account or an Interest Income Account or both.
If a distribution occurs by reason of the Participant's death or, if
at the time of death, the Participant was receiving distributions in
installments, the balance remaining in the Participant's Accounts shall be
payable to his or her Beneficiaries. All distributions to Beneficiaries shall
be in a lump sum, without interest.
All distributions shall be paid in cash.
SECTION 5. Beneficiary Designation
A Participant may at any time file a Beneficiary Designation Form
with the Corporate Secretary of the Company. Such Beneficiary Designation Form
may be revoked or modified at any time by filing a new Beneficiary Designation
Form.
SECTION 6. General Provisions
6.1 Unfunded Plan.
It is intended that the Plan constitute an "unfunded" plan for deferred
compensation. The Company may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan; provided, however,
that, unless the Company otherwise determines, the existence of such trusts or
other arrangements is consistent with the "unfunded" status of the Plan. Any
liability of the Company to any person with respect to any grant under the Plan
shall be based solely upon any contractual obligations that may be created
pursuant to the Plan. No such obligation of the Company shall be deemed to be
secured by any pledge of, or other encumbrance on, any property of the Company.
6.2 Rules of Construction.
Headings are given to the sections of the Plan solely as a convenience to
facilitate reference. The reference to any statute, regulation, or other
provision of law shall be construed to refer to any amendment to or successor
of such provision of law.
6.3 Withholding.
No later than the date as of which an amount first becomes includible in the
gross income of the Participant or Beneficiary for Federal income tax purposes
with respect to any participation under the Plan, the Participant or
Beneficiary shall pay to the Company, or make arrangements satisfactory to the
Company regarding the payment of, any Federal,
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<PAGE>
state, local or foreign taxes of any kind required by law to be withheld with
respect to such amount.
6.4 Amendment.
The Plan may be amended by the Board, but no amendment shall be made that would
impair the rights of a Participant to his or her Accounts without his or her
consent.
6.5 Duration of Plan.
There shall be no time limitation with respect to the Plan. The Board may
terminate the Plan at any time. Upon terminatian of the Plan, amounts credited
to each Account shall be distributed in accordance with the Distribution
Election Form applicable to each such Account or as otherwise provided in
Section 4.
6.6 Assignability.
No Participant or Beneficiary shall have the right to assign, pledge or
otherwise transfer any payments to which such Participant or Beneficiary may be
entitled under the Plan other than by will or by the laws of descent and
distribution or pursuant to a "qualified domestic relations order" (as defined
by Title I of ERISA).
6.7 Construction.
The Plan shall be construed and interpreted in accordance with Virginia law.
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<PAGE>
INITIAL ELECTION FORM
Philip Morris Companies Inc.
Unit Plan for Non-Employee Directors
(THIS FORM, DULY COMPLETED AND SIGNED, MUST BE RECEIVED
BY THE CORPORATE SECRETARY OF PHILIP MORRIS COMPANIES INC.
BEFORE DECEMBER 20, 1995)
THIS ELECTION IS IRREVOCABLE
To: The Corporate Secretary of Philip Morris Companies Inc.
In accordance with the terms of the Philip Morris Companies Inc. Unit
Plan for Non-Employee Directors (the "Plan"), I am making the following
election. Capitalized terms used in this form have the meanings assigned by the
Plan.
I hereby elect to have the amount of $_______ allocated to the
following Accounts:
$____________ Stock Unit Account (not less than $_______)
$____________ Equity Index Account
$____________ Interest Income Account
$
===========
I UNDERSTAND THAT THIS ELECTION IS IRREVOCABLE AND THAT, EXCEPT IN
CONNECTION WITH MY CEASING TO BE A DIRECTOR, I CANNOT MAKE TRANSFERS AMONG THE
ACCOUNTS.
I acknowledge receipt of a copy of the Plan.
Dated:
-----------------------------
(Signature)
-----------------------------
(Print Name)
-----------------------------
(Social Security Number)
<PAGE>
DISTRIBUTION AND SPECIAL TRANSFER ELECTION FORM
Philip Morris Companies Inc.
Unit Plan for Incumbent Non-Employee Directors
THIS FORM, DULY COMPLETED AND SIGNED, MUST BE RECEIVED BY THE
CORPORATE SECRETARY OF PHILIP MORRIS COMPANIES INC. AT LEAST ONE YEAR
AND ONE DAY BEFORE THE PARTICIPANT CEASES TO BE A DIRECTOR.
To: The Corporate Secretary of Philip Morris Companies Inc.
In accordance with the terms of the Philip Morris Companies Inc. Unit
Plan for Incumbent Non-Employee Directors (the "Plan"), I am making the
following elections. Capitalized terms used in this form have the meanings
assigned by the Plan.
THIS DISTRIBUTION ELECTION IS IRREVOCABLE.
I hereby elect to have my Accounts paid as follows:
(Check and complete only one of A or B.)
____A. In ____________________ (insert not more than 180 monthly, 60
quarterly or 15 annual) installments commencing the first day of
the second month following my ceasing to be a Director;
or
____B. ____% in a lump sum upon the first day of the second month
following my ceasing to be a Director and
____% in _________________ (insert not more than 180 monthly, 60
quarterly or 15 annual) installments commencing the first day of
the second month following my ceasing to be a Director:
THIS SPECIAL TRANSFER ELECTION IS IRREVOCABLE.
Effective the second day of the month following my ceasing to be a
Director, make the following transfers from my Stock Unit Account
____% to an Equity Index Account
____% to an Interest Income Account
<PAGE>
I UNDERSTAND THAT THE ELECTIONS MADE ABOVE ARE IRREVOCABLE.
I acknowledge receipt of a copy of the Plan.
Dated:
---------------------------------
(Signature)
---------------------------------
(Print Name)
---------------------------------
(Social Security Number)
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I.E.F.
March 5, 1996
Exhibit 10.26
EMPLOYEE GRANTOR TRUST ENROLLMENT AGREEMENT
-------------------------------------------
This agreement, made the ____ day of ________________, 1995, between
[Executive] (the "Employee"), the person, if any, to whom the Employee is
legally married (the "Employee's Spouse"), and Philip Morris Companies Inc.,
("Philip Morris") and those subsidiaries of Philip Morris, if any, that have
also executed this agreement (collectively, the "Company"),
INTRODUCTION
------------
The Company has established and maintains the Philip Morris Benefit
Equalization Plan, Philip Morris Survivor Income Benefit Equalization Plan,
Philip Morris Supplemental Management Employees' Retirement Plan, [and] Kraft
Foods Supplemental Benefits Plan, [and (name of any other relevant supplemental
retirement arrangement)] (the "Supplemental Plans"), which are designed to
provide benefits supplemental to those provided under the tax-qualified
retirement plans maintained by the Company (the "Qualified Plans"). The
Employee is entitled to certain benefits under one or more of the Supplemental
Plans.
The Employee and the Company desire to enter into this Agreement
pursuant to which the Employee directs the Company to deposit certain cash
compensation payments on behalf of the Employee directly into a grantor trust to
be established and maintained by the Employee, which amounts will be in lieu of
benefits payable under the Supplemental Plans;
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<PAGE>
In consideration of their mutual undertakings, the Company, the
Employee, and the Employee's Spouse agree as follows:
I. Establishment and Maintenance of Grantor Trust
----------------------------------------------
1.1 The Employee agrees to establish and maintain an irrevocable
grantor trust (the "Trust") in the form attached hereto as Exhibit A for the
purpose of receiving and holding the cash deposits made pursuant to this
Agreement and any interest or other earnings on the outstanding balances in the
Trust.
1.2 The Employee and the Employee's Spouse agree that they will not
contribute any additional funds to the Trust and will withdraw funds only in
accordance with the terms of the Supplemental Plans, except to the extent that
Trust withdrawals are necessary to pay taxes on Trust earnings or cash deposits.
II. Payments to Trust
-----------------
2.1 The Company agrees to make available to the Employee $[insert sum
of trust contribution and tax payments] (the "Funding Payment"), as of [month,
day, year] and the Employee directs the Company to (a) deduct federal, state and
local income and employment taxes from the Funding Payment and remit such taxes
to the appropriate authorities; and (b) pay the remainder of the Funding Payment
into the Trust in cash.
2.2 The Company may, from time to time, make available to the Employee
additional funding payments. Unless the Employee terminates this Agreement
pursuant to Section 7.2 prior to the time such additional funding payments are
to be paid into the Trust, the Employee directs the Company to (a) deduct
federal, state and local income and employment taxes from such additional
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<PAGE>
funding payments and remit such taxes to the appropriate authorities; and (b)
pay the remainder of such additional funding payments into the Trust.
III. Distributions from Trust, Benefit Payments
------------------------------------------
3.1 The Employee and the Employee's Spouse agree that any amounts paid
from the Trust including any Trust earnings (other than any amounts distributed
to pay taxes on Trust earnings) shall offset the benefits otherwise payable to
them under the Supplemental Plans. For purposes of calculating this offset, the
amount otherwise payable under the Supplemental Plans at the relevant time to
the Employee or his Beneficiary(ies) will be converted to an after-tax amount
(the "After-Tax Benefit") using the tax assumptions set forth in Exhibit B. The
amount of any Trust distribution shall offset the amount of the After-Tax
Benefit and shall discharge the Company's liability to the Employee, the
Employee's Spouse and his Beneficiary(ies) to the extent of the corresponding
pre-tax benefit otherwise payable under the Supplemental Plans.
3.2 If the amount of the Trust distribution is less than the After-Tax
Benefit, the difference between the amount of the Trust distribution and the
After-Tax Benefit shall be converted to a pre-tax amount (the "Additional
Pre-Tax Benefit") based on the tax assumptions set forth in Exhibit B, and the
Company shall pay an amount equal to the Additional Pre-Tax Benefit to the
Employee or his Beneficiary(ies), from the Company's general assets in
satisfaction of the Company's remaining obligations under the Supplemental
Plans.
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<PAGE>
3.3 The Employee and the Employee's Spouse understand and agree that to
the extent funds in the Trust are distributed to either of them in amounts
greater than, or at times earlier than, those contemplated by the benefit
payment provisions of the Supplemental Plans and by Sections 3.1 and 3.2 hereof,
(a) the offsets against any amounts otherwise payable under the Supplemental
Plans will be calculated in the manner set forth in Section 6.1 as if the
amounts so distributed had remained in the Trust, accumulated earnings, and been
distributed at the proper time; and (b) such offsets will discharge the
Company's liability in the same manner as set forth in such Section 6.1.
IV. Tax Payments With Respect to Trust Earnings
-------------------------------------------
The Company may make payments on behalf of the Employee (or his
Beneficiary(ies)) to tax authorities to pay the federal, state and local income
taxes with respect to any earnings of the Trust and any income and employment
taxes as a result of the Company's payment of the Employee's taxes under this
Article IV. To the extent that the Company does not make payments sufficient
(using the assumptions set forth in Exhibit B) to pay such taxes, Trust income
will be distributed to provide any additional amounts required for such purpose.
V. Appointment of Philip Morris as Agent
-------------------------------------
5.1 The Employee appoints Philip Morris and such persons as may be
designated to act on behalf of Philip Morris as his duly authorized agent for
the following purposes: (a) providing, in accordance with the duties of the
"Administrator" as set forth in the form of Trust Agreement attached as Exhibit
A, investment
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<PAGE>
guidelines and other information and direction to the trustee of the Trust;
(b) removing the trustee and appointing a successor trustee of the Trust; (c)
examining the books and records of the Trust; and (d) amending and terminating
the Trust.
5.2 The Employee's appointment of Philip Morris as his agent is based
on the Employee's special trust and confidence in Philip Morris and its
management. In the event of a Change of Control (as defined in Section 8.5) of
Philip Morris, the Employee (or, if applicable, his Beneficiary(ies)) may remove
Philip Morris (or its successor) as the duly authorized agent for purposes of
carrying out the actions set forth in Section 5.1 by delivering to both Philip
Morris (or its successor) and the trustee of the Trust, within any period of two
days, written notice of such removal. The trustee shall not be required to
verify that there has been a Change of Control of Philip Morris and shall be
entitled to rely upon the Employee's notice of removal unless Philip Morris
provides to the trustee (within 10 days following the trustee's receipt of the
notice of removal from the Employee) written notice certifying that no Change of
Control has occurred. From and after the date on which Philip Morris (or its
successor) ceases to serve as the duly authorized agent, the offsets against the
Company's obligations to the Employee and the Employee's Spouse or
Beneficiary(ies) under the Supplemental Plans shall be determined by assuming
(a) that the value of Trust assets last reported by the trustee to Philip Morris
(or its successor) prior to such date is accumulated with earnings at the rate
specified in the second sentence of Section 6.1 (treating the immediately
preceding
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<PAGE>
December as the date for determining such rate) and (b) that all subsequent
distributions from the Trust occur at the proper times and in the proper
amounts.
VI. Attachment of Trust Assets
--------------------------
6.1 The Employee understands and agrees that in the event all or a
portion of the funds in the Trust are attached by court order or other legal
process or are otherwise alienated, the offset against any amounts otherwise
payable under the Supplemental Plans will be calculated as if the amount so
alienated remained in the Trust, had accumulated with earnings at the same rate
as amounts that actually remain in the Trust, was distributed at the proper
time, and was or is to be offset against benefits otherwise payable from the
Supplemental Plans before any remaining Trust assets were or are distributed. To
the extent that for any calendar year or portion thereof no assets remain in the
Trust, the amounts so alienated shall be deemed to earn interest at the annual
interest rate on 30-year Treasury securities (within the meaning of Internal
Revenue Code section 417(e)(3)) for the month of December preceding the first
year in which no assets remain in the Trust, reduced by estimated federal, state
and local income taxes on the deemed earnings using the tax assumptions set
forth in Exhibit B. The Employee agrees that the value of any amounts so
alienated, and the earnings that would have accumulated thereon, shall be offset
against a like amount of After-Tax Benefit, and shall discharge the Company's
liability to the Employee to the extent of the corresponding pre-tax benefit
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<PAGE>
otherwise payable to the Employee or his Beneficiary(ies) under the
Supplemental Plans.
6.2 The Employee's Spouse understands and agrees that should any
amounts under the Trust be assigned to her under a domestic relations order or
otherwise, the offset against any amounts otherwise payable under the
Supplemental Plans will be calculated in the manner set forth in Section 6.1 as
if the amount so alienated had remained in the Trust, accumulated earnings, and
been distributed at the proper time. The Employee's Spouse agrees that if she
also claims entitlement to benefits under the Supplemental Plans, the value of
the amount alienated under the Trust, and the earnings that would have
accumulated thereon absent such alienation, shall be offset against a like
amount of After-Tax Benefit, and shall discharge the Company's liability to the
Employee and the Employee's Spouse to the extent of the corresponding pre-tax
benefit otherwise payable to the Employee or the Employee's Spouse under the
Supplemental Plans.
VII. Termination
-----------
7.1 This Enrollment Agreement shall terminate 30 days after the date
the Trust terminates.
7.2 Notwithstanding the above, during the lifetime of the Employee,
this Enrollment Agreement may be terminated at any time by the Company or the
Employee by providing 30 days written notice to all parties. Any such
termination shall operate on a prospective basis only and shall not operate to
release the funds already in the Trust or to otherwise alter the application of
the terms of this Enrollment Agreement to such funds.
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<PAGE>
VIII. Miscellaneous
-------------
8.1 Nothing in this Agreement shall be construed to confer upon the
Employee the right to continue in the employment of the Company, or to require
the Company to continue the employment of the Employee.
8.2 This Agreement shall be binding upon and inure to the benefit of
the Company, it successors and assigns and the Employee or his Beneficiary(ies)
and the Employee's Spouse and their heirs, executors, other successors in
interest, administrators, and legal representatives.
8.3 The validity and interpretation of this Agreement shall be governed
by the laws of the State of New York.
8.4 The Employee's Beneficiary(ies) shall be determined in accordance
with the terms of the trust agreement pursuant to which the Trust is maintained.
8.5 Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) of 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of Philip Morris (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of Philip Morris entitled to vote generally
in the election of directors (the "Outstanding Company Voting Securities");
provided, however,
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<PAGE>
that the following acquisitions shall not constitute a Change of Control:
(i) any acquisition directly from Philip Morris; (ii) any acquisition by
Philip Morris, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by Philip Morris or any corporation controlled
by Philip Morris or (iv) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of subsection
(c) of this Section 8.5; or
(b) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by
Philip Morris's shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered as though
such individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Approval by the shareholders of Philip Morris of a
reorganization, merger, share exchange or consolidation (a "Business
Combination"), in each case, unless, following such Business Combination, (i)
all or substantially all of the individuals and entities who were the beneficial
owners,
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<PAGE>
respectively, of the Outstanding Company Common Stock and Outstanding Company
Voting Securities immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 80% of, respectively, the then
outstanding shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a result of
such transaction owns the Company through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, or (ii) no Person (excluding any
employee benefit plan (or related trust) or Philip Morris or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
(d) Approval by the shareholders of Philip Morris of (i) a complete
liquidation or dissolution of Philip Morris or (ii)
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<PAGE>
the sale or other disposition of all or substantially all of the assets of
Philip Morris, other than to a corporation, with respect to which following such
sale or other disposition, (A) more than 80% of, respectively, the then
outstanding shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to such sale
or other disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities, as the case may be, (B)
less than 20% of, respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by any Person
(excluding any employee benefit plan (or related trust) of Philip Morris or such
corporation), except to the extent that such Person owned 20% or more of the
Outstanding Company Common Stock or Outstanding Company Voting Securities prior
to the sale or disposition and (C) at least a majority of the members of the
board of directors of such corporation were members of the Incumbent Board at
the time of the execution of the initial
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<PAGE>
agreement, or of the action of the Board, providing for such sale or other
disposition of assets of Philip Morris or were elected, appointed or nominated
by the Board; or
(e) the entry of an order for relief against Philip Morris issued
pursuant to any chapter of the United States Bankruptcy Code, as amended.
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<PAGE>
IN WITNESS WHEREOF, the Employee, the Employee's Spouse, [and] Philip
Morris [and Subsidiary] have caused this Agreement to be executed as of the day
and year first above written.
Attest:
- --------------------------------- ---------------------------------
Signature of Employee
Attest:
- --------------------------------- ---------------------------------
Signature of Employee's Spouse
Attest:
Philip Morris Companies Inc.
By:
- --------------------------------- ------------------------------
Attest: [Subsidiary]
By:
- --------------------------------- ------------------------------
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<PAGE>
EXHIBIT B
Tax Assumptions
---------------
Federal income tax rate: the highest marginal Federal income tax rate as
adjusted for the Federal deduction of state and local taxes and the phase out of
Federal deductions under current law (or as adjusted under any subsequently
enacted similar provisions of the Internal Revenue Code).
State income tax rate: the highest adjusted marginal state income tax rate based
on the Employee's or Beneficiary's state of residence.
Local income tax rate: the highest adjusted marginal local income tax rate based
on the Employee's or Beneficiary's locality of residence.
Exceptions: While the Employee is actively employed, the state and local tax
rate assumptions used to determine the appropriate deduction from a Funding
Payment for state and local taxes, and the appropriate amount of such taxes on
Company payments to provide for the taxes due on earnings of the Trust, will
generally be based on the Employee's work location rather than his residence.
With respect to New York City tax, however, status as a non-resident will be
taken into account.
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<PAGE>
EXHIBIT A
EMPLOYEE GRANTOR TRUST AGREEMENT
THIS TRUST AGREEMENT made the ______________ day of
_____________________, 1995 between [EXECUTIVE'S NAME] (hereinafter called the
Grantor) and MORGAN GUARANTY TRUST COMPANY OF NEW YORK (hereinafter called the
Trustee),
W I T N E S S E T H T H A T:
WHEREAS, the Grantor desires to establish and maintain a trust
(hereinafter referred to as the "Trust Fund") to hold certain cash payments
actually or constructively received by the Grantor in lieu of certain future
payments the Grantor would otherwise be entitled to receive from Philip Morris
Companies Inc. (hereinafter referred to singularly as "Philip Morris") or its
subsidiaries (Philip Morris and its subsidiaries being collectively hereinafter
referred to as the "Companies") pursuant to the terms of the nonqualified
supplemental benefit plans specified in Schedule A annexed hereto (hereinafter
referred to as the Plans); and
WHEREAS, the Grantor has entered into certain agreements with the
Companies specifying the manner and extent to which amounts he will receive as
payments from the Trust Fund reduce the payments he would otherwise be entitled
to receive pursuant to the terms of the Plans or from other arrangements with
the Companies; and
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<PAGE>
WHEREAS, the Grantor has appointed Philip Morris to act as his agent in
connection with certain matters pertaining to the administration of the Trust
Fund;
NOW, THEREFORE, in consideration of the premises and covenants herein
contained, the Grantor hereby conveys and assigns to the Trustee, and the
successors or assigns of the Trustee, the sum of ______________ dollars
($___________ ), the receipt of which is hereby acknowledged by the Trustee,
to have and to hold the said sum together with any additions thereto upon the
following express trust and with the powers, authorities and discretions
hereinafter conferred:
ARTICLE I
---------
Introduction
------------
I. (1). Name. This agreement and the trust hereby evidenced may be
----
referred to as the "[Executive's Name] Employee Grantor Trust."
-------------------
I. (2). The Trust Fund. The "Trust Fund" as at any date means all
--------------
property then held by the Trustee under this agreement.
I. (3). Status of the Trust. The trust shall be irrevocable until such
-------------------
time as the Grantor (or, in the event of the Grantor's death, the Grantor's
Beneficiaries, as defined in Section VI. (8). below) and the Administrator
provide written certification to the Trustee that all obligations of the
Companies to the Grantor and his Beneficiaries have been satisfied. The trust is
intended to
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<PAGE>
constitute a grantor trust under which the Grantor is treated as grantor and
owner pursuant to Sections 671 - 678 of the Internal Revenue Code of 1986, as
amended, and shall be construed accordingly. Neither the Companies nor any
person other than the Grantor and, in the event of the Grantor's death, the
Grantor's Beneficiaries, and the Trustee acting as such, have any right, title
or interest in the assets of the Trust Fund.
I. (4). The Administrator. Philip Morris shall be the "Administrator"
-----------------
for purposes of this Trust and shall have certain powers, rights and duties
under this agreement as described below; provided that, Philip Morris may from
time to time designate a person or persons to act as the Administrator on its
behalf or to carry out certain duties of the Administrator. Philip Morris will
certify to the Trustee from time to time the person or persons authorized to act
on behalf of Philip Morris as the Administrator. The Trustee may rely on the
latest certificate received without further inquiry or verification.
Notwithstanding any provision herein, in the event of a Change of Control of
Philip Morris (as defined in the most recently executed Employee Grantor Trust
Enrollment Agreement entered into by Philip Morris and the Grantor), the Grantor
may remove Philip Morris (or its successor) and any designee of Philip Morris as
Administrator by delivering to both Philip Morris (or its successor) and the
Trustee within any period of two days written notice of such removal. The
Trustee may rely upon any notice of
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<PAGE>
removal received from the Grantor without further inquiry or verification,
unless Philip Morris (or its successor) provides to the Trustee (within 10 days
following the Trustee's receipt of the notice of removal from the Grantor)
written notice certifying that no change in control has occurred. In the event
the Grantor removes Philip Morris as Administrator, the Grantor shall appoint a
successor Administrator, who may be the Grantor, a committee of persons
including the Grantor, or such other person or persons as shall be reasonably
acceptable to the Trustee, and shall notify the Trustee of the appointment. In
such event, the Grantor shall also have the authority to, from time to time,
remove the person or persons so appointed and appoint such other person or
persons as shall be reasonably acceptable to the Trustee.
I. (5). Acceptance. The Trustee accepts the duties and obligations of
----------
the "Trustee" hereunder, agrees to accept funds delivered to it on behalf of the
Grantor, and agrees to hold such funds (and any proceeds from the investment of
such funds) in trust in accordance with this agreement; provided that the
Trustee reserves the right to determine whether to accept the transfer of any
property other than cash proposed to be transferred to it.
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<PAGE>
ARTICLE II
----------
Distribution of the Trust Fund
------------------------------
II. (1). The Trustee shall hold, manage, invest and reinvest the Trust
Fund, shall collect the income therefrom and, after deducting all proper
charges, shall pay or apply to or for the benefit of the Grantor (or, in the
event of the Grantor's death, the Grantor's Beneficiaries) so much, including
all, of the net income and principal of the Trust Fund as is set forth in a
schedule of payments provided to the Trustee by the Administrator. The
Administrator shall be responsible for providing the Trustee with all necessary
information as to the Grantor's current address, beneficiary designations, and
the form in which and time at which payments are to be made. The Trustee shall
incur no liability to the Grantor or any other person interested in the Trust
Fund for any action or any omission in reliance upon information provided by the
Administrator.
II. (2). The Trustee shall also distribute to the Grantor at least
annually such amount(s), if any, as the Administrator may certify to the Trustee
is (are) necessary to pay tax obligations of the Grantor resulting from earnings
on the Trust Fund or from additional amounts actually or constructively received
by the Grantor from the Companies and contributed to the Trust Fund.
II. (3). All income not so paid or applied shall be accumulated and
added to principal of the Trust Fund.
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<PAGE>
II. (4). This trust shall terminate on the first business day of the
Trustee following the date ninety (90) days after receipt by the Trustee of
written certification by the Grantor (or in the event of the Grantor's death,
the Grantor's Beneficiaries) and the Administrator that all obligations of the
Companies to the Grantor and his Beneficiaries have been satisfied, at which
time the Trustee shall transfer and pay over the principal of the Trust Fund,
together with any undistributed income on hand and accrued income, as then
constituted to the Grantor, if living, or the Beneficiaries designated by the
Grantor, in the event of his death.
ARTICLE III
-----------
The Trustee
-----------
III. (1). Any corporation resulting from any merger, conversion,
reorganization or consolidation to which any corporation acting as Trustee
hereunder shall be a party, or any corporation to which shall be transferred all
or substantially all of any such corporation's trust business, shall be the
successor of such corporation as Trustee hereunder, without the execution or
filing of any instrument or the performance of any further act and shall have
the same powers, authorities and discretions as though originally named in this
Trust Agreement.
III. (2). The Trustee may resign by giving ninety (90) days' advance
written notice to the Grantor and the
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<PAGE>
Administrator. The Administrator, as agent for the Grantor, may remove a Trustee
by giving ninety (90) days advance written notice to the Trustee and the
Grantor. The Administrator may appoint a successor Trustee by written notice
signed by the Administrator and delivered to the Trustee and the Grantor (or,
in the event of the Grantor's death, his Beneficiaries). If a successor Trustee
is not appointed within ninety (90) days of the Trustee's resignation, the
Trustee may apply to a court of competent jurisdiction for the appointment of
a successor.
III. (3). The Trustee shall be entitled to such compensation for its
services in any fiduciary capacity hereunder as the Administrator, as agent for
the Grantor, or the Grantor, and the Trustee may from time to time agree,
including minimum fees and additional compensation for special investments and
services, notwithstanding that such stipulated compensation shall be greater
than that now in effect or than that provided from time to time under applicable
law, and such compensation and reimbursement for reasonable expenses may be paid
at any time without court approval. Such compensation shall be paid from the
Trust Fund to the extent that it is not paid by the Administrator or the
Grantor.
III. (4). No bond or other security shall be required of any trustee in
any jurisdiction, whether for the faithful performance of duties, to secure
payment of commissions in advance or otherwise, and if, notwithstanding
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<PAGE>
this express direction, any such bond or security shall be required by any law,
statute or rule of court, no surety shall be required thereon.
ARTICLE IV
----------
Trustee Reporting
-----------------
IV. (1). The Trustee shall furnish the Administrator with statements of
transactions in the trust and statements of the market value of the Trust Fund
at least monthly, and the Administrator and the Grantor with a statement of
trust investments including the market value thereof at least annually. The
failure of both the Grantor and the Administrator to object to any matter
contained in such statements by written notice signed by either the Grantor or
the Administrator within ninety (90) days after receipt of the same shall
constitute the Grantor's assent to such statements and shall be final and
binding as to all matters contained in such statements upon the Grantor, the
Administrator as agent for the Grantor, and all persons, whether or not in
being, interested in the Trust Fund. In addition, the Grantor may execute a
release, with or without an account, approving the administration of the trust.
A release shall discharge the Trustee from any accountability and liability to
the Grantor, the Grantor's legal representatives, or any persons, whether or not
in being, interested in the Trust Fund, with the same effect as if the account
of the Trustee were judicially settled and allowed.
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<PAGE>
IV. (2). The Trustee shall also furnish the Administrator or the
Grantor with such other information relating to the actual or estimated income
of the Trust Fund, including the character of such income, and to estimated
taxes resulting from such income as the Trustee and the Administrator may from
time to time agree is necessary or desirable to assure appropriate reporting and
payment of taxes by or on behalf of the Grantor.
IV. (3). The Grantor and the Administrator, or such persons as may be
designated by them, shall at any time upon five days' advance written notice to
the Trustee have the right to examine, during the normal business hours of the
Trustee, all books and records of the Trustee pertaining to the Trust Fund.
ARTICLE V
---------
Investment and Administrative Authority
---------------------------------------
V. (1). In addition to any powers conferred by law, the Trustee shall
have the following powers, authorities and discretions with respect to any
property, real or personal, at any time held under any provision hereof and may
exercise the same with sole and absolute discretion and without the order or
approval of any court, and the Grantor intends that such powers, authorities and
discretions (including the following) be construed in the broadest possible
manner:
(a) To retain any such property without regard to the
proportion any such property or similar property held may bear to the
entire amount held and without any
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<PAGE>
obligation to diversify the same, whether or not the same is of the
kind in which fiduciaries are authorized by law or any rule of court
to invest funds;
(b) To sell any such property upon such terms and conditions
as may be deemed advisable, at public or private sale, for cash or on
credit for such period of time as may be deemed advisable, or partly
for cash and partly on credit, and with or without security, without
obligation to "test the market" by soliciting offers from a third party
or to obtain an appraisal to establish the value thereof; and the
purchaser of such property shall have no obligation to inquire as to
the use or application of the proceeds of sale; to exchange any
property held hereunder upon such terms and conditions as may be deemed
advisable; and to grant warranties, guaranties, indemnities or options
with respect to any of the foregoing without regard to the duration of
any trust or any time limitation imposed by law;
(c) To invest and reinvest in and to acquire by purchase,
exchange or otherwise property of any character whatsoever, foreign or
domestic, or interests or participations therein, including by way of
illustration and not of limitation: real property, mortgages, bonds,
notes, debentures, certificates of deposit, options, puts, calls,
warrants, partnerships, common and preferred stocks, annuity contracts,
futures contracts, forward contracts, short sales and swap contracts,
in each case whether foreign or domestic and with respect to financial
instruments and any group or index of securities (or any interest
therein based upon the value thereof) and in connection therewith to
deposit any property as collateral with any agent and to grant security
interests in such collateral and shares or interests in investment
trusts, mutual funds or common trust funds (including without
limitation common trust funds maintained by a corporate fiduciary and
other trusts or funds with respect to which the Trustee or its
affiliates acts as investment advisor or custodian or provides other
services), without regard to the proportion any such property or
similar property held may bear to the entire amount held and without
any obligation to diversify, whether or not the same is of the kind in
which fiduciaries are authorized by law or any rule of court to invest
funds;
(d) To participate in and to consent to any plan of
reorganization, recapitalization, consolidation, merger, combination,
dissolution, liquidation or similar plan and any action thereunder,
including by way of illustration and not of limitation to receive and
retain property under any such plan whether or not the same is
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<PAGE>
of the kind in which fiduciaries are authorized by law or any rule of
court to invest funds;
(e) To exercise all conversion, subscription, voting and other
rights of whatsoever nature pertaining to any such property and to
grant proxies, discretionary or otherwise, with respect thereto; to
appoint voting trustees under voting trust agreements and to delegate
to such voting trustees the power to vote and all other powers,
authorities and discretions usually conferred upon trustees under
voting trust agreements;
(f) To borrow such sums of money at any time and from time to
time for such periods of time upon such terms and conditions from such
persons or corporations (including any fiduciary hereunder) for such
purposes as may be deemed advisable, and to secure such loans by the
pledge or hypothecation of any property held hereunder; and the lender
shall have no obligation to inquire as to the application of the sums
loaned or as to the necessity, expediency or propriety of the loan;
(g) To register and hold any property of any kind, whether
real or personal, at any time held hereunder in the name of a nominee
or nominees and to hold any such personal property in any State; and to
receive and keep any stocks, bonds or other securities unregistered or
in such condition that title thereto will pass by delivery;
(h) To distribute (including in satisfaction of any pecuniary
disposition) any property in kind at market value unless otherwise
directed herein or in cash, or partly in kind and partly in cash, and,
without the consent of any beneficiary, to allocate among the
recipients the property distributed in kind (including in satisfaction
of any pecuniary disposition) in divided or undivided interests and
without any obligation to make proportionate distributions or any
obligation to distribute to all recipients property having an
equivalent Federal income tax cost;
(i) To allocate to principal all dividends and distributions
payable in property or in stocks, bonds or other securities whether of
the disbursing company or another company;
(j) After the termination of the trust hereunder to exercise
all the powers, authorities and discretions herein conferred until the
complete distribution of the property held hereunder;
(k) To accept additional property transferred on behalf of the
Grantor;
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<PAGE>
(l) To remove all or any part of the assets of or the situs of
administration of the trust hereunder from one jurisdiction to another
jurisdiction, either within or without the United States of America, at
any time or from time to time;
(m) To employ investment counsel, accountants, depositories,
custodians, brokers, consultants, agents, attorneys and other
employees, irrespective of whether any person or entity so employed
shall be a fiduciary hereunder or shall be a corporate affiliate of a
fiduciary hereunder and irrespective of whether any entity so employed
shall be one in which a fiduciary hereunder shall be a partner,
stockholder, director, officer or corporate affiliate or shall have any
interest, and to pay the usual compensation for such services out of
principal or income as may be deemed advisable; and such compensation
may be paid without diminution of or charging the same against the
commissions or compensation of any fiduciary hereunder; and any
fiduciary who shall be a partner, stockholder, director, officer or
corporate affiliate in any such entity shall nevertheless be entitled
as partner, stockholder, director, officer or corporate affiliate to
receive such fiduciary's share of the compensation paid to such entity;
(n) To exercise any and all of the powers, authorities and
discretions conferred hereunder in respect of any securities of any
corporate fiduciary acting hereunder, or in respect of any securities
of any holding company or corporation owning securities of any
corporate fiduciary acting hereunder; and
(o) To act in any jurisdiction where permitted by law, or to
designate one or more persons or a corporation to be ancillary
fiduciary who shall serve without bond or security in any jurisdiction
in which ancillary administration may be necessary; and to negotiate
and determine the compensation to be paid to such ancillary fiduciary
whether or not any compensation would otherwise be authorized by law,
and to pay such compensation out of principal or income or both; and
such ancillary fiduciary shall have with respect to any and all
property subject to the ancillary administration all powers,
authorities and discretions granted in this Article; provided, however,
that any action which may require the investment of additional funds or
the assumption of additional obligations shall not be undertaken
without prior written consent of the fiduciary or fiduciaries acting
hereunder; and if by reason of the law of any jurisdiction in which it
may be necessary to perform any act any fiduciary hereunder may be
disqualified from acting, then all of the acts
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<PAGE>
required to be performed in such jurisdiction may be performed by such
fiduciary's qualified co-fiduciary or co-fiduciaries then acting
hereunder.
V. (2). Notwithstanding the provisions of Section V. (1). hereof,
(a) The Administrator, as agent for the Grantor, shall have
the authority to establish and deliver to the Trustee from time to time
written investment guidelines setting forth the parameters within which
the Trustee shall exercise its discretionary authority with respect to
the investment of the Trust Fund subject to the restrictions on
investments set forth above, and the Trustee shall have no liability to
the Administrator, the Companies, the Grantor or any other person
interested in the Trust Fund for any action or any omission in reliance
upon such guidelines;
(b) The Administrator, as agent for the Grantor, is authorized
to receive any disclosures or other notices delivered by the Trustee
with respect to the investment of the Trust Fund in shares or interests
in investment trusts or mutual funds with respect to which the Trustee
or any of its affiliates acts as investment advisor or custodian or
provides other services;
(c) In no event may the Trust Fund be invested in securities
(including stock or rights to acquire stock) or obligations issued by
the Companies, other than a de minimis amount held in common investment
vehicles in which the Trustee invests; and
(d) The Trustee and its affiliates shall discharge their
duties with respect to the Trust Fund solely in the interest of the
Grantor and his Beneficiary(ies), for the exclusive purpose of
accumulating assets to make distributions as provided in Article II
hereunder and paying the reasonable expenses of administering the
trust.
ARTICLE VI
----------
General Provisions
------------------
VI. (1). This Trust Agreement and the trust created hereunder shall be
construed, regulated and governed in all respects, not only as to administration
but also as to
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<PAGE>
validity and effect, by the laws of the State of New York in effect from
time to time.
VI. (2). The references in this Trust Agreement to the Internal Revenue
Code shall mean the Internal Revenue Code of 1986, as amended, and shall include
corresponding provisions of all subsequently enacted Federal tax laws.
VI. (3). Any provision of the Trust Agreement prohibited by law, or
which would cause the trust to any extent to fail or cease to be a grantor trust
as described in Section I. (3). hereof, shall be to such extent ineffective,
without invalidating the remaining provisions hereof.
VI. (4). Amounts held in the Trust Fund may not be anticipated,
assigned, alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process, except to the
extent specifically permitted herein or as otherwise required by law.
VI. (5). Any notice required under this Trust Agreement shall be
delivered (a) personally, (b) by next day courier service (e.g., Federal
----
Express or UPS), or (c) by certified or registered mail, return receipt
requested, addressed as follows (or to such other address as any party may so
notify the other party):
If to the Trustee:
Diane E. Moyer, Vice President
Morgan Guaranty Trust Company of New York
9 West 57th Street
New York, New York 10019
-14-
<PAGE>
If to the Grantor:
If to the Administrator:
Philip Morris Companies Inc.
Attention: Vice President,
Corporate Human Resources
120 Park Avenue
New York, New York 10017-5592
Any notice required under this Trust Agreement may be waived by the person
entitled to such notice. Any notice to or from the Grantor under this Trust
Agreement shall, in the event of the Grantor's death, be provided to or by
the Beneficiary(ies) designated by the Grantor under this Trust Agreement. If
more than one beneficiary has been designated, the Grantor shall designate one
Beneficiary who shall be entitled to provide any notice required to the
Administrator or Trustee.
VI. (6). This Agreement shall be binding on all persons entitled to
payments from the Trust Fund and their respective heirs and legal
representatives, and on the Trustee and its successors.
VI. (7). The Administrator, acting on behalf of the Grantor, may from
time to time amend this Trust Agreement in any respect, provided, however, that
no such amendment shall change the duties, responsibilities, or compensation of
the Trustee without its written consent or shall cause any amount held in the
Trust Fund to be payable to the Companies or to any person other than the
Grantor, his Beneficiaries,
-15-
<PAGE>
his estate, or to the Trustee as compensation for services, or reimbursement
for payment to its agents.
VI. (8). In general, a Grantor's Beneficiary(ies) shall be the
beneficiary(ies) designated by the Grantor or otherwise determined under the
terms of the Plans. In the event, however, that no survivor's benefit or other
death benefit is payable on behalf of the Grantor under one or more Plans, the
Trust Fund shall first be applied to make payments due under any Plan for which
a death benefit is payable; any balance remaining in the Trust Fund following
payment of all death benefits under the Plans shall be paid in one lump sum in
cash to the Beneficiary(ies) designated by the Grantor hereunder. A beneficiary
designation under this Trust Agreement shall be made in writing by the Grantor
in such manner and on such form as shall be specified by the Administrator, and
a designation shall not be effective until it has been filed with the
Administrator. In the absence of a beneficiary designation hereunder or the
failure of the Beneficiary to survive, the Beneficiary shall be the Grantor's
spouse, if any, and, if none his estate.
-16-
<PAGE>
IN WITNESS WHEREOF, the Grantor has hereunto set his hand and seal and
the undersigned corporate party has caused this Trust Agreement to be executed
and its seal affixed hereunto by its officers duly authorized and directed all
as of the day and year first above written.
_____ __________________________(L.S.)
[Executive's Name], Grantor
Morgan Guaranty Trust Company
of New York, Trustee
BY__________________________________
Attest:
__________________________
-17-
<PAGE>
Schedule A
----------
[List relevant plans and arrangements]
-18-
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On this _________ day of ____________, 19__, before me personally came
[EXECUTIVE'S NAME], to me known and known to me to be the same person described
in and who executed the foregoing instrument, and acknowledged to me that such
person executed the same.
______________________________
-19-
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On this ______________ day of _____________, 199__, before me
personally came ___________________________, to me known, who, being by me duly
sworn, did depose and say that such person resides at _________________________
in the City of, _____________________________, County of ______________________,
State of ___________________________; that such person is a ____________________
of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, the corporation described in and
which executed the foregoing instrument; that such person knows the seal of
said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by order of the Board of Directors of said
corporation, and that such person signed such person's name thereto by
like order.
______________________________
-20-
<PAGE>
BENEFICIARY DESIGNATION
EMPLOYEE GRANTOR TRUST
----------------------
I understand that assets of the Employee Grantor Trust (the "Grantor
Trust") established with Morgan Guaranty Trust Company of New York will be
applied to pay benefits to me or on my behalf under the nonqualified
supplemental benefit plans specified in Schedule A attached to the Grantor Trust
(the "Plans"). Generally, the beneficiary(ies) entitled to receive benefits
under the Grantor Trust in the event of my death shall be the beneficiary(ies)
designated or otherwise determined under the terms of the Plans. If, however,
after my death any assets of the Grantor Trust remain after all payments due
under the Plans have been made to me or to my beneficiary(ies) under the Plans,
those remaining assets of the Grantor Trust shall be paid to the beneficiary
designated below. I understand that my spouse must consent to the designation of
any beneficiary other than my spouse. I further understand that in the event my
beneficiary does not survive, any remaining assets of the Grantor Trust will be
paid to my spouse, if any, or if none, my estate. [To designate more than one
beneficiary, attach additional sheet(s) with the name, SSN and address of each
beneficiary, indicate each beneficiary's share and which beneficiary is entitled
to provide notices regarding the Grantor Trust, and obtain spouse's consent in
the same form as below.]
Name of Beneficiary:___________________________________________________________
Social Security Number:________________________________________________________
Address:_______________________________________________________________________
_______________________________________________________________________________
_________________________________ ________________________________________
Date Signature of Employee
____________________________________
Witness
CONSENT OF SPOUSE
-----------------
I understand that I am entitled to be designated as the 100%
beneficiary of the Grantor Trust. I give my consent to the designation of the
above-named beneficiary. I am aware that in the event of my spouse's death, I
will not receive 100% of the remaining assets of the Grantor Trust, and I may
not receive any such assets. [Spouse's consent must be witnessed by the
Administrator or a Notary Public.]
_______________________________ _____________________________________
Date Signature of Employee's Spouse
_______________________________________
Administrator or Notary Public
-21-
<PAGE>
ADDITIONAL BENEFICIARY DESIGNATION
----------------------------------
Name of Beneficiary:___________________________________________________________
Social Security Number:________________________________________________________
Address:_______________________________________________________________________
_______________________________________________________________________________
Beneficiary Share:_____________________________________________________________
Name of Beneficiary:___________________________________________________________
Social Security Number:________________________________________________________
Address:_______________________________________________________________________
_______________________________________________________________________________
Beneficiary Share:_____________________________________________________________
Name of Beneficiary:___________________________________________________________
Social Security Number:________________________________________________________
Address:_______________________________________________________________________
_______________________________________________________________________________
Beneficiary Share:_____________________________________________________________
_________________________________ _______________________________________
Date Signature of Employee
_________________________________
Witness
CONSENT OF SPOUSE
-----------------
I understand that I am entitled to be designated as the 100%
beneficiary of the Grantor Trust. I give my consent to the designation of the
above-named beneficiary. I am aware that in the event of my spouse's death, I
will not receive 100% of the remaining assets of the Grantor Trust, and I may
not receive any such assets. [Spouse's consent must be witnessed by the
Administrator or a Notary Public.]
_________________________________ _______________________________________
Date Signature of Employee's Spouse
_______________________________________
Administrator or Notary Public
-22-
Exhibit 13
A WORLD
OF GROWTH
IN STORE
FINANCIAL CONTENTS
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
26 SELECTED FINANCIAL DATA--FIFTEEN-YEAR REVIEW
28 CONSOLIDATED BALANCE SHEETS
30 CONSOLIDATED STATEMENTS OF EARNINGS AND CASH FLOWS
32 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
47 REPORT OF INDEPENDENT ACCOUNTANTS
47 COMPANY REPORT ON FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONSOLIDATED OPERATING RESULTS--OPERATING REVENUES
(in millions) 1995 1994 1993
- -------------------------------------------------------------------
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 $66,071 $65,125 $60,901
===================================================================
CONSOLIDATED OPERATING RESULTS--OPERATING INCOME
(in millions) 1995 1994 1993
- --------------------------------------------------------------------
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
- --------------------------------------------------------------------
Operating profit 10,973 9,891 7,982
Unallocated corporate expenses (447) (442) (395)
- --------------------------------------------------------------------
Total $10,526 $9,449 $7,587
====================================================================
1995 Compared with 1994
- -----------------------
Operating revenues for 1995 increased $946 million (1.5%) over 1994, primarily
due to increases in tobacco revenues, partially offset by the impact of
divestitures of food businesses. Operating profit, as defined for segment
reporting purposes (operating income excluding unallocated corporate expenses),
increased $1.1 billion (10.9%), reflecting increases in all consumer products
business segments. Currency movement, primarily the Japanese yen and German
mark, increased operating profit by $213 million in 1995. Although the Company
cannot predict future movement in currency rates, it currently estimates that
currency movement may have an unfavorable impact on operating profit in 1996.
Excluding the results of divested food businesses (discussed below), operating
revenues and operating profit increased $5.1 billion (8.7%) and $1.2 billion
(13.0%), respectively, over 1994.
Interest and other debt expense, net, decreased $54 million (4.4%) in 1995,
due primarily to lower average outstanding debt during the year, partially
offset by higher average commercial paper rates.
Excluding the cumulative effect of accounting changes discussed below,
earnings increased by $753 million (15.9%) in 1995, primarily due to increased
operating profit ($1.1 billion), which was partially offset by a higher income
tax provision ($378 million).
Excluding the cumulative effect of accounting changes discussed below,
earnings per share increased by 19.4% in 1995, due to a 15.9% increase in
earnings to $5.5 billion and fewer shares outstanding. As a result of the
Company's share repurchase program, the weighted average number of shares
outstanding decreased to 842 million in 1995 from 867 million in 1994.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," for its non-U.S. retiree benefit plans and SFAS
No. 116, "Accounting for Contributions Received and Contributions Made." The
adoption of these Statements reduced 1995 net earnings by $21 million ($.02 per
share) and $7 million ($.01 per share), respectively. However, the application
of these standards did not materially reduce operating income or earnings before
cumulative effect of accounting changes in 1995.
1994 Compared with 1993
- -----------------------
Operating revenues for 1994 increased $4.2 billion (6.9%) over 1993. Operating
profit increased $1.9 billion (23.9%), due primarily to increases in all
consumer products business segments, the 1993 restructuring charge (discussed
below) and the 1993 domestic tobacco business strategy (discussed below in
Domestic tobacco--1994 Compared with 1993). Excluding the 1993 restructuring
charge, operating profit increased $1.2 billion (13.4%) over 1993.
Interest and other debt expense, net, decreased $158 million (11.4%) in 1994,
due primarily to lower average outstanding debt during the year, partially
offset by higher interest rates on debt.
Excluding the cumulative effect of an accounting change discussed below,
earnings increased by $1.2 billion (32.4%) in 1994,
19
<PAGE>
due to increased operating profit ($1.9 billion) and lower interest and other
debt expense, net ($158 million), partially offset by a higher income tax
provision ($863 million). Excluding the 1993 restructuring charge and
cumulative effect of accounting change, earnings increased 17.4% over 1993.
Excluding the cumulative effect of an accounting change discussed below,
earnings per share increased by 34.2% in 1994, due to a 32.4% increase in
earnings to $4.7 billion and fewer shares outstanding. Excluding the 1993
restructuring charge and cumulative effect of accounting change, earnings per
share increased 19.0% over 1993. As a result of the Company's share repurchase
programs, the weighted average number of shares outstanding decreased to 867
million in 1994 from 878 million in 1993.
Effective January 1, 1993, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." The cumulative effects at January 1,
1993 of adopting SFAS No. 112 were a reduction of 1993 net earnings by $477
million ($.54 per share), net of $297 million of income tax benefits and the
recording of a liability of $774 million. Adoption of SFAS No. 112 did not
materially reduce 1993 earnings before cumulative effect of accounting change.
1993 Restructuring
- ------------------
In the fourth quarter of 1993, the Company provided for the restructuring of
its worldwide operations to reduce its cost structure significantly and to
improve its future growth, profitability and cash flow. 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. Included in this charge were asset write-downs of $429
million, with the remainder of the charge representing anticipated cash
expenditures to be funded with cash proxvided by operating activities. During
1995 and 1994, the Company expended approximately $230 million in connection
with this program. The SFAS No. 112 liability described above is sufficient to
provide for costs associated with the workforce reduction contemplated by the
restructuring.
Savings from the planned actions are being used for both business-building
initiatives and profit improvement. Originally, the Company had estimated that
the restructuring would result in approximately $600 million of annual after-tax
savings by 1997. As reported in 1994, due to higher worldwide demand for
American-style cigarettes and the corresponding impact on shipment volumes of
the Company's tobacco subsidiaries, downsizing of certain tobacco manufacturing
plants has been delayed and the resultant restructuring savings are also
expected to be delayed. Accordingly, the estimate of planned annual after-tax
savings by 1997 was revised in 1994 to $500 million.
OPERATING RESULTS BY BUSINESS SEGMENT
TOBACCO--OPERATING REVENUES
(in millions) 1995 1994 1993
- ---------------------------------------------------------------
Domestic tobacco $11,493 $11,110 $10,227
International tobacco 20,823 17,561 15,746
- ---------------------------------------------------------------
Total $32,316 $28,671 $25,973
===============================================================
TOBACCO--OPERATING PROFIT
(in millions) 1995 1994 1993
- ---------------------------------------------------------------
Domestic tobacco $ 3,740 $ 3,302 $ 2,808
International tobacco 3,453 2,877 2,360
Amortization of goodwill (16) (17) (13)
Restructuring charges (245)
- ---------------------------------------------------------------
Total $ 7,177 $ 6,162 $ 4,910
===============================================================
Business Environment
- --------------------
The tobacco industry, including Philip Morris Incorporated ("PM Inc."), the
Company's domestic tobacco subsidiary, has faced, and continues to face, a
number of issues which have affected or which may affect volume, operating
revenues and operating profit. These issues include proposed federal regulatory
controls (including, as discussed below, the publication of proposed regulations
by the United States Food and Drug Administration (the "FDA") which purport to
regulate tobacco products as "drugs" or medical "devices"); actual and proposed
excise tax increases; federal, state and local governmental and private
restrictions on smoking (including additional restrictions imposed by airlines);
new and proposed restrictions on tobacco manufacturing, marketing, advertising
and sales; new and proposed regulations to ban or severely restrict smoking in
workplaces and in buildings permitting public access, to require substantial
additional health warning and product content information on cigarette packages
and in advertising, and to eliminate the tax deductibility of a portion of the
cost of tobacco advertising; increased assertions of adverse health effects
associated with both smoking and exposure to environmental tobacco smoke (and
legislation or other governmental action seeking to ascribe to the industry
responsibility and liability therefor), the diminishing social acceptance of
smoking, governmental and grand jury investigations, and private plaintiff class
action litigation as well as actions by states seeking Medicaid reimbursement.
See Note 15 to the Consolidated Financial Statements regarding litigation in
which the Company and/or its subsidiaries (including PM Inc.) are defendants.
In June 1995, PM Inc. entered into a consent decree with the Department of
Justice pursuant to which PM Inc. agreed to reposition its brand advertising at
professional football, baseball, basketball and hockey arenas so as not to be
inadvertently exposed to prominent television coverage.
In June 1995, PM Inc. announced that it has voluntarily undertaken a program
to limit minors' access to cigarettes. Elements of the program include
discontinuing free cigarette sampling to consumers in the United States,
discontinuing the distribution of cigarettes by mail to consumers in the United
States, placing a
20
<PAGE>
notice on cigarette cartons and packs for sale in the U.S. stating "Underage
Sale Prohibited," taking measures to encourage retailer compliance with
minimum-age laws, and independent auditing of the program.
In August 1995, President Clinton announced and the FDA initiated a
rule-making proceeding purportedly designed to prevent minors from smoking. In
the proposed regulations, the FDA asserted that it has jurisdiction over
nicotine as a "drug" and over cigarettes as a medical "device" (a nicotine
delivery system) under the provisions of the Food, Drug and Cosmetic Act. The
proposed regulations include severe restrictions on the distribution, marketing
and advertising of cigarettes. The period for public comment on the proposal
ended on January 2, 1996. The FDA's assertion of jurisdiction, if not reversed
by judicial or legislative action, could lead to more expansive FDA-imposed
restrictions on cigarette operations than those set forth in the current
proposed regulations. PM Inc., four other domestic cigarette manufacturers and
an advertising firm have sued the FDA, seeking a judicial declaration that the
FDA has no authority to regulate cigarettes and asking the court to issue an
injunction requiring the FDA to withdraw its proposed regulations. Similar suits
have been filed against the FDA by manufacturers of smokeless tobacco products,
by a trade association of cigarette retailers, and by advertising agency
associations.
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.
It is not possible to determine the outcome of the FDA regulatory initiative
announced by President Clinton or the related litigation or to predict what, if
any, other foreign or domestic governmental legislation or regulations will be
adopted relating to the advertising, sale or use of cigarettes or to the tobacco
industry generally. However, if any or all of the foregoing were to be
implemented, the volume, operating revenues and operating profit of PM Inc.,
Philip Morris International Inc. ("PMI"), the Company's international tobacco
subsidiary, and the Company could be adversely impacted, in amounts that cannot
be determined.
In addition to the foregoing, there is litigation pending against the Company
and its subsidiaries which is discussed in Note 15 to the Consolidated Financial
Statements. The Company's position with regard to this litigation is set forth
therein.
1995 Compared with 1994
- -----------------------
Domestic tobacco. During 1995, PM Inc.'s operating revenues increased 3.4% from
- ----------------
1994, due primarily to pricing ($174 million), volume ($120 million) and
improved product mix ($83 million). Operating profit for 1995 increased 13.3%
from 1994, due primarily to pricing ($174 million), volume ($73 million),
improved product mix ($76 million) and lower marketing, administration and
research costs ($60 million).
The premium and discount segments (based on shipments) accounted for
approximately 70.0% and 30.0%, respectively, of domestic cigarette industry
volume in 1995, versus approximately 67.5% for the premium segment and 32.5% for
the discount segment in 1994, continuing the shift toward the premium segment
that began following the pricing strategy implemented by PM Inc. in 1993
(discussed below).
PM Inc.'s volume (based on shipments) for 1995 was 221.8 billion units, an
increase of 1.1% over 1994, compared with an industry decline of 1.7% during
1995.
PM Inc.'s market share (based on shipments) for 1995 was 46.1%, an increase
of 1.3 share points over 1994. In the premium segment, volume in PM Inc.'s
brands increased 3.5%, compared with a 1.9% increase for the industry, resulting
in a premium segment share of 54.5%, an increase of 0.9 share points from 1994.
Marlboro volume was up 7.1 billion units (5.2%) for a 30.1% share of the total
industry, an increase of 2.0 share points from 1994. In the discount segment, PM
Inc.'s shipments decreased 9.1%, to 38.5 billion units, in 1995 compared with an
industry decline of 9.2%, resulting in a discount segment share at 26.6%, an
increase of 0.1 share points from 1994.
Retail sales data (compiled by the A.C. Nielsen Company), indicate PM Inc.
and Marlboro market shares of 47.3% and 30.7%, respectively, in 1995, compared
with 46.2% and 28.6%, respectively, in 1994. The market share for PM Inc.'s
other premium brands as a group was 8.9% in 1995, unchanged from 1994. In the
discount segment, Basic increased its segment share 1.3 points, to 15.8%, in
1995.
PM Inc. cannot predict change or rates of change in the relative sizes of the
premium and discount segments or in PM Inc.'s shipments, market share (based on
shipments) or retail market share.
International tobacco. During 1995, operating revenues of PMI increased 18.6%,
- ---------------------
due primarily to higher foreign excise taxes ($1.6 billion), currency movement
($708 million), higher volume/mix ($713 million) and price increases ($264
million). Operating profit increased 20.0% due primarily to higher volume/mix
($338 million), price increases ($264 million) and currency movement ($210
million), partially offset by higher marketing, administration and research
costs ($264 million).
PMI's volume grew 57.2 billion units (10.7%) in 1995 to 593.2 billion units.
Volume advanced in most major markets, including Germany, Italy, Spain, the
Netherlands, Belgium, Central and Eastern Europe, Turkey, the Middle East,
Japan, Korea, the Philippines, Australia and Argentina. In Eastern Europe, which
includes parts of the former Soviet Union, PMI's volume climbed 54%. This
emerging market has in part driven PMI's volume growth to double its historic
growth level of 5% to 6%. Volume declined in France, due to tax-driven price
increases; in Mexico, due to continued poor economic conditions; and in Brazil,
due to competition. Importantly, however, volume and market share for Marlboro
increased in France and Brazil. In the growing American-style segment, PMI's
international and U.S.-heritage brands grew a collective 13.4% in volume during
1995.
PMI's market shares reached record levels in most major international
markets, with strong gains in Germany, Italy, the Netherlands, Belgium, Spain,
the Czech and Slovak Republics, Turkey, Japan, Korea, Hong Kong, Singapore,
Australia and Argentina.
1994 Compared with 1993
- -----------------------
Domestic tobacco. During 1994, PM Inc.'s operating revenues increased 8.6%, due
- ----------------
primarily to volume increases ($1.3 billion) and favorable product mix ($461
million), partially offset by price decreases ($887 million). Operating profit
in 1994 increased 17.6%, due primarily to volume increases ($802 million),
favorable product mix ($452 million) and lower marketing, administration and
21
<PAGE>
research costs ($245 million), partially offset by price decreases and higher
costs (aggregating $1.0 billion).
The premium and discount segments accounted for approximately 67.5% and
32.5%, respectively, of the domestic cigarette industry in 1994, compared with
63.2% and 36.8%, respectively, in 1993. The shift toward the premium segment
reflected a pricing strategy implemented by PM Inc. in 1993 in response to the
domestic tobacco market, which was becoming increasingly price-sensitive.
Specifically, PM Inc. created a two-category pricing structure for its tobacco
brands, premium and discount. Prices were lowered on premium brands and the net
list price of deep discount brands was increased, effectively narrowing the
price gap between PM Inc.'s premium cigarette brands and competitors' discount
products.
PM Inc.'s volume (based on shipments) was 219.4 billion units in 1994, an
increase of 12.7%, reflecting the success of PM Inc.'s 1993 pricing strategy
discussed above and its marketing and promotional programs. This compared with
an industry increase of 6.2%. PM Inc.'s market share for 1994 was 44.8%, an
increase of 2.6 share points from 1993. In the premium segment, volume in PM
Inc.'s brands increased 22.3% in 1994, compared with a 13.3% increase for the
industry, resulting in a category share gain of 3.9 share points, to 53.6%.
Marlboro volume was up 29.3 billion units (27.0%) for a 28.1% share of the total
industry, as compared with a 23.5% share in 1993. In the discount segment, PM
Inc.'s shipments decreased 15.2%, to 42.3 billion units in 1994, compared with
an industry decrease of 6.1%, resulting in a decrease of 2.8 share points in
this segment, to 26.5%.
Nielsen retail sales data indicate PM Inc. and Marlboro 1994 market shares of
46.2% and 28.6%, respectively, as compared with 43.8% and 24.9%, respectively,
during 1993, and 41.6% and 22.0%, respectively, at their low point in March
1993. Additionally, retail share of PM Inc.'s other premium brands, as a group,
climbed to 8.9% during 1994, up from 8.8% during 1993 and 8.3% in August 1993,
when PM Inc. lowered its premium brands' wholesale list prices.
International tobacco. Operating revenues in 1994 increased 11.5%, due
- ---------------------
primarily to favorable volume/mix ($756 million), higher foreign excise taxes
($752 million), price increases ($260 million) and currency movement ($59
million). Operating profit increased 21.9%, due primarily to price increases
and lower costs (aggregating $426 million) and volume/mix increases ($351
million), partially offset by higher marketing expenses ($179 million) and
currency movement ($71 million).
Total international unit volume increased 76.2 billion units (16.6%), to
536.0 billion units. Volume advanced in most markets, including Germany, Italy,
France, Spain, the Netherlands, Belgium, Central and Eastern Europe, the Middle
East, Hong Kong, Japan, Korea, Argentina and Brazil. Volume declined in Turkey,
reflecting reduced consumer purchasing power as poor economic conditions
persisted.
PMI's market share advanced in most of its major international markets, with
record shares achieved in Germany, Italy, France, Spain, the Netherlands,
Belgium, Finland, Japan, Korea, Hong Kong, Singapore, Argentina and Brazil.
International volume continued to grow for Marlboro and PMI's international and
U.S. heritage brands.
FOOD--OPERATING REVENUES
(in millions) 1995 1994 1993
- --------------------------------------------------------------
North American food $17,891 $21,556 $20,940
International food 11,183 10,113 9,432
- --------------------------------------------------------------
Total $29,074 $31,669 $30,372
==============================================================
FOOD--OPERATING PROFIT
(in millions) 1995 1994 1993
- --------------------------------------------------------------
North American food $ 2,542 $ 2,539 $ 2,404
International food 1,218 1,153 1,114
Amortization of goodwill (572) (584) (553)
Restructuring charges (357)
- --------------------------------------------------------------
Total $ 3,188 $ 3,108 $ 2,608
==============================================================
Business Environment
- --------------------
Several steps have been taken to build the value of premium brands, reduce costs
and increase profitability in the food businesses. Effective January 1995, the
North American food business was reorganized to fully integrate the operations
of Kraft USA and General Foods USA. The combined organization, named Kraft
Foods, Inc., has streamlined operations and improved effectiveness and customer
response. In December 1995, the international food business was realigned to
capitalize on future growth opportunities and reorganized into separate regional
units: Western Europe; Northern Europe; Central and Eastern Europe, Middle East
and Africa; Asia/Pacific; and Latin America.
During 1995, Kraft Foods 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 profit 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. 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, Kraft Foods offered an early retirement program and is
downsizing or closing other food facilities. The cost of these actions offset
the gains from businesses sold. In 1994, Kraft Foods sold The All American
Gourmet Company, maker of frozen meals and side dishes. These divestitures are
not expected to have a material effect on Kraft Foods' future results of
operations and are expected to improve the operating profit margin of North
American food operations.
During the second half of 1994 and into the first quarter of 1995, both the
North American and International food businesses were affected by higher coffee
prices due to higher green coffee bean costs, resulting from frosts in Brazil in
the second quarter of 1994. Throughout 1995, green coffee bean prices remained
volatile, but have moderated compared with the latter part of 1994. Volatile
green coffee bean costs significantly affected consumption and consumer buying
patterns. In some markets, such as Germany, these volatile costs resulted in
intense price competition among coffee companies.
22
<PAGE>
1995 Compared with 1994
- -----------------------
North American food. During 1995, operating revenues decreased 17.0%, due
- -------------------
primarily to the impact of divestitures ($4.2 billion), partially offset by
increases in price/mix ($311 million) and volume ($226 million). Operating
profit increased 0.1% over 1994, due primarily to price increases, net of cost
increases ($61 million), gains on sales of businesses ($202 million), volume
increases ($97 million) and lower marketing, administration and research costs
($14 million), partially offset by the reduction in operating profit resulting
from divestitures ($166 million) and provisions for an early retirement
program and the write-down of assets of facilities to be closed or downsized
(aggregating $202 million).
Excluding operating results of divested businesses (discussed above), North
American food operating revenues and operating profit increased 3.4% and 7.5%,
respectively, in 1995 compared with 1994.
Volume grew in beverages, on the strength of ready-to-drink fruit juices;
cheese, led by growth in the process and natural cheese segments; processed
meats, driven by lunch combinations and cold cuts, both of which were aided by
new product introductions; ready-to-eat and packaged desserts, due to enhanced
marketing efforts and the introduction of line extensions; frozen pizza, helped
by geographic expansion and new product introductions; and coffee, which
reported volume growth in premium products. Volume decreased in cereals, due to
a general slowdown in industry sales and heightened competition; and in pourable
and spoonable salad dressings, due to declines in industry sales. In Canada,
volume decreased, due primarily to weakness in the foodservice business,
partially offset by higher retail sales, which benefited from enhanced
advertising and marketing support. Market shares were higher in the majority of
North American food's top categories.
International food. Operating revenues for 1995 increased 10.6% over 1994, due
- ------------------
primarily to currency movement ($652 million), price increases ($477 million,
primarily coffee) and the impact of acquisitions ($92 million), partially offset
by volume decreases ($151 million). Operating profit increased 5.6% over 1994,
due primarily to gains on sales of businesses as discussed below ($73 million),
the gain on sale of an equity investment ($43 million), and income from
unconsolidated subsidiaries, reflecting higher volume in emerging markets ($77
million), partially offset by provisions recorded primarily to write-down assets
of facilities to be closed ($73 million) and lower volume ($50 million).
During 1995, Kraft Foods International sold a Scandinavian cereal operation,
a U.K. frozen foods operation and the international distribution rights of Kraft
Foods, Inc.'s baked goods.
Overall volume declined in 1995. In Western Europe, volume declined, due to
market softness and intense competition for core coffee and confectionery
products, particularly in Germany, Kraft Foods' largest European market. Despite
intense price competition in coffee and a soft confectionery market resulting
from an unusually hot summer, market shares increased in Germany in both the
roast and ground coffee and chocolate tablet categories. In Central and Eastern
Europe, volume increased in coffee and confectionery products, while the Asia/
Pacific region recorded increases in the coffee, and cheese and grocery
categories. In Latin America, total volume was higher in 1995, driven by
powdered soft drinks in Argentina and Brazil and higher ice cream volume in
Brazil, partially offset by lower ice cream volume in Argentina and lower
powdered soft drink volume in Mexico.
1994 Compared with 1993
- -----------------------
North American food. In 1994, North American food operating revenues increased
- -------------------
2.9%, due to volume increases ($807 million) and price increases ($493 million,
due primarily to rising commodity costs), partially offset by the impact of
dispositions, net of acquisitions ($629 million) and currency movement ($85
million). Operating profit in 1994 increased 5.6%, due primarily to volume
increases ($307 million) and price increases, net of cost increases ($139
million), partially offset by higher marketing expenses ($322 million).
Volume rose from increases in cheese; in cereals and processed meats, due
primarily to new products and line extensions; in frozen pizza, due to
geographic expansion and category growth; and in foodservice and Canadian
operations. Volume declined in commodity oil products, dinners and enhancers
(rice products, stuffing mixes and syrups) and coffee (reflecting category
contraction from higher pricing, due to increased green bean costs).
International food. Operating revenues in 1994 for International food increased
- ------------------
7.2%, due primarily to acquisitions ($336 million) and commodity driven price
increases, partially offset by volume decreases ($104 million) and currency
movement ($32 million). Operating profit in 1994 increased 3.5%, due primarily
to acquisitions ($34 million) and price increases, partially offset by higher
marketing, administration and research costs ($89 million, due partly to
geographic expansion), volume decreases ($63 million) and currency movement
($22 million).
Coffee volume was unfavorably impacted by higher retail prices, a result of
frosts in Brazil which substantially increased green bean costs. Confectionery
volume increased, benefiting from successful marketing programs and new product
launches. Overall, cheese and grocery volume was also higher as key brands
continued to perform well in Europe and Asia.
BEER
- ----
- --------------------------------------------------------------------------------
1995 Compared with 1994
- -----------------------
Operating revenues of Miller Brewing Company ("Miller") for 1995 increased $7
million (0.2%) from 1994, due to price/mix improvements ($27 million),
partially offset by volume decreases. Operating profit increased $31 million
(7.5%) over 1994, due to price/mix improvements and lower costs (aggregating
$39 million), partially offset by volume decreases ($9 million).
Miller's 1995 shipment volume of 45.0 million barrels of beer decreased 0.5%
from 1994, in line with the industry. Miller's domestic shipments were 1.1%
lower in 1995, reflecting the current softness in the domestic beer industry,
but were partially offset by growth in Miller's international sales. Shipments
of premium-priced beers rose 1.3% to account for 81.8% of shipments in 1995
compared with 80.4% in 1994. Premium brand growth was led by the initial success
of Red Dog and increased shipments of Miller Lite, reflecting enhanced
advertising and marketing. Shipments of Miller Genuine Draft and ice beers
23
<PAGE>
were down versus the prior year. Miller's market share of the U.S. malt
beverage industry (based on shipments) was 22.7% in 1995, unchanged from 1994.
Miller expects cost increases for aluminum and other packaging and brewing
materials as supply agreements expire during 1996.
1994 Compared with 1993
- -----------------------
Operating revenues for Miller in 1994 increased $143 million (3.4%), due to
price/mix increases ($93 million), the acquisition of Molson Breweries U.S.A.
Inc. in the second quarter of 1993 ($71 million) and volume increases ($61
million), partially offset by the disposition of distributorships ($82 million).
Operating profit, excluding the $139 million impact of the 1993 restructuring,
increased $59 million (16.7%), due primarily to price/mix increases ($75
million), lower costs due to a reduction in workforce ($38 million) and higher
volume ($25 million), partially offset by higher marketing, administration and
research costs ($77 million) and dispositions ($11 million).
Miller's shipment volume increased 2.8% in 1994, reflecting strong growth in
premium brands (7.6%), partially offset by a decrease in budget brands. Premium
brand growth was led by the introduction of ice-brewed products and Red Dog.
Miller Lite volume declined, but volume for the Lite brand family grew, due to
the introduction of Lite Ice. Miller's market share of the U.S. malt beverage
industry (based on shipments) was 22.7% in 1994, compared with 22.2% in 1993.
FINANCIAL SERVICES AND REAL ESTATE
- ----------------------------------
- --------------------------------------------------------------------------------
1995 Compared with 1994
- -----------------------
For 1995, operating revenues from financial services, Philip Morris Capital
Corporation ("PMCC"), and real estate operations, Mission Viejo Company,
decreased 22.7%, and operating profit decreased 21.1% from 1994. Lower financial
services operating profit reflects the gains recognized in 1994 related to the
sale of PMCC's marketable securities portfolio. Moreover, the proceeds were
remitted to Philip Morris Companies Inc. Operating profit from real estate
operations increased from 1994 levels, due primarily to improved residential
land sales volume in Colorado, and higher profit margins in California.
1994 Compared with 1993
- -----------------------
Operating revenues from financial services and real estate operations increased
21.4%, and operating profit decreased 16.5% in 1994. Operating revenues from
financial services decreased 7.0%, due primarily to lower finance asset levels,
resulting from PMCC's sale of its marketable securities portfolio in the first
quarter of 1994. The majority of the proceeds from the sales were not
reinvested, but used for a $475 million dividend to Philip Morris Companies Inc.
Operating profit from financial services decreased 22.1%, due primarily to
higher 1993 income recorded after an adjustment to PMCC's leveraged lease
portfolio to account for the new federal income tax rate and lower 1994 finance
asset investment income. Operating profit from real estate operations increased
from 1993 levels, due primarily to higher residential land sales in Southern
California and Colorado.
FINANCIAL REVIEW
- ----------------
- --------------------------------------------------------------------------------
Net Cash Provided by Operating Activities
- -----------------------------------------
During 1995, cash provided by operating activities decreased $178 million
(2.5%), to $6.9 billion. The decrease was due primarily to an investment in
working capital, partially offset by higher net earnings.
In 1994, cash provided by operating activities was $7.1 billion, compared
with $7.0 billion in 1993. The increase was due primarily to higher earnings,
partially offset by an investment in working capital (including approximately
$300 million of expenditures related to the 1993 restructuring program and
corresponding workforce reductions).
Cash provided by operating activities excludes payments of income taxes on
sales of businesses in 1995 and PMCC's interest payment on zero coupon bonds,
which matured in 1994.
Net Cash Used in Investing Activities
- -------------------------------------
Cash used in investing activities for 1995 was $109 million, compared with
$1.2 billion for 1994. The change is due primarily to cash received from sales
of businesses in 1995, partially offset by a $797 million decrease in cash
provided by PMCC, reflecting the sale of PMCC's marketable securities portfolio
in 1994.
Capital expenditures for 1995 decreased 6.1%, to $1.6 billion, of which 58%
related to food operations and 32% related to tobacco operations, primarily for
modernization and consolidation of manufacturing facilities and expansion of
certain production capacity. Capital expenditures are estimated to be $1.8
billion in 1996 and a total of approximately $8.0 billion for the five-year
period 1996-2000, of which approximately 41% and 46%, respectively, are
projected for food operations and approximately 53% and 44%, respectively, are
projected for tobacco operations.
During 1995, Kraft Foods 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. Total gross proceeds from the sales of these businesses
were $2.1 billion.
Cash used in investing activities was $1.2 billion in 1994 compared with $4.2
billion in 1993, reflecting less spent on acquisitions in 1994. Capital
expenditures were $1.7 billion in 1994, of which approximately 62% related to
food and 31% related to tobacco.
In 1994, cash provided by net proceeds from finance assets was $307 million,
as compared with cash used for net investments in finance assets of $70 million
in 1993.
During 1994, the Company made several strategic international acquisitions in
its tobacco and food operations at a cost of $146 million. Also during 1994, the
Company sold The All American Gourmet Company (frozen dinners business) and
several beer distributorships. The proceeds from the sales of these businesses
and other smaller divestitures aggregated $300 million.
Net Cash Used in Financing Activities
- -------------------------------------
During 1995, the Company's net cash used in financing activities was $5.6
billion, compared with $5.7 billion during 1994. The change reflects lower
repayment of debt ($901 million), partially offset by a 37.8% increase in cash
used for stock repurchases and an 18.2% increase in dividends paid.
24
<PAGE>
Debt
- ----
The Company's total debt was $15.8 billion, $16.5 billion and $18.2 billion at
December 31, 1995, 1994 and 1993, respectively.
Total consumer products debt decreased $606 million in 1995 and $1.4 billion
in 1994, both due primarily to scheduled debt maturities. During 1993, total
consumer products debt increased $95 million, representing a $1.2 billion net
issuance of short-term borrowings, partially offset by $1.1 billion of scheduled
maturities of long-term debt.
Fixed rate debt constituted approximately 79% and 81% of total consumer
products debt at December 31, 1995 and 1994, respectively. The average interest
rate on total consumer products debt was approximately 8.0% and 7.7% during 1995
and 1994, respectively. At December 31, 1995, the average interest rate on total
consumer products debt, including the impact of currency swap agreements
discussed below, was approximately 7.7%.
The Company operates internationally, with manufacturing and sales facilities
in various locations around the world. The Company continually evaluates its
foreign currency exposure (primarily the Swiss franc, German mark, Swedish
krona, Canadian dollar and Norwegian krone) based on current market conditions
and business strategies. It acts to manage such exposure, when deemed prudent,
through various hedging transactions. The Company has entered into currency and
related interest rate swap agreements to manage exposure to currency movements.
The aggregate notional principal amounts of these agreements outstanding at
December 31, 1995 and 1994 were $2.0 billion and $1.6 billion, respectively, of
which $1.5 billion and $1.2 billion related to consumer products debt at
December 31, 1995 and 1994, respectively.
The Company enters into forward exchange contracts, for purposes other than
trading, to reduce the effects of fluctuating foreign currency on foreign
currency denominated assets, liabilities, commitments and short-term
intercompany 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.
At December 31, 1995, the Company's credit facilities amounted to
approximately $15.4 billion, of which approximately $15.3 billion were unused.
Included in these facilities is a revolving credit facility for $8 billion
expiring in 2000, which enables the Company to reclassify short-term debt on a
long-term basis, and a $4 billion credit facility expiring in October 1996.
These facilities are used to support the Company's commercial paper borrowings
and are available for acquisitions and other corporate purposes. The Company
expects to continue to refinance long-term and short-term debt from time to
time. The nature and amount of the Company's long-term and short-term debt and
the proportionate amount of each can be expected to vary as a result of future
business requirements, market conditions and other factors.
The Company's credit ratings by Moody's at December 31, 1995, 1994 and 1993
were "P-1" in the commercial paper market and "A2" for long-term debt
obligations. The Company's credit ratings by Standard & Poor's at December 31,
1995, 1994 and 1993 were "A-1" in the commercial paper market and "A" for
long-term debt obligations.
Equity and Dividends
- --------------------
During 1995, the Company repurchased 28.2 million shares of its common stock at
an aggregate cost of $2.1 billion. These purchases were made in accordance
with the Company's 1994 announcement of its intention to spend up to $6 billion
to repurchase common stock in open market transactions over three years. The
program began in October 1994. Through December 31, 1995, cumulative purchases
under the program totaled 35.4 million shares at a cost of $2.5 billion.
At December 31, 1995, the ratio of consumer products debt to total equity was
1.03, compared with 1.17 at December 31, 1994. The Company's ratio of total debt
to total equity at December 31, 1995 was 1.13 compared with 1.29 at December 31,
1994. The decrease in these ratios primarily reflects an increase in
stockholders' equity, due to net earnings in 1995 and favorable movement in the
currency translation adjustments ($514 million), and net repayment of long-term
debt, partially offset by dividends declared ($3.1 billion) and repurchases of
outstanding stock.
Dividends paid in 1995 increased 18.2% over 1994, reflecting the increase in
dividends declared, partially offset by fewer shares outstanding. On August 30,
1995, the Board of Directors increased the Company's quarterly dividend rate to
$1.00 per share, a 21.2% increase, resulting in an annualized dividend rate of
$4.00 per share.
Return on average stockholders' equity was 40.7% in 1995 and 38.7% in 1994.
The increase from 1994 reflects higher earnings and favorable movement in the
currency translation adjustment, as well as the impact of stock acquired
pursuant to the common stock repurchase program.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents increased $954 million in 1995. The increase
represents cash earned and retained outside of North America in 1995. This cash
will be used for payment of excise taxes to local governments, new investments
and dividend remittances.
Recently Issued Financial Accounting Pronouncements
- ---------------------------------------------------
During 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," which will be adopted by the Company effective January 1, 1996.
The Company estimates that the effect of adoption will not be material.
During 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.
CONTINGENCIES
- -------------
- --------------------------------------------------------------------------------
See Note 15 to the Consolidated Financial Statements for discussion of
contingencies.
25
<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data--Fifteen-Year Review (in millions of dollars, except per share data)
- ------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Operating revenues $ 66,071 $ 65,125 $ 60,901 $ 59,131 $ 56,458
United States export sales 5,920 4,942 4,105 3,797 3,061
Cost of sales 26,685 28,351 26,771 26,082 25,612
Federal excise taxes on products 3,446 3,431 3,081 2,879 2,978
Foreign excise taxes on products 9,486 7,918 7,199 6,157 5,416
Operating income 10,526 9,449 7,587 10,059 8,622
Interest and other debt expense,
net (consumer products) 1,179 1,233 1,391 1,451 1,651
Earnings before income taxes and
cumulative effect of accounting
changes 9,347 8,216 6,196 8,608 6,971
Pretax profit margin 14.1% 12.6% 10.2% 14.6% 12.3%
Provision for income taxes $ 3,869 $ 3,491 $ 2,628 $ 3,669 $ 3,044
Earnings before cumulative effect
of accounting changes 5,478 4,725 3,568 4,939 3,927
Cumulative effect of accounting
changes (28) (477) (921)
Net earnings 5,450 4,725 3,091 4,939 3,006
Earnings per share before
cumulative effect of
accounting changes 6.51 5.45 4.06 5.45 4.24
Per share cumulative effect
of accounting changes (.03) (.54) (.99)
Net earnings per share 6.48 5.45 3.52 5.45 3.25
Dividends declared per share 3.65 3.03 2.60 2.35 1.91
Weighted average shares (millions) 842 867 878 906 925
Capital expenditures
(consumer products) $ 1,621 $ 1,726 $ 1,592 $ 1,573 $ 1,562
Depreciation (consumer products) 1,023 1,025 1,042 963 938
Property, plant and equipment,
net (consumer products) 11,116 11,171 10,463 10,530 9,946
Inventories (consumer products) 7,862 7,987 7,358 7,785 7,445
Total assets 53,811 52,649 51,205 50,014 47,384
Total long-term debt 13,107 14,975 15,221 14,583 14,213
Total debt-consumer products 14,372 14,978 16,364 16,269 15,289
-financial services
and real estate 1,454 1,494 1,792 1,934 1,611
Total deferred income taxes 2,827 2,496 2,168 2,248 1,803
Stockholders' equity 13,985 12,786 11,627 12,563 12,512
Common dividends declared as
a % of net earnings 56.3% 55.6% 73.8% 43.0% 58.7%
Book value per common share $ 16.83 $ 14.99 $ 13.26 $ 14.07 $ 13.60
Market price of common
share-high/low 94 3/8-55 3/4 64 1/2-47 1/4 77 5/8-45 86 5/8-69 1/2 81 3/4-48 1/4
Closing price of common
share at year-end 90 1/4 57 1/2 55 5/8 77 1/8 80 1/4
Price/earnings ratio at year-end 14 11 14 14 19
Number of common shares
outstanding at year-end
(millions) 831 853 877 893 920
Number of employees 151,000 165,000 173,000 161,000 166,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the consolidated financial statements regarding the 1995
divestitures of food businesses, the 1995 adoptions of SFAS No. 116 and SFAS No.
106 for non-U.S. benefit plans, the 1993 adoption of SFAS No. 112 and the 1993
restructuring of the Company's worldwide operations.
In 1991, the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" for its U.S. retiree benefit plans.
The cumulative effect of adopting SFAS No. 106 reduced 1991 net earnings by $921
million ($.99 per share).
In 1991, the Company provided for the costs of restructuring its worldwide
food operations. The restructuring charge reduced 1991 earnings before income
taxes, net earnings and earnings per share by $455 million, $275 million and
$.30, respectively.
26
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1990 1989 1988 1987 1986 1985 1984 1983 1982 1981
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$51,169 $44,080 $31,273 $27,650 $25,542 $16,158 $14,102 $13,256 $11,720 $10,886
2,928 2,288 1,863 1,592 1,193 923 925 970 978 834
24,430 21,868 13,565 12,183 11,901 6,709 5,840 5,665 5,532 5,253
2,159 2,140 2,127 2,085 2,075 2,049 2,041 1,983 1,180 1,169
4,687 3,608 3,755 3,331 2,653 1,766 1,635 1,527 1,435 1,411
7,946 6,789 4,397 3,990 3,537 2,664 1,908 1,840 1,547 1,312
1,635 1,731 670 646 772 311 276 230 244 232
6,311 5,058 3,727 3,344 2,765 2,353 1,632 1,610 1,303 1,080
12.3% 11.5% 11.9% 12.1% 10.8% 14.6% 11.6% 12.1% 11.1% 9.9%
$ 2,771 $ 2,112 $ 1,663 $ 1,502 $ 1,287 $ 1,098 $ 743 $ 706 $ 521 $ 420
3,540 2,946 2,064 1,842 1,478 1,255 889 904 782 660
273
3,540 2,946 2,337 1,842 1,478 1,255 889 904 782 660
3.83 3.18 2.22 1.94 1.55 1.31 .91 .90 .78 .66
.29
3.83 3.18 2.51 1.94 1.55 1.31 .91 .90 .78 .66
1.55 1.25 1.01 .79 .62 .50 .43 .36 .30 .25
925 927 932 951 954 959 981 1,008 1,005 999
$ 1,355 $ 1,246 $ 1,024 $ 718 $ 678 $ 347 $ 298 $ 566 $ 918 $ 1,019
876 755 608 564 514 367 341 294 250 211
9,604 8,457 8,648 6,582 6,237 5,684 4,014 4,381 4,178 3,583
7,153 5,751 5,384 4,154 3,836 3,827 2,653 2,599 2,834 2,922
46,569 38,528 36,960 21,437 19,482 18,712 9,880 9,908 9,756 9,180
16,121 14,551 16,812 5,983 6,887 8,035 2,239 2,549 3,776 3,499
17,182 14,887 16,442 6,355 6,889 7,887 2,566 3,054 3,728 3,804
1,560 1,538 1,504 1,378 1,141 944 436 141 83 3
2,083 1,732 1,559 2,044 1,519 1,233 907 825 627 455
11,947 9,571 7,679 6,823 5,655 4,737 4,093 4,034 3,663 3,234
40.5% 39.3% 40.3% 40.6% 39.9% 38.1% 46.8% 40.5% 38.6% 37.9%
$ 12.90 $ 10.31 $ 8.31 $ 7.21 $ 5.94 $ 4.96 $ 4.21 $ 4.03 $ 3.64 $ 3.22
52-36 45 1/2-25 25 1/2-20 1/8 31 1/8-18 1/8 19 1/2-11 11 7/8-9 10 3/8-7 3/4 9-6 3/4 8 1/2-5 1/2 6 7/8-5 1/4
51 3/4 41 5/8 25 1/2 21 3/8 18 11 10 1/8 9 7 1/2 6 1/8
14 13 11 11 11 8 11 10 9 9
926 929 924 947 951 955 971 1,000 1,007 1,003
168,000 157,000 155,000 113,000 111,000 114,000 68,000 68,000 72,000 72,000
- -----------------------------------------------------------------------------------------------------------------------------------
27
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets (in millions of dollars, except per share data)
- ----------------------------------------------------------------------------------
at December 31, 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
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
==================================================================================
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
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
=================================================================================================
- -------------------------------------------------------------------------------------------------
29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings (in millions of dollars, except per share data)
- -------------------------------------------------------------------------------------------------------
for the years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
=======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (in millions of dollars)
- -------------------------------------------------------------------------------------------------------
for the years ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
- -------------------------------------------------------------------------------------------------------
30
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
for the years ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------------------------------------
31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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.
- ------------------------------------------------------------------------------------------------------------------------------
32
</TABLE>
<PAGE>
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.
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
33
<PAGE>
smaller acquisitions, were not material to the Company's 1993 results of
operations.
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
Average Average
Amount Year-End Amount Year-End
(in millions) 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.
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:
- --------------------------------------------------------------------------------
(in millions) 1995 1994
- -----------------------------------------------------------------------------
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
=============================================================================
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
=============================================================================
- -----------------------------------------------------------------------------
34
<PAGE>
Aggregate maturities of long-term debt, excluding short-term
borrowings reclassified as long-term debt, are as follows:
- ----------------------------------------------------
Financial
Consumer Services and
(in millions) Products Real Estate
- ---------------------------------------------------
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.
NOTE 7. CAPITAL STOCK:
- ----------------------
- ------------------------------------------------------------------------
Shares of authorized common stock are 4 billion; issued, repurchased and
outstanding were as follows:
- ------------------------------------------------------------------------
Shares Shares Net 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.
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
- ---------------------------------------------------------------
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
35
<PAGE>
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.
NOTE 10. PRETAX EARNINGS AND PROVISION FOR INCOME TAXES:
- --------------------------------------------------------
- --------------------------------------------------------------------------------
Pretax earnings and provision for income taxes consisted of the following:
- --------------------------------------------------------------------------------
(in millions) 1995 1994 1993
- -------------------------------------------------------------
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.
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,
(in millions) 1995 1994
- ------------------------------------------------------------------
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.
36
<PAGE>
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:
- ------------------------------------------------------------------
Data by Segment for the
years ended December 31,
(in millions) 1995 1994 1993
- ------------------------------------------------------------------
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
- ------------------------------------------------------------------
Data by Geographic Region for the
years ended December 31,
(in millions) 1995 1994 1993
- ------------------------------------------------------------------
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
==================================================================
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.
37
<PAGE>
U.S. Plans
- -------------------------------------------------------------
Net pension cost (income) consisted of the following:
- -------------------------------------------------------------
(in millions) 1995 1994 1993
- -------------------------------------------------------------
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.
The funded status of U.S. plans at December 31 was as follows:
- ----------------------------------------------------------------
(in millions) 1995 1994
- ----------------------------------------------------------------
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.
Non-U.S. Plans
- --------------------------------------------------------------
Net pension cost consisted of the following:
- --------------------------------------------------------------
(in millions) 1995 1994 1993
- --------------------------------------------------------------
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
Accumulated Benefits Exceed
Benefits Assets
(in millions) 1995 1994 1995 1994
- -------------------------------------------------------------------------
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)
=========================================================================
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.
38
<PAGE>
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.
Net postretirement health care costs consisted of the following:
- ------------------------------------------------------------
(in millions) 1995 1994 1993
- ------------------------------------------------------------
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:
- -----------------------------------------------------------------
(in millions) 1995 1994
- -----------------------------------------------------------------
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.
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%.
39
<PAGE>
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.
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.
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
40
<PAGE>
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.
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.
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
41
<PAGE>
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.
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.
- -------------------------------------
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.
42
<PAGE>
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.
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.
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
43
<PAGE>
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.
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.
NOTE 16. ADDITIONAL INFORMATION:
- --------------------------------
- ---------------------------------------------------------------
(in millions) 1995 1994 1993
- ---------------------------------------------------------------
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.
44
<PAGE>
Condensed balance sheet data at December 31 follow:
- -----------------------------------------------------------------
(in millions) 1995 1994
- -----------------------------------------------------------------
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.
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,
- ---------------------------------------------------------
(in millions) 1995 1994 1993
- ---------------------------------------------------------
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.
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.
45
<PAGE>
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.
NOTE 19. QUARTERLY FINANCIAL DATA (UNAUDITED):
- ----------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1995 Quarters
(in millions, except per share data) 1st 2nd 3rd 4th
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
======================================================================================================
</TABLE>
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.
- -------------------------------------------------------------------------------
1994 Quarters
(in millions, except per share data) 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------
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
===============================================================================
----------------
The principal stock exchange, on which the Company's common stock (par value $1
per share) is listed, is the New York Stock Exchange. At January 31, 1996 there
were approximately 144,400 holders of record of the Company's common stock.
46
<PAGE>
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.
COOPERS & LYBRAND L.L.P.
New York, New York
January 29, 1996
COMPANY REPORT ON FINANCIAL STATEMENTS
- --------------------------------------
The consolidated financial statements and all related financial information
herein are the responsibility of the Company. The financial statements, which
include amounts based on judgments, have been prepared in accordance with
generally accepted accounting principles. Other financial information in the
annual report is consistent with that in the financial statements.
The Company maintains a system of internal controls that it believes provides
reasonable assurance that transactions are executed in accordance with
management's authorization and properly recorded, that assets are safeguarded,
and that accountability for assets is maintained. The system of internal
controls is characterized by a control-oriented environment within the Company,
which includes written policies and procedures, careful selection and training
of personnel, and audits by a professional staff of internal auditors.
Coopers & Lybrand L.L.P., independent accountants, have audited and reported
on the Company's consolidated financial statements. Their audits were performed
in accordance with generally accepted auditing standards.
The Audit Committee of the Board of Directors, composed of six non-management
directors, meets periodically with Coopers & Lybrand L.L.P., the Company's
internal auditors and management representatives to review internal accounting
control, auditing and financial reporting matters. Both Coopers & Lybrand L.L.P.
and the internal auditors have unrestricted access to the Audit Committee and
may meet with it without management representatives being present.
47
EXHIBIT 21
Certain active subsidiaries of the Company and their subsidiaries as of
December 31, 1995, are listed below. The names of certain subsidiaries, which
considered in the aggregate would not constitute a significant subsidiary, have
been omitted.
<TABLE>
<CAPTION>
State or
Country of
Name Organization
---- ------------
<S> <C>
464088 Ontario Limited .................................... Canada
AB Estrella ............................................... Sweden
AB Kraft Jacobs Suchard Lietuva ........................... Lithuania
AB Malaco ................................................. Sweden
AB Marabou ................................................ Sweden
AB Slotts ................................................. Sweden
A/O Almaty Tobacco Company ................................ Kazakhstan
A/O Krasnadortabakprom .................................... Russia
A/O Philip Morris NEVA .................................... Russia
A/S Freia ................................................. Norway
A/S Freia Husholdning ..................................... Norway
A/S Maarud ................................................ Norway
A/S Malaco ................................................ Norway
A/S Trans-Scandia ......................................... Norway
Ajinomoto General Foods, Inc. ............................. Japan
American Specialty & Craft Beer Co. ....................... Delaware
Beijing Kraft Food Corporation Limited .................... China
C.A. Tabacalera Nacional .................................. Venezuela
Cafe GRAND'MERE S.A. ...................................... France
Cafe HAG Sarl ............................................. France
Callard & Bowser-Suchard, Inc. ............................ Delaware
Capri Sun, Inc. .......................................... Delaware
Carlton Lebensmittelvertriebs GmbH ........................ Germany
Celis Brewery, Inc. ....................................... Texas
Century Importers Inc. .................................... Delaware
Churny Company, Inc. ...................................... Delaware
Closed Joint Stock Company Kraft Jacobs Suchard Petroconf.. Russian Federation
COFFEE HAG (U.K.) LIMITED ................................. United Kingdom
Comptoir De La Confiserie ................................. France
Consolidated Beverage Distributors, Inc. .................. California
Cote d'Or Italia S.r.l. ................................... Italy
DE LA S.r.l. .............................................. Italy
Daesung Machinary ......................................... Korea
Dart Resorts Inc. ......................................... Delaware
Dart & Kraft Finance N.V. ................................. Netherlands Antilles
Di Giorno Foods Co. ....................................... Delaware
Dong Suh Foods Corporation ................................ Korea
Dong Suh Oil & Fats Co., Ltd. ............................. Korea
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
---- ------------
<S> <C>
Egri Dohanygyar kft. ...................................... Hungary
El Gallito Industrial, S.A. ............................... Costa Rica
Estrella A/S .............................................. Denmark
Estrella Holding A/S ...................................... Denmark
FTR Holding S.A. .......................................... Switzerland
Fabriques de Tabac Reunies S.A. ........................... Switzerland
Foodco Corporation ........................................ Delaware
Franklin Baker Company of the Philippines ................. Philippines
Freia Choklad & Konfektyr AB .............................. Sweden
Freia Chokolade A/S ....................................... Denmark
Freia Marabou Danmark A/S ................................. Denmark
Freia Marabou Sverige AB .................................. Sweden
Gardner's Good Foods, Inc. ................................ New Jersey
General Foods Credit Corporation .......................... Delaware
General Foods Credit Investors No. 1 Corporation .......... Delaware
General Foods Credit Investors No. 2 Corporation .......... Delaware
General Foods Credit Investors No. 3 Corporation .......... Delaware
General Foods Foreign Sales Corporation ................... Virgin Islands (U.S.)
General Foods Pty. Ltd. ................................... Australia
Grant Holdings, Inc. ..................................... Pennsylvania
Grundstucksgemeinschaft Kraft Jacobs Suchard GbR .......... Germany
Guangtong Food Company Ltd. ............................... China
HAG GF AG ................................................. Germany
HAG GF Vertriebs & Marketing Corporation .................. Delaware
Hansung Life Insurance Co. Ltd. ........................... Korea
HNB Investment Corp. ...................................... Delaware
International Pet Foods Ltd. .............................. New Zealand
ION SA .................................................... Greece
Jacob Leinenkugel Brewing Company, Inc. ................... Wisconsin
Jacobs Caffe S.p.A. ....................................... Italy
Jacobs Erzeugnisse GmbH ................................... Germany
Jacobs Kaffee Gesellschaft mbH Vienna ..................... Austria
Jacobs Suchard Beteiligungs Gesellschaft GmbH ............. Austria
Jacobs Suchard China Limited .............................. Hong Kong
Jacobs Suchard Dadak A.S. ................................. Czechoslovakia
Jacobs Suchard Figaro A.S. ................................ Czechoslovakia
Jacobs Suchard Pavlides SA ................................ Greece
Jacobs Suchard SPA ........................................ Italy
KJS 1995 Limited .......................................... United Kingdom
Kaffee HAG AG ............................................. Switzerland
Kaffee Handels Gesellschaft G.m.b.H. ...................... Germany
The Kenco Coffee Company Limited .......................... United Kingdom
Kharkov Tobacco Factory ................................... Ukraine
Kraft Beverage (Tianjin) Co., Ltd. ........................ China
Kraft Canada Inc. ........................................ Canada
Kraft Chorzele Sp. z o.o. ................................ Poland
Kraft Food Ingredients Corp. .............................. Delaware
Kraft Foods AB ............................................ Sweden
Kraft Foods de Mexico S.A. de C.V. ........................ Mexico
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
---- ------------
<S> <C>
Kraft Foods Holdings Norway, Inc. ......................... Delaware
Kraft Foods, Inc. ......................................... Delaware
Kraft Foods (Philippines), Inc. ........................... Philippines
Kraft Foods (Puerto Rico), Inc. ........................... Puerto Rico
Kraft Foods International, Inc. ........................... Delaware
Kraft Foods (Australia) Limited ........................... Australia
Kraft Foods Limited (Australia) ........................... Australia
Kraft Foods Limited (United Kingdom) ...................... United Kingdom
Kraft Foods Manufacturing Corporation ..................... Delaware
Kraft Freia Marabou ApS ................................... Denmark
Kraft Freia Marabou Danmark A/S ........................... Denmark
Kraft Freia Marabou Norden a.s. ........................... Norway
Kraft General Foods Europe GmbH ........................... Germany
Kraft General Foods New Zealand Limited ................... New Zealand
Kraft General Foods Norge AS .............................. Norway
Kraft General Foods S.p.A. ................................ Italy
Kraft Hellas SA ........................................... Greece
Kraft Holdings Limited (United Kingdom) ................... United Kingdom
Kraft Jacobs Suchard AG ................................... Switzerland
Kraft Jacobs Suchard (Schweiz) AG ......................... Switzerland
Kraft Jacobs Suchard BV ................................... Netherlands
Kraft Jacobs Suchard Berlin & Co. GmbH KG ................. Germany
Kraft Jacobs Suchard Bulgaria AD .......................... Bulgaria
Kraft Jacobs Suchard CS SPOL. S.R.O. ..................... Czechoslovakia
Kraft Jacobs Suchard Central & Eastern Europe Service BV .. Netherlands
Kraft Jacobs Suchard Coffex ............................... France
Kraft Jacobs Suchard Coordination Center SA ............... Belgium
Kraft Jacobs Suchard - Cote d'Or S.A/N.V. ................. Belgium
Kraft Jacobs Suchard Erzeugnisse GmbH & Co. KG ............ Germany
Kraft Jacobs Suchard Food & Beverage Service GmbH ......... Germany
Kraft Jacobs Suchard France S.A. .......................... France
Kraft Jacobs Suchard GmbH (Bremen) ........................ Germany
Kraft Jacobs Suchard Hungaria KFT ......................... Hungary
Kraft Jacobs Suchard Iberia, S.A. ......................... Spain
Kraft Jacobs Suchard Ireland Ltd. ......................... Ireland
Kraft Jacobs Suchard Kaffeeveredelungs GmbH & Co KG ....... Germany
Kraft Jacobs Suchard La Vosgienne ......................... France
Kraft Jacobs Suchard Laverune ............................. France
Kraft Jacobs Suchard Limited .............................. United Kingdom
Kraft Jacobs Suchard (Holdings) Limited (United Kingdom) .. United Kingdom
Kraft Jacobs Suchard (Middle East & Africa) Limited ....... United Kingdom
Kraft Jacobs Suchard Management & Consulting AG ........... Switzerland
Kraft Jacobs Suchard Manufacturing GmbH & Co KG ........... Germany
Kraft Jacobs Suchard Polska Sp. z o.o. .................... Poland
Kraft Jacobs Suchard R & D, Inc. .......................... Delaware
Kraft Jacobs Suchard Reims ................................ France
Kraft Jacobs Suchard Romania SA ........................... Romania
Kraft Jacobs Suchard Service AG (Switzerland) ............. Switzerland
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
---- ------------
<S> <C>
Kraft Jacobs Suchard Service GmbH & Co. KG ...................... Germany
Kraft Jacobs Suchard Strasbourg ................................. France
Kraft Jacobs Suchard Ukraina Open Joint Stock Company ........... Ukraine
Kraft Japan, K.K. ............................................... Japan
Kraft Manufacturing GmbH ........................................ Germany
Kraft Pizza Company ............................................. Delaware
Kraft Suchard Brasil S.A. ....................................... Brazil
Kraft Tianmei Food (Tianjin) Co., Ltd. .......................... China
Krema Limited ................................................... Ireland
MBC Holdings, Inc. .............................................. Wisconsin
Malaco A/S ...................................................... Denmark
Malaco i Eskilstuna AB .......................................... Sweden
Malaco (U.K.) Ltd. .............................................. United Kingdom
Marabou Belgium N.V. ............................................ Belgium
Marabou GmbH .................................................... Germany
Marsa Kraft Jacobs Suchard Sabanci Gida Sanayi ve Ticaret A.S. .. Turkey
Martlet Importing Co. Inc. ...................................... New York
Massalin Particulares S.A. ...................................... Argentina
Maxpax France SA ................................................ France
Maxpax (U.K.) Limited ........................................... United Kingdom
Miller Brewing 1855, Inc. ....................................... Delaware
Miller Brewing Company .......................................... Wisconsin
Miller Brewing do Brasil, Ltda. ................................. Brazil
Miller Brewing of Canada, Ltd. .................................. Canada
Miller Brewing of Europe, Ltd. .................................. United Kingdom
Mission Viejo Company............................................ California
Molson Breweries U.S. Holdings Inc. ............................. Delaware
Molson Breweries U.S.A. Inc. .................................... Delaware
N.V. Kraft Jacobs Suchard SA .................................... Belgium
OMFC Service Company ............................................ Delaware
ONKO Grossroesterei G.m.b.H. .................................... Germany
Oy Estrella AB .................................................. Finland
Oy Marabou, AB .................................................. Finland
P.M. Beverage Holdings, Inc. .................................... Delaware
P.T. Kraft Ultrajaya Indonesia................................... Indonesia
Phenix Leasing Corporation ...................................... Delaware
Phenix Management Corporation ................................... Delaware
Philip Morris Asia Incorporated ................................. Delaware
Philip Morris Belgium S.A. ...................................... Belgium
Philip Morris Capital Corporation ............................... Delaware
Philip Morris Capital (Bermuda) Limited ......................... Bermuda
Philip Morris Corporate Services Inc. ........................... Delaware
Philip Morris Credit Capital N.V. ............................... Netherlands Antilles
Philip Morris Europe S.A. ....................................... Delaware
Philip Morris Finance Europe B.V. ............................... Netherlands
Philip Morris G.m.b.H. .......................................... Germany
Philip Morris Holland B.V. ...................................... Netherlands
Philip Morris Incorporated ...................................... Virginia
Philip Morris International Finance Corporation ................. Delaware
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
State or
Country of
Name Organization
---- ------------
<S> <C>
Philip Morris International Inc. ................................ Delaware
Philip Morris Kabushiki Kaisha................................... Japan
Philip Morris Korea C.H. ........................................ Korea
Philip Morris Latin America Inc. ................................ Delaware
Philip Morris Limited ........................................... Australia
Philip Morris Management Corp. .................................. New York
Philip Morris Marketing S.A. .................................... Delaware
Philip Morris Products Inc. ..................................... Virginia
Philip Morris SA, Phillip Morris Sabanci Pazarlama ve Satis A.S.. Turkey
Philip Morris Sales Inc. ....................................... Delaware
Philip Morris (Malaysia) Sdn. Bhd. .............................. Malaysia
PHILSA Philip Morris Sabanci Sigara ve Tutunculuk
Sanayi ve Ticaret, A.S......................................... Turkey
PMCC Investors No. 1 Corporation ................................ Delaware
PMCC Investors No. 2 Corporation ................................ Delaware
PMCC Investors No. 3 Corporation ................................ Delaware
PMCC Investors No. 4 Corporation ................................ Delaware
PMCC Leasing Corporation ........................................ Delaware
Premierfoods Corporation ........................................ Taiwan
Ridg's Finer Foods, Inc.......................................... Delaware
Rye Ventures, Inc. .............................................. Delaware
SB Leasing Inc. ................................................ Delaware
Seven Seas Foods, Inc. .......................................... Delaware
SICMA SA (Societe Industrielle pour la Construction
de Materiels Automa) .......................................... France
Shunde Kraft Confectionery Company Limited ...................... China
Suchard Limited ................................................. United Kingdom
Suchard Schokolade Ges. mbH Bludenz (Austria) ................... Austria
Suchard Tobler Vertriebs GmbH ................................... Germany
Superior AgResource, Inc. ....................................... Delaware
Tabacalera Centroamericana S.A. ................................. Guatemala
Tabacalera Costarricense S.A. ................................... Costa Rica
Tabak A.S. ...................................................... Czech Republic
Taloca AG ....................................................... Switzerland
Terry's Suchard Limited ......................................... United Kingdom
UAB Philip Morris Lietuva ....................................... Lithuania
Vict. Th. Engwall & Co., Inc. ................................... Delaware
Votesor BV ...................................................... Netherlands
Zaklady Przemyslu Cukierniczego 'Olza' SA ....................... Poland
</TABLE>
5
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 13
to the registration statement of Philip Morris Companies Inc. (the "Company")
on Form S-14 (File No. 2-96149) and in the Company's registration statements on
Form S-3 (File Nos. 33-21033 and 33-49195) and Form S-8 (File Nos. 33-1479,
33-1480, 33-10218, 33-13210, 33-14561, 33-17870, 33-37115, 33-38781, 33-39162,
33-40110, 33-48781, 33-59109, 33-63975 and 33-63977), of our reports dated
January 29, 1996, on our audits of the consolidated financial statements and
financial statement schedule of the Company as of December 31, 1995 and 1994,
and for the years ended December 31, 1995, 1994, and 1993, which reports are
included or incorporated by reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
New York, New York
March 26, 1996
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ Elizabeth E. Bailey
Elizabeth E. Bailey
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ Murray H. Bring
Murray H. Bring
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ Harold Brown
Harold Brown
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ William H. Donaldson
William H. Donaldson
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ Jane Evans
Jane Evans
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ Robert E.R. Huntley
Robert E.R. Huntley
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ Rupert Murdoch
Rupert Murdoch
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ John D. Nichols
John D. Nichols
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ Richard D. Parsons
Richard D. Parsons
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ Roger S. Penske
Roger S. Penske
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ John S. Reed
John S. Reed
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS THAT the undersigned, a Director of
Philip Morris Companies Inc., a Virginia corporation (the "Company"), does
hereby constitute and appoint Geoffrey C. Bible, Hans G. Storr and William H.
Donaldson, or any one or more of them, his/her true and lawful attorney, for
him/her and in his/her name, place and stead, to execute, by manual or
facsimile signature, electronic transmission or otherwise, the Annual Report on
Form 10-K of the Company for the year ended December 31, 1995 and any
amendments or supplements to said Annual Report and to cause the same to be
filed with the Securities and Exchange Commission, together with any exhibits,
financial statements and schedules included or to be incorporated by reference
therein, hereby granting to said attorneys full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things which said attorneys may do or cause to be done by virtue of
these presents.
IN WITNESS WHEREOF, the undersigned has hereunto set his/her hand and
seal this 28th day of February, 1996.
/s/ Stephen M. Wolf
Stephen M. Wolf
a:\power.aty
